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How Intellectual Property plays a Role in Crypto and Blockchain
There are many large companies dedicated to investing in the future of cryptocurrency despite the complications in obtaining crypto patents.
How Intellectual Property plays a Role in Crypto and Blockchain
The rise of the blockchain and cryptocurrency movements has generated a booming new industry, ripe with opportunity for monetization. Investors, entrepreneurs, and innovators getting in on the ground floor of these movements should consider implementing Intellectual Property (IP) protection strategy in their business plans.
IP protection is especially critical for inventors of new coins, developers who have created new software or computer-based methodology to innovate within blockchain, or emerging bitcoin companies seeking to attract investors.
Types of Intellectual Property Protection
The types of IP protection are patents, trademarks, copyrights, and trade secrets. The best Intellectual Property strategy should contain a combination of all four types, with a focus on patents.
Patents grant the owner an exclusive right, or monopoly, for a limited time on the claimed subject matter disclosed in the issued patent. They are a powerful form of intellectual property protection. A significant distinction for patents compared to other types of intellectual property protection is that the published patent documentation must enable someone of ordinary skill in the art to make and use the invention.
A trademark is a word, name, logo, symbol, device, or combination thereof, used to identify the source of goods or services in the marketplace. Trademarks allow prospective customers to weigh the reputation of the manufacturer of the goods or provider of the services.
A copyright provides the copyright author with the exclusive right to reproduce and distribute copies, prepare derivative works, as well as perform or display the work publicly. The author does not need to register the work in order to have the copyright, but the author must register the copyright to sue another party for infringement.
A trade secret is any valuable information that is not publicly known and of which the owner has taken reasonable steps to maintain secrecy. These include information such as a business plans, customer lists, ideas related to research and development, specific methodology utilized, etc.
Complications With Patenting Blockchain and Crypto
There are two distinct patent category types: blockchain-specific and cryptocurrency-specific. Both patent categories are increasing in popularity.
While patents are considered the most crucial aspect of any successful Intellectual Property strategy, the growth of the blockchain movement has revealed a number of complexities in the process of patenting these assets. Three of the most notable complexities revolve around the newness and instability of the industries, ethical concerns, and difficulty demonstrating patent eligibility.
Inherently, there is controversy in patenting crypto. After 2008, the world experienced a deep lack of trust about money being owned by one central party. Cryptocurrency arose in part to eliminate this need for monetary centralization. The original blockchain software was intentionally made to be free and open-source. Many would argue that patenting directly contradicts the ethos of the blockchain.
Next, cryptocurrency patents often see scrutiny in courts due to subject-matter eligibility concerns. Blockchain currencies and software are financial transactions. Federal Circuit courts hold that mere financial transactions are not patentable. In order to patent cryptocurrency, inventors must demonstrate that their crypto software’s functionality makes a process more efficient or effective, provides new data or exceeds that which can be done by humans alone.
Trends with Blockchain Patents
Despite the aforementioned complications, increasing regulations/bans, and price volatility, crypto-specific patent filings rose by 16 percent to a total of 602 patent applications in 2020, while blockchain-specific patents increased by 300%.
These growth figures demonstrate that there are many large companies dedicated to investing in the future of cryptocurrency despite the complications in obtaining crypto patents.
The major players who are scooping up blockchain patents are Bank of America, Barclay’s, and Mastercard. Bank of America sought patent protection on its blockchain-based system allowing the external validation of data; Barclays filed two patent applications to protect their method for transferring digital currency and storing blockchain data; and MasterCard applied for patent protection on its blockchain-based method for linking assets between blockchain and legal tender accounts. These early patents are extremely valuable because of the freshness of the technology.
Other Methods of IP Protection
While patents are the most critical and valuable IP asset for a business or entrepreneur to obtain on an emerging product, process, or technology, the other methods of Intellectual Property protection are less difficult to obtain and can provide key benefits.
J.D. Houvener, founder & CEO of Bold Patents says that,
“A bitcoin company, a major bank innovating within blockchain, or a new institution that wants to launch a crypto coin has a brand they’re building much like in any other industry. Trademarks and copyrights are crucial in these early stages. These forms of protection can help solidify a brand and a logo, which in turn will help that company build up a prospective customer base and generate goodwill in the marketplace.”
Copyrights specifically are all about artistic creation and can go very far in crypto. The software codes used by blockchain companies, their UX designs and interfaces, their coin specifics should be protected under copyright law.
Trade secrets are critical as a competitive advantage and should be kept strictly in-house. If a competing company were to rip off your blockchain patent, their copycat wouldn’t be able to perform exactly the way yours would because they wouldn’t have access to your trade secrets. Keep your distinctive processes and systems strictly under wraps, and utilize NDAs as often as possible.
Overall, blockchain and IP can exist in a parallel space despite the underlying complications. Houvener thinks of the relationship between IP law and blockchain as analogous to the relationship between IP and the Internet: “Internet (open) is to website (protected) as blockchain (open) is to a cryptocurrency payment network (protected). With the Internet, no one can necessarily restrict what you can do, where you can go, or how it exists. With blockchain, which is a distributed ledger with a revolutionary lack of central ownership, no one is excluded from obtaining access, nor can one person patent the blockchain.
Like how companies can obtain rights to certain web addresses, website logos, or search engines, blockchain users can get rights to specific usages. This is similar to any particular software or method that uses computing and networking technology.”
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Carly Klein is a law student at Loyola Law School in Los Angeles. A graduate from Boston University with a B.A. in Political Science & Philosophy, she previously served an Americorps term at the American Red Cross in Los Angeles on the Service to the Armed Forces & International Services Team.
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If you have been following banking, investing, or cryptocurrency over the last ten years, you may be familiar with “blockchain,” the record-keeping technology behind the Bitcoin network. And there’s a good chance that it only makes so much sense. In trying to learn more about blockchain, you’ve probably encountered a definition like this: “blockchain is a distributed, decentralized, public ledger.”
The good news is that blockchain is actually easier to understand than that definition sounds.
What is Blockchain?
If this technology is so complex, why call it “blockchain?” At its most basic level, blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When we say the words “block” and “chain” in this context, we are actually talking about digital information (the “block”) stored in a public database (the “chain”).
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“Blocks” on the blockchain are made up of digital pieces of information. Specifically, they have three parts:
- Blocks store information about transactions like the date, time, and dollar amount of your most recent purchase from Amazon. (NOTE: This Amazon example is for illustrative purchases; Amazon retail does not work on a blockchain principle as of this writing)
- Blocks store information about who is participating in transactions. A block for your splurge purchase from Amazon would record your name along with Amazon.com, Inc. (AMZN). Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” sort of like a username.
- Blocks store information that distinguishes them from other blocks. Much like you and I have names to distinguish us from one another, each block stores a unique code called a “hash” that allows us to tell it apart from every other block. Hashes are cryptographic codes created by special algorithms. Let’s say you made your splurge purchase on Amazon, but while it’s in transit, you decide you just can’t resist and need a second one. Even though the details of your new transaction would look nearly identical to your earlier purchase, we can still tell the blocks apart because of their unique codes.
While the block in the example above is being used to store a single purchase from Amazon, the reality is a little different. A single block on the Bitcoin blockchain can actually store up to 1 MB of data. Depending on the size of the transactions, that means a single block can house a few thousand transactions under one roof.
What Is the Blockchain?
How Blockchain Works
When a block stores new data it is added to the blockchain. Blockchain, as its name suggests, consists of multiple blocks strung together. In order for a block to be added to the blockchain, however, four things must happen:
- A transaction must occur. Let’s continue with the example of your impulsive Amazon purchase. After hastily clicking through multiple checkout prompt, you go against your better judgment and make a purchase. As we discussed above, in many cases a block will group together potentially thousands of transactions, so your Amazon purchase will be packaged in the block along with other users’ transaction information as well.
- That transaction must be verified. After making that purchase, your transaction must be verified. With other public records of information, like the Securities Exchange Commission, Wikipedia, or your local library, there’s someone in charge of vetting new data entries. With blockchain, however, that job is left up to a network of computers. When you make your purchase from Amazon, that network of computers rushes to check that your transaction happened in the way you said it did. That is, they confirm the details of the purchase, including the transaction’s time, dollar amount, and participants. (More on how this happens in a second.)
- That transaction must be stored in a block. After your transaction has been verified as accurate, it gets the green light. The transaction’s dollar amount, your digital signature, and Amazon’s digital signature are all stored in a block. There, the transaction will likely join hundreds, or thousands, of others like it.
- That block must be given a hash. Not unlike an angel earning its wings, once all of a block’s transactions have been verified, it must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.
When that new block is added to the blockchain, it becomes publicly available for anyone to view—even you. If you take a look at Bitcoin’s blockchain, you will see that you have access to transaction data, along with information about when (“Time”), where (“Height”), and by who (“Relayed By”) the block was added to the blockchain.
Is Blockchain Private?
Anyone can view the contents of the blockchain, but users can also opt to connect their computers to the blockchain network as nodes. In doing so, their computer receives a copy of the blockchain that is updated automatically whenever a new block is added, sort of like a Facebook News Feed that gives a live update whenever a new status is posted.
Each computer in the blockchain network has its own copy of the blockchain, which means that there are thousands, or in the case of Bitcoin, millions of copies of the same blockchain. Although each copy of the blockchain is identical, spreading that information across a network of computers makes the information more difficult to manipulate. With blockchain, there isn’t a single, definitive account of events that can be manipulated. Instead, a hacker would need to manipulate every copy of the blockchain on the network. This is what is meant by blockchain being a “distributed” ledger.
Looking over the Bitcoin blockchain, however, you will notice that you do not have access to identifying information about the users making transactions. Although transactions on the blockchain are not completely anonymous, personal information about users is limited to their digital signature or username.
This raises an important question: if you cannot know who is adding blocks to the blockchain, how can you trust blockchain or the network of computers upholding it?
Is Blockchain Secure?
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” As of January 2020, the block’s height had topped 615,400.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof of work.”
In the proof of work system, computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, the odds of solving one of these problems on the Bitcoin network were about one in 15.5 trillion in January 2020. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy (read: money).
Proof of work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to control more than 50% of all computing power on the blockchain so as to be able to overwhelm all other participants in the network. Given the tremendous size of the Bitcoin blockchain, a so-called 51% attack is almost certainly not worth the effort and more than likely impossible. (More about this below.)
Blockchain vs. Bitcoin
The goal of blockchain is to allow digital information to be recorded and distributed, but not edited. That concept can be difficult to wrap our heads around without seeing the technology in action, so let’s take a look at how the earliest application of blockchain technology actually works.
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system where document timestamps could not be tampered with. But it wasn’t until almost two decades later, with the launch of Bitcoin in January 2009, that blockchain had its first real-world application.
The Bitcoin protocol is built on the blockchain. In a research paper introducing the digital currency, Bitcoin’s pseudonymous creator Satoshi Nakamoto referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
Here’s how it works.
You have all these people, all over the world, who have bitcoin. There are likely many millions of people around the world who own at least a portion of a bitcoin. Let’s say one of those millions of people wants to spend their bitcoin on groceries. This is where the blockchain comes in.
When it comes to printed money, the use of printed currency is regulated and verified by a central authority, usually a bank or government—but Bitcoin is not controlled by anyone. Instead, transactions made in bitcoin are verified by a network of computers. This is what is meant by the Bitcoin network and blockchain being “decentralized.”
When one person pays another for goods using bitcoin, computers on the Bitcoin network race to verify the transaction. In order to do so, users run a program on their computers and try to solve a complex mathematical problem, called a “hash.” When a computer solves the problem by “hashing” a block, its algorithmic work will have also verified the block’s transactions. As we described above, the completed transaction is publicly recorded and stored as a block on the blockchain, at which point it becomes unalterable. In the case of Bitcoin, and most other blockchains, computers that successfully verify blocks are rewarded for their labor with cryptocurrency. This is commonly referred to as “mining.”
Although transactions are publicly recorded on the blockchain, user data is not—or, at least not in full. In order to conduct transactions on the Bitcoin network, participants must run a program called a “wallet.” Each wallet consists of two unique and distinct cryptographic keys: a public key and a private key. The public key is the location where transactions are deposited to and withdrawn from. This is also the key that appears on the blockchain ledger as the user’s digital signature.
Even if a user receives a payment in bitcoins to their public key, they will not be able to withdraw them with the private counterpart. A user’s public key is a shortened version of their private key, created through a complicated mathematical algorithm. However, due to the complexity of this equation, it is almost impossible to reverse the process and generate a private key from a public key. For this reason, blockchain technology is considered confidential.
Public and Private Key Basics
Here’s the ELI5—“Explain it Like I’m 5”—version. You can think of a public key as a school locker and the private key as the locker combination. Teachers, students, and even your crush can insert letters and notes through the opening in your locker. However, the only person that can retrieve the contents of the mailbox is the one that has the unique key. It should be noted, however, that while school locker combinations are kept in the principal’s office, there is no central database that keeps track of a blockchain network’s private keys. If a user misplaces their private key, they will lose access to their bitcoin wallet, as was the case with this man who made national headlines in December of 2020.
A Single Public Chain
In the Bitcoin network, the blockchain is not only shared and maintained by a public network of users—but it is also agreed upon. When users join the network, their connected computer receives a copy of the blockchain that is updated whenever a new block of transactions is added. But what if, through human error or the efforts of a hacker, one user’s copy of the blockchain manipulated to be different from every other copy of the blockchain?
The blockchain protocol discourages the existence of multiple blockchains through a process called “consensus.” In the presence of multiple, differing copies of the blockchain, the consensus protocol will adopt the longest chain available. More users on a blockchain mean that blocks can be added to the end of the chain quicker. By that logic, the blockchain of record will always be the one that most users trust. The consensus protocol is one of blockchain technology’s greatest strengths but also allows for one of its greatest weaknesses.
Theoretically, it is possible for a hacker to take advantage of the majority rule in what is referred to as a 51% attack. Here’s how it would happen. Let’s say that there are five million computers on the Bitcoin network, a gross understatement for sure but an easy enough number to divide. In order to achieve a majority on the network, a hacker would need to control at least 2.5 million and one of those computers. In doing so, an attacker or group of attackers could interfere with the process of recording new transactions. They could send a transaction—and then reverse it, making it appear as though they still had the coin they just spent. This vulnerability, known as double-spending, is the digital equivalent of a perfect counterfeit and would enable users to spend their bitcoins twice.
Such an attack is extremely difficult to execute for a blockchain of Bitcoin’s scale, as it would require an attacker to gain control of millions of computers. When Bitcoin was first founded in 2009 and its users numbered in the dozens, it would have been easier for an attacker to control a majority of computational power in the network. This defining characteristic of blockchain has been flagged as one weakness for fledgling cryptocurrencies.
User fear of 51% attacks can actually limit monopolies from forming on the blockchain. In “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money,” New York Times journalist Nathaniel Popper writes of how a group of users, called “Bitfury,” pooled thousands of high-powered computers together to gain a competitive edge on the blockchain. Their goal was to mine as many blocks as possible and earn bitcoin, which at the time were valued at approximately $700 each.
By March 2020, however, Bitfury was positioned to exceed 50% of the blockchain network’s total computational power. Instead of continuing to increase its hold over the network, the group elected to self-regulate itself and vowed never to go above 40%. Bitfury knew that if they chose to continue increasing their control over the network, bitcoin’s value would fall as users sold off their coins in preparation for the possibility of a 51% attack. In other words, if users lose their faith in the blockchain network, the information on that network risks becoming completely worthless. Blockchain users, then, can only increase their computational power to a point before they begin to lose money.
Blockchain’s Practical Application
Blocks on the blockchain store data about monetary transactions—we’ve got that out of the way. But it turns out that blockchain is actually a pretty reliable way of storing data about other types of transactions, as well. In fact, blockchain technology can be used to store data about property exchanges, stops in a supply chain, and even votes for a candidate.
Professional services network Deloitte recently surveyed 1,000 companies across seven countries about integrating blockchain into their business operations. Their survey found that 34% already had a blockchain system in production today, while another 41% expected to deploy a blockchain application within the next 12 months. In addition, nearly 40% of the surveyed companies reported they would invest $5 million or more in blockchain in the coming year. Here are some of the most popular applications of blockchain being explored today.
Perhaps no industry stands to benefit from integrating blockchain into its business operations more than banking. Financial institutions only operate during business hours, five days a week. That means if you try to deposit a check on Friday at 6 p.m., you likely will have to wait until Monday morning to see that money hit your account. Even if you do make your deposit during business hours, the transaction can still take one to three days to verify due to the sheer volume of transactions that banks need to settle. Blockchain, on the other hand, never sleeps.
By integrating blockchain into banks, consumers can see their transactions processed in as little as 10 minutes, basically the time it takes to add a block to the blockchain, regardless of the time or day of the week. With blockchain, banks also have the opportunity to exchange funds between institutions more quickly and securely. In the stock trading business, for example, the settlement and clearing process can take up to three days (or longer, if banks are trading internationally), meaning that the money and shares are frozen for that time.
Given the size of the sums involved, even the few days that the money is in transit can carry significant costs and risks for banks. Santander, a European bank, put the potential savings at $20 billion a year. Capgemini, a French consultancy, estimates that consumers could save up to $16 billion in banking and insurance fees each year through blockchain-based applications.
Use in Cryptocurrency
Blockchain forms the bedrock for cryptocurrencies like Bitcoin. As we explored earlier, currencies like the U.S. dollar are regulated and verified by a central authority, usually a bank or government. Under the central authority system, a user’s data and currency are technically at the whim of their bank or government. If a user’s bank collapses or they live in a country with an unstable government, the value of their currency may be at risk. These are the worries out of which Bitcoin was borne.
By spreading its operations across a network of computers, blockchain allows Bitcoin and other cryptocurrencies to operate without the need for a central authority. This not only reduces risk but also eliminates many of the processing and transaction fees. It also gives those in countries with unstable currencies a more stable currency with more applications and a wider network of individuals and institutions they can do business with, both domestically and internationally (at least, this is the goal.)
Health care providers can leverage blockchain to securely store their patients’ medical records. When a medical record is generated and signed, it can be written into the blockchain, which provides patients with the proof and confidence that the record cannot be changed. These personal health records could be encoded and stored on the blockchain with a private key, so that they are only accessible by certain individuals, thereby ensuring privacy
Property Records Use
If you have ever spent time in your local Recorder’s Office, you will know that the process of recording property rights is both burdensome and inefficient. Today, a physical deed must be delivered to a government employee at the local recording office, where is it manually entered into the county’s central database and public index. In the case of a property dispute, claims to the property must be reconciled with the public index.
This process is not just costly and time-consuming—it is also riddled with human error, where each inaccuracy makes tracking property ownership less efficient. Blockchain has the potential to eliminate the need for scanning documents and tracking down physical files in a local recording office. If property ownership is stored and verified on the blockchain, owners can trust that their deed is accurate and permanent.
Use in Smart Contracts
A smart contract is a computer code that can be built into the blockchain to facilitate, verify, or negotiate a contract agreement. Smart contracts operate under a set of conditions that users agree to. When those conditions are met, the terms of the agreement are automatically carried out.
Say, for example, I’m renting you my apartment using a smart contract. I agree to give you the door code to the apartment as soon as you pay me your security deposit. Both of us would send our portion of the deal to the smart contract, which would hold onto and automatically exchange my door code for your security deposit on the date of the rental. If I don’t supply the door code by the rental date, the smart contract refunds your security deposit. This eliminates the fees that typically accompany using a notary or third-party mediator.
Supply Chain Use
Suppliers can use blockchain to record the origins of materials that they have purchased. This would allow companies to verify the authenticity of their products, along with health and ethics labels like “Organic,” “Local,” and “Fair Trade.”
As reported by Forbes the food industry is moving into the use of blockchain to increasingly track the path and safety of food throughout the farm-to-user journey.
Uses in Voting
Voting with blockchain carries the potential to eliminate election fraud and boost voter turnout, as was tested in the Nov. 2020 midterm elections in West Virginia. Each vote would be stored as a block on the blockchain, making them nearly impossible to tamper with. The blockchain protocol would also maintain transparency in the electoral process, reducing the personnel needed to conduct an election and provide officials with instant results.
Advantages and Disadvantages of Blockchain
For all its complexity, blockchain’s potential as a decentralized form of record-keeping is almost without limit. From greater user privacy and heightened security to lower processing fees and fewer errors, blockchain technology may very well see applications beyond those outlined above.
Improved accuracy by removing human involvement in verification
Cost reductions by eliminating third-party verification
Decentralization makes it harder to tamper with
Transactions are secure, private and efficient
Significant technology cost associated with mining bitcoin
Low transactions per second
History of use in illicit activities
Susceptibility to being hacked
Here are the selling points of blockchain for businesses on the market today in more detail.
Accuracy of the Chain
Transactions on the blockchain network are approved by a network of thousands or millions of computers. This removes almost all human involvement in the verification process, resulting in less human error and a more accurate record of information. Even if a computer on the network were to make a computational mistake, the error would only be made to one copy of the blockchain. In order for that error to spread to the rest of the blockchain, it would need to be made by at least 51% of the network’s computers—a near impossibility.
Typically, consumers pay a bank to verify a transaction, a notary to sign a document, or a minister to perform a marriage. Blockchain eliminates the need for third-party verification and, with it, their associated costs. Business owners incur a small fee whenever they accept payments using credit cards, for example, because banks have to process those transactions. Bitcoin, on the other hand, does not have a central authority and has virtually no transaction fees.
Blockchain does not store any of its information in a central location. Instead, the blockchain is copied and spread across a network of computers. Whenever a new block is added to the blockchain, every computer on the network updates its blockchain to reflect the change. By spreading that information across a network, rather than storing it in one central database, blockchain becomes more difficult to tamper with. If a copy of the blockchain fell into the hands of a hacker, only a single copy of the information, rather than the entire network, would be compromised.
Transactions placed through a central authority can take up to a few days to settle. If you attempt to deposit a check on Friday evening, for example, you may not actually see funds in your account until Monday morning. Whereas financial institutions operate during business hours, five days a week, blockchain is working 24 hours a day, seven days a week. Transactions can be completed in about ten minutes and can be considered secure after just a few hours. This is particularly useful for cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing.
Many blockchain networks operate as public databases, meaning that anyone with an internet connection can view a list of the network’s transaction history. Although users can access details about transactions, they cannot access identifying information about the users making those transactions. It is a common misperception that blockchain networks like bitcoin are anonymous, when in fact they are only confidential.
That is, when a user makes public transactions, their unique code called a public key, is recorded on the blockchain, rather than their personal information. Although a person’s identity is still linked to their blockchain address, this prevents hackers from obtaining a user’s personal information, as can occur when a bank is hacked.
Once a transaction is recorded, its authenticity must be verified by the blockchain network. Thousands or even millions of computers on the blockchain rush to confirm that the details of the purchase are correct. After a computer has validated the transaction, it is added to the blockchain in the form of a block. Each block on the blockchain contains its own unique hash, along with the unique hash of the block before it. When the information on a block is edited in any way, that block’s hash code changes—however, the hash code on the block after it would not. This discrepancy makes it extremely difficult for information on the blockchain to be changed without notice.
Even though personal information on the blockchain is kept private, the technology itself is almost always open source. That means that users on the blockchain network can modify the code as they see fit, so long as they have a majority of the network’s computational power backing them. Keeping data on the blockchain open source also makes tampering with data that much more difficult. With millions of computers on the blockchain network at any given time, for example, it is unlikely that anyone could make a change without being noticed.
Disadvantages of Blockchain
While there are significant upsides to the blockchain, there are also significant challenges to its adoption. The roadblocks to the application of blockchain technology today are not just technical. The real challenges are political and regulatory, for the most part, to say nothing of the thousands of hours (read: money) of custom software design and back-end programming required to integrate blockchain to current business networks. Here are some of the challenges standing in the way of widespread blockchain adoption.
Although blockchain can save users money on transaction fees, the technology is far from free. The “proof of work” system that bitcoin uses to validate transactions, for example, consumes vast amounts of computational power. In the real world, the power from the millions of computers on the bitcoin network is close to what Denmark consumes annually. All of that energy costs money and according to a recent study from research company Elite Fixtures, the cost of mining a single bitcoin varies drastically by location, from just $531 to a staggering $26,170.
Based on average utility costs in the United States, that figure is closer to $4,758. Despite the costs of mining bitcoin, users continue to drive up their electricity bills in order to validate transactions on the blockchain. That’s because when miners add a block to the bitcoin blockchain, they are rewarded with enough bitcoin to make their time and energy worthwhile. When it comes to blockchains that do not use cryptocurrency, however, miners will need to be paid or otherwise incentivized to validate transactions.
Bitcoin is a perfect case study for the possible inefficiencies of blockchain. Bitcoin’s “proof of work” system takes about ten minutes to add a new block to the blockchain. At that rate, it’s estimated that the blockchain network can only manage seven transactions per second (TPS). Although other cryptocurrencies like Ethereum (20 TPS) and Bitcoin Cash (60 TPS) perform better than bitcoin, they are still limited by blockchain. Legacy brand Visa, for context, can process 24,000 TPS.
While confidentiality on the blockchain network protects users from hacks and preserves privacy, it also allows for illegal trading and activity on the blockchain network. The most cited example of blockchain being used for illicit transactions is probably Silk Road, an online “dark web” marketplace operating from Feb. 2020 until Oct. 2020 when it was shut down by the FBI.
The website allowed users to browse the website without being tracked and make illegal purchases in bitcoins. Current U.S. regulation prevents users of online exchanges, like those built on blockchain, from full anonymity. In the United States, online exchanges must obtain information about their customers when they open an account, verify the identity of each customer, and confirm that customers do not appear on any list of known or suspected terrorist organizations.
Central Bank Concerns
Several central banks, including the Federal Reserve, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. According to a Feb. 2020 Bank of England research report, “Further research would also be required to devise a system which could utilize distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.”
Newer cryptocurrencies and blockchain networks are susceptible to 51% attacks. These attacks are extremely difficult to execute due to the computational power required to gain majority control of a blockchain network, but NYU computer science researcher Joseph Bonneau said that might change. Bonneau released a report last year estimating that 51% attacks were likely to increase, as hackers can now simply rent computational power, rather than buying all of the equipment.
What’s Next for Blockchain?
First proposed as a research project in 1991, blockchain is comfortably settling into its late twenties. Like most millennials its age, blockchain has seen its fair share of public scrutiny over the last two decades, with businesses around the world speculating about what the technology is capable of and where it’s headed in the years to come.
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself at age twenty-seven, in no small part because of bitcoin and cryptocurrency. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, and secure.
As we prepare to head into the third decade of blockchain, it’s no longer a question of “if” legacy companies will catch on to the technology—it’s a question of “when.”
Trade Finance Blockchain: Redesigning The World of Trades and Businesses
The growth of the trade finance market heavily depends on the robustness and easy availability of financial mechanisms. Trade finance is widely considered to be the fuel of global commerce. However, there is an unpleasant truth that currently trade finance deals with a lot of inefficiencies. Not to mention the extreme vulnerability to fraudulent trading.
Our typical way of depending on the paper-based system is in dire need of a change. It’s high time we moved on to more controlled and digitized solutions to ensure the safety of trillions dollar worth of industry.
With the introduction of blockchain technology, many financial institutions are now wondering how it would influence the trade finance sector. Needless to say, blockchain has proved its worth more than one occasion, and it reduces the problems in this niche too.
That’s why today we will explore the inefficiencies of the trade finance along with whether trade finance blockchain is capable of handling the load.
Table of Contents
Chapter-1: What Is Trade Finance?
Chapter-2: How Does Trade Finance Work?
Chapter-3: Creating a Trustless Platform for the Trade Finance
Chapter-4: What Are The Advantages of Blockchain?
Chapter-5: How Trade Financing Can Work Using Blockchain
Chapter-6: Popular Enterprise Blockchains Suitable For Trade Finance
Chapter-7: Blockchain Consortiums for Trade Finance
Chapter-8: Real-World Companies Using Blockchain for Trade Finance
Chapter-9: Concluding Words
Chapter-1: What Is Trade Finance?
Let’s start with the basics. Trade finance is the financial products and instruments the companies use to facilitate commerce and international trade. Trade finance actually makes it more convenient for importers and exporters to conduct business using trade.
However, the whole concept of Trade finance is much boarder category, as it’s an umbrella term. Typically it covers many financial models and products that companies or banks use to make the transactions for trade feasible.
So, in short, basic three concepts sum it up –
- Financial products and instruments the companies use to facilitate commerce and international trade.
- Importer and exporter use it to make their business more convenient through trade.
- Reduces the risk of global trade using reconciliation of the needs of exporters and importers.
Trade Finance: Fundamentals And Issues Infographic
Understanding Trade Finance
The main target of trade finance is to use a third-party for the transactions. What it does is that it removes the payment risks and also the supply risks. Trade finance gives the receivable or the payment of the agreement with the importer. However, the exporter has to credit the payment in order to fulfill the agreements in the first place.
Usually, there are numerous parties in the trade finance ecosystem. They are –
- Trade finance organizations
- Export credit companies and service providers
But you need to understand that the process of trade finance is quite different than usual financing or credit issuances. Furthermore, general financing is mainly for maintaining liquidity or solvency. However, trade financing might not always indicate if a buyer is out of liquidity or funds.
Instead, trade finance is a shield from the international risk factors such as issues of non-payment, currency fluctuations, the creditworthiness of any of the party’s involved, and political instability.
Financial Instruments for the Trade Finance
We have already discussed that there are some financial instruments in trade finance to make everything go smoothly. Usually, these are the main instruments –
- Banks lend lines of credit to help the exporter and the importer to make the deal.
- Letters of credit is an important factor as it reduces the risk of global trade. Moreover, using this the seller will know that the buyer can guarantee the payment they agreed upon. However, the buyer is also protected with it because it would not release the funds unless every agreement on the LC is met. Furthermore, both party needs to honor the agreements they had in order to make the trade go through.
- Factoring is a system where the companies will get a percentage from the accounts receivable or in simple terms a percentage of the payment.
- Working capital or export credit can be offered to the exporters.
- The exporter and importer can insure the shipment and the delivery of the products. It also protects the seller from any buyer that isn’t paying up.
In reality, international trade did exist from a very long time, but trade finance takes it to a whole other level. Moreover, using trade finance, the international trading community is growing, and it’s one of the important parts of our economy. According to the World Trade Organization, over 80-90 percent of international trade depends on trade finance.
Does it Actually Reduce the Risk?
Trade finance does reduce the risk of the international trading process according to the needs of importer and exporter. In an ideal case, the exporter would want the importer to pay up the money upfront to reduce the risk of payment. But the importer could take the shipment and not pay for the products or goods.
On the other hand, even if the importer does pay up upfront, the exporter could take the money and not ship the goods to them.
A common solution for this problem is the importer’s bank to offer a letter of credit to the exporter’s bank. Furthermore, this will enable the exporter to know that the importer will pay up once the trading is done. But for that the exporter would need to show proof of the shipment, it’s kind of like a bill of lading.
Moreover, the letter of credit will guarantee that when the importer’s bank gets proof of the shipment of products, it will release the payment. However, both of the parties need to meet all the terms and conditions.
Using the letter of credit, the importer’s bank would be responsible for paying the exporter. However, the bank also needs to make sure that their customer (importer) can really honor the payment perfectly. So, trade finance in a way ensures a form of trust between both parties and makes sure they can trade without any hassles.
Moreover, the system helps both parties to enjoy many financial benefits and mostly tailor those only for them. They can also use multiple products to help the transaction go smoothly.
Are There Any Other Benefits of Trade Finance?
So, it reduces the risk of payment and shipment but does it offer anything more than this? Well, trade finance is one of the most important tools for companies, and they use it to boost their revenue and efficiency.
There are some other reasons why this sector is truly important for us –
Improves Efficiency of Operation and Cash Flow
Trade finance helps trading companies to boost their efficiency of the business. The less time it takes, the better, right? In most cases, it’s the extension of credits. Furthermore, it will let the companies streamline the process of importing and exporting. Usually, if there’s no trade financing, they won’t trust each other to know that they will receive payment or shipment.
So, when the bank issues the letter of credit, both parties know they are getting what they wanted. So, overall it improves their business efficiency. Moreover, with the steady line of credit, they have good cash flow coming in.
In simple terms, it will shorten the time for payments and even shipments, which allows both parties to run their company without any problems. In reality, it’s a win-win situation for both of them.
Trade finance allows organizations to increase their revenue and business using trade. For example, a company might not be able to seal a deal with an overseas organization due to lack of money or produced goods.
But with the help of export financing they can pay up the bill, and other parties could get the goods they needed for the shipment. As a result, both companies are getting a business that they might not have without the help of trade financing companies.
No Financial Hardship
Believe us when we say that even the big organization face financial hardships in terms of payments. In reality, shipping goods especially large amount of products requires a lot of money. But if they can’t pay up smoothly or fall behind then, they can lose one of their potential customers.
Revolving credit options ensures that the payment gets done in time. Not only that but it also helps them out in times of financial crisis.
Chapter-2: How Does Trade Finance Work?
Let me clarify it with an example if you are still confused with how the whole process works. In the current standard of trade finance, let’s say a company named XYZ in the U.S.A is trying to import a shipment of products forms a suppliers ABC in Japan.
Moreover, here the XYZ company would have to pay for the products, but they are hesitant because they don’t know whether they will get the shipment of products or not. On the other hand, the company ABC is also hesitant to send out the shipment because they don’t know whether the company XYZ will pay up in due time.
Furthermore, in this middle point, the XYZ’s bank issues a letter of credit to the ABC Company via their bank. In the letter, they will propose an agreement of paying up the money once they get documents such as the bill of lading as proof.
Here, the bill of lading means legal documentation stating that the goods are on a cargo ship, or train, or truck. And so, both of the parties are protected with the help of the banks and get their desired money or goods.
The structure is around for over a century and mostly remains like this without any changes. However, the issue with this structure is the enormous pile of paperwork from every party linked with the trade. These parties such as importer, exporter, exporter’s bank, importer’s bank, receiving company, shipping company, insurers, local shippers and many more have to have paperwork’s to confirm their trust.
Every step of the way they would have to verify their accuracy using them.
We’ve talked about trade finance, how it works and you probably have a great idea about it now. But in today’s scene, the system isn’t all positive anymore. Let’s examine how trade finance today looks like.
Today’s Trade Finance Scene: Disruption at Its Bay
Any kind of efficient trade of physical products relies on typically three types of facts – Transparent payment, solid logistics, and credit. Moreover, trade finance actually gets rid of the problems of all these established instruments such as issuing the credit, document transfers or even shipment of goods and lastly execution of the payment.
However, even though the process is quite established still, many companies are facing issues with it. According to them, it’s becoming harder to manage the whole system. But why is that?
To answer the question, we have dive into the roots of the system. In reality, trade finance targets importers and exporters of a specific size. Furthermore, only medium to large enterprises can truly afford the trade finance instruments such as a letter of credit or other payment services from the buyer’s part.
Not to mention the insurers or other shipment company fees. Any company who uses trade finance already knows that a balance of all the instruments actually forms the system.
But change is heading toward the method, disrupting the usual tradition.
Usually, companies deal with seven main issues –
Low Customer Experience
Here, the customers are the exporters and importers and the complex nature of the system makes it hard to keep track of all the parties involved in the trade. Moreover, it requires a lot of coordination from many sources such as banks, insurers, shipping companies, etc. Furthermore, this leads to adverse effects like long waiting time, complicated process, paperwork, low transparency, low level of certainty and many more.
But it doesn’t end only here, many importers have to deal with fake deliveries where the exporter offers the documents, but in reality, they do not ship out the goods. In these cases, even the letter of credit can’t do much.
Increasing Cost Pressure
Creating the letter of credit is a high-cost pressure point for both the clients and the banks. Moreover, if somehow any party files dispute it takes a relatively long time and takes up quite a lot of money. Furthermore, the restricted profile of trade finance customers makes it less scalable. However, if a company builds up a volume of business they might be able to reduce the costing. So, the solution is still not good.
Substantial Regulatory Burden
In terms of international trade, both parties have to maintain all regulations accordingly. But to do that there needs to a middle man or system that can reduce their trust issues. Furthermore, managing geopolitical risks – trade barriers, sanctions, fraud prevention, and the KYC/AML protocols are becoming a mandatory part of trade finance.
In reality, the process mainly drives up more operational overheads along the way.
Product risks are another massive challenge in trade finance. Usually, a seller would have to consider some risk associated with the products. Unfortunately, no one can minimize these or completely left these out.
For example, service obligations agreed on maintenance, or specified performance warranties are few of the probable product risks. Furthermore, the importer needs to check whether the product conditions are right or how much the weather could affect the shipment.
If both parties do not consider these pain points, then they will most likely lead to disputes even after they agreed on the contract from beforehand. Moreover, the seller also has to make sure that they word the contract perfectly and leave nothing out.
Additionally, the exporter would need to keep everything by default so that any changes would include the compensation of the buyer and the seller.
These risks are quite common when it comes to trading. Usually, manufacturing risk is common for products that need to have unique features or are fashioned in a different way. In that case, the seller would have to readjust the end products until they can meet the demand of the buyer. Moreover, it’s a risk that they need to take because they can’t sell these products to other buyer’s weather.
If you are an exporter, you would need to address these risk right in the product planning phase. But if you don’t the buyer might not pay up the due money. On the other hand, if you do consider these risks, then the buyer would be obligated to pay up at that phase of the trade.
To minimize the risks usually, both parties make agreements and fractional payments through the manufacturing, processing and delivering phase. However, at present fraudulent activities make it a risky move too.
Other than risks with the manufacturing process, a great deal of problems just lies ahead. In this phase, you’ll be shipping it to the buyer or buying it from a seller. So, for that, you would need to get a transport and cargo insurance. Usually, standard international policy schemes cover those, but sometimes they can be a burden too.
In case of no insurance, you always have a risk of losing your shipment to an accident or natural disasters.
Furthermore, there’s a debate in this case. Typically it’s not clear which party will insure the shipment. If the seller does it, then they can estimate all the risk factors and get the insurance as they need during their agreement. But in the case of the buyer to do it, it might not be an ideal scenario.
In particular, if the buyer insures some of the cargo shipment and leaves out other possibilities the whole insurance could become invalid. In fact, if they don’t point out which direction the shipment will take the insurance can become invalid.
Nowadays, markets are tough. Furthermore, foreign exchange levels always keep fluctuating. You never know when the prices might go up or down. Moreover, all of these mean that you need to have a strong strategy against currency risks.
Furthermore, governmental influences and regional politics may pressure the market and make it a tight margin point for you.
There are many risk management policies for currencies, but most of them run on a centralized system, and they are easily influenced. Additionally, you could take up some of these policies, but as we can see it might not be enough. Typically, because policies need to be really flexible but they aren’t.
Exchange rate fluctuations can affect any kind of businesses no matter how big or small they are. Furthermore, these risks are really important to consider because it involves a change in cash flow, assets, and liability.
For example, you might see a greater exchange value when you shipped your goods, but when receiving money, the conversion value could fall. And when you are dealing with millions and millions even a drop in cent could lead to big losses.
For that, both parties need to see which currency they are using to make payments and how much volatile that marketplace is. In a fast world, maintaining all these becomes a tough job, and many companies lose profits for that.
So, in short, you are getting a trade finance system that comes with built-in vulnerability. Furthermore, the process is complex, expensive to continue and with limited scope. The business seriously needs a change in scene and reduction in cost.
But how will we that? Let’s see if we can use blockchain for trade finance in this regard.
Chapter-3: Creating a Trust-less Platform for the Trade Finance
Trade finance blockchain will get its true potential is it’s able to meet up with the demands of trading companies along with offering better solutions for them. But for this to happen people needs to reopen closed systems if the banks truly want to utilize the overall market potential.
If they don’t come forward, then newer disruptive payers will start to use the technology and create more solutions. Furthermore, this in term won’t be a great stepping stone for trade finance marketplace. So, to make a meaningful impact it has to offer something more unique or broader in the trade finance blockchain.
Moreover, trade finance blockchain can actually move away from the limited set of clients and offer trading services to any kind of company that can afford the fee. Thus, it won‘t be limited to the only medium to large corporations only.
Trading Needs From an Open Ecosystem
By contrast, blockchain for trade finance can offer a marketplace where any importer or exporter can quickly and easily get access to credits or insurances or other advisory solutions.
But to make it all come true trading needs to run on trade finance blockchain platform. Furthermore, the platform is best suited for the cause because it’s open, transparent and automated and so companies won’t have to rely on trust anymore.
So, what are the needs for trade finance actors from the new platform?
Quick Transactions: The operational team of trade finance needs to have a faster transaction, which will in return reduce the daily overheads. Moreover, it will help them to focus on the experiences to deal with disputes.
Tracking Transactions and Applying for Credit: All the importers and exporters want to apply for credits and make the payment without any hassles. Moreover, they also need to track transaction status in real time.
No Violation: Logistics provider needs to understand the concept of the agreement fully. So, they have to ship the good in a time where no violation of the deal would occur.
Full Transparency: Well, obviously they need a fully transparent process in the overall trading system. This way they can minimize the risks associated with it. We’ll talk about how the role of trade finance blockchain can actually accomplish all these needs.
Can An Open Platform Offer Any Solutions?
A trade finance blockchain platform will be open to all parties, and it will at least offer two significant advantages –
- Self-service Smart Contracts: Trade finance blockchain platform can offer API standards for creating contracts. Furthermore, any exporter or importer can simply build their contracts using the platform or any other website that offers specific trade finance blockchain APIs for contracts — using building blocks or predefined templates to keep everything going easily.
- Conditional Settlement and Payment Gateway: Trade finance blockchain platform allows logistics, financials, bank operators and intermediaries to track and make the payment. Furthermore, it also acts as a payment gateway but follows the rules of the agreement. Moreover, you can use any trade finance blockchain software to adapt to make it a new kind of gateway.
- Transparency: Trade finance blockchain platforms can offer the level of transparency they need to use it in real life events. Furthermore, this will drastically reduce counterfeit products or any other fraudulent activities.
These are some of the few points that the trade finance blockchain can offer to the trade finance. It’s just an envision. However, people nowadays are using blockchain for trade finance.
But with technological advancement, it’s quite common for the platform to offer specific features for a specific type of companies. Furthermore, what we mean is that if you are running an enterprise, you will get solutions for your enterprise needs.
On the other hands, smaller companies don’t have large quantity needs. Moreover, the need for trade financing actually varies from company to company. So, getting a trade finance blockchain only for your specific needs should help out a deal with the situation a bit.
Trade Finance Blockchain to the Rescue
The new digital need for security is rising everywhere. Furthermore, as everything is becoming digitalized everyone wants extreme security for their companies. In this regard, blockchain truly comes to the rescue.
With its new decentralized model, it’s redefining the values of operations and interactions. Moreover, it’s also quite cost-effective. So, why won’t you use it, right?
Three key features of blockchain technology are actually revolutionizing the pain points of trade finance. And with these three characteristics, you can create trade finance blockchain platforms for your needs. Additionally, these are cryptographic security, consensus mechanism, and distributed ledgers system.
Blockchain is full of surprises. It comes with a cryptographic security mechanism that allows everything on the ledger to be immutable and credible. So, when you are storing trade transactions on the ledger system, no one will be able to alter them in any way.
Thus, everything on the ledger will be a credible source of information. With special permissioned access, you can also determine who can see your trade transactions and who can’t.
It means no one party would have full control over the whole network. Everything will get distributed among the parties involved in the process, mainly the consensus process. Furthermore, this helps trade finance blockchain to manage contractual bargains, make the network resilient and get rid of any manipulation.
The consensus mechanism is really important for any trade finance to run smoothly. It allows all the parties involved to agree with the transaction and add it up to the ledger. Furthermore, if you are using any native currencies then you can get rid of the double spend issue, need for reconciliation within the trading issue and fraudulent activities.
In reality, all these features come together and form the foundation of trade finance blockchain. Furthermore, it allows trade finance blockchain to be robust and synergetic. Can it get any better than this?
Check out our guide on Blockchain for Healthcare now!
Blockchain Advantages And How Trade Financing Can Work Using Blockchain Infographic
Chapter-4: What Are The Advantages of Blockchain?
Real-Time Previewing and Reviewing
Any document related to trade finance on the platform can be reviewed to see its authenticity in real-time. When two parties would create the contract, they would have to attach certain documents to make sure that everything is authentic. In order to that, they can directly upload the documents to the trade finance blockchain ledger.
Furthermore, after checking the authenticity and making sure that they are valid, both party can preview these in real time. Moreover, in this way they can reduce a lot of timing as usually both parties bank or financial support takes care of it and sometimes these documents take a lot of time to get processed.
In reality, during the exchange of these documents sometimes fraudulent activities happen. So, you might send out an authentic document, but en-route it might get tampered with. Furthermore, the other party could also tamper with it and claim that you did not send out the authentic papers in the first place. This gives rise to disputes.
However, blockchain for trade finance can take care of the situation quite easily as the platform is secure. Moreover, no one would be able to tamper with it.
Blockchain can offer transparent viewing of the invoices which helps to factor them for short-terms. In reality, this situation occurs when you would need immediate cash to run your business. Invoice factoring is a different kind of financial transaction and a special kind of debtor finance. Furthermore, a company can sell its invoices to a third party company at a discounted pricing.
Obviously, you would have to compromise with the profit of the unpaid invoices; however, you’ll be getting immediate cash flow. Furthermore, mitigating credit risks are one of the major reasons for invoice factoring.
Maybe and exporter is selling good to an importer and give them the correct invoices. In reality, it takes up 30, 60, or even 90 days to confirm the payment. Thus, the exporter could sell the unpaid invoices to a factoring company.
They will give you let’s say 90% of the payment within that day. Moreover, they will later get the payment directly from the importer. As you can see the exporter needs to pay up a fee for that and the fee is the discounted invoices.
What you can do in trade finance for blockchain is to upload or sell your unpaid invoices to the factoring company in the platform. Furthermore, they can check the invoices and make sure they are all unpaid and is of a creditworthy client. After that, they can process the payment, and you’ll get it within the day.
After the shipment is made and the importer receives the goods, they can make the payment to the factoring company and close the contract. So, you would not have to wait after the shipment is made, you can get paid within the day of your shipment or even before that.
No need for going for an intermediary and increase the risk of fraudulence. Instead, banks can safely facilitate trade finance without issues. Usually, in trade finance banks have to trust a middleman to keep contacts with the other party and send out sensitive information.
In reality, the middleman is a strong point of fraudulent activities, and they aren’t trustable. But with blockchain for trade finance, you won’t have to think about that. Moreover, banks can directly now contact with other party’s bank and process all the documents accordingly. The blockchain trade finance platform is highly secured, and it can offer a peer-to-peer connection for that.
No Double Spending
All the bills of lading can be tracked from the blockchain, which eliminates the chance of double spending. In reality, bills of lading need to be checked thoroughly to ensure that you are not paying for more goods than what you ordered. Bills of lading is actually a thorough list of the shipment’s contents. Furthermore, the seller can change the numbers of goods; this can create a double spending scenario.
But with blockchain trade finance platform you will be able to track the bills of lading, and you won’t have to spend more or less than what the original bill is.
Smart Contract Execution
Smart contracts are essential in trade finance blockchain. Furthermore, the contract both parties originally agree to is fully on the platform now. All you’ll need to do is meet your partner from the platform and write a smart contract agreement with predefined rules.
But keeping track of all the rules and fulfilling each one of them is tough. That’s why the status of the smart contract agreement will get updated in real time, which will reduce the paperwork and time. Furthermore, after completing each of the requirements, both parties will get an update of the overall process. This will ensure that both of them know when the trading will be done and in what stage do they stand.
Proof of Ownership
Blockchain can offer proof of ownership and be fully transparent of the location of the shipment. Proof of ownership would come from the exporter that they no longer own the good instead the importer owns them from now on, and they use them as they wish.
However, the proper processing of this legal document becomes quite complicated, mostly in case of international trades. Blockchain for trade finance in this matter can make it much simpler. Furthermore, the change of ownership would take place in the blockchain trade finance platform, and both parties can exchange documents with their signature to seal the deal.
Moreover, after that the importer can use the documents legally, there will be no issues with it.
As we said earlier, there are lots of hurdles in the case of international trading. Furthermore, you could face issue in other countries for something totally legal in your country. Also, the shipment also needs to maintain the laws and regulations while traveling if it would pass through other regions on the way.
Thus, it gives rise to a lot of complexities, and many find it hard to keep track of them. However, with blockchain for trade finance, all the regional regulations can get maintained just from one place. Furthermore, it can also enforce KYC/AML solutions to make it more solid.
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Possible Blockchain Trade Finance Use Case
There are many blockchain trade finance use case. Let’s see what they are, shall we?
Payment Certainty Using Automation Process
Well, traditionally letters of credit actually offer an effective way to reduce the risk of international trading. However, this is proving to be unproductive for that matter. Why?
Because of the higher price point that it comes in. Typically, banks facilitate the settlement and trade flow, and they offer the letters of credit.
Moreover, everything of the letters of credit is based on the documentation, but it doesn’t include the delivery of goods or even the quality of good. Furthermore, sometimes it even does not include technical legal aspects of the contracts.
As a result, the bank phrases out certain points and maintains discretions. In reality, this type of situation gives rise to disputes as many times people misinterpret them. Moreover, errors in terminology requirements make it much worse. Furthermore, for this, goods remain at the delivery location without being claimed.
If any kind of data mismatching occurs between the LC and trade documents payments, get delayed. So, unless the buyer approves it, the seller won’t get it, which is a loss for the seller. Moreover, if the LC is valid for only a short window time and the shipments take longer to process, then it becomes invalid. Therefore, causing more trouble than reducing it.
How Blockchain Trade Finance Use Case Can Help
That’s why in this case, blockchain trade finance use case can really come in handy. With the help of blockchain trade finance use case, you can model the LC as a self-executing smart contract.
Using this method would automate compliance verification according to the trading terms, and it would be secure and faster payment for the seller. You would not have to worry about the payment in case of issues because there won’t be scope for that.
Moreover, automating the process would also mean that any discrepancies rising would get detected from the start. That’s why it’s one of the efficient blockchain trade finance use cases.
Delivery Assurance for Buyers Using Trade Asset Tokenization
Visibility is one of the major keys in terms of trade finance. It’s because buyers would have to know about the timely indications of when they might get the potential shipment of goods. Furthermore, to fulfill their downstream obligations, they need to know about the location of the shipment.
However, in many cases, buyers actually lack this scenario and don’t have a proper insight into the possible delay factors or bad weather outcomes, port congestion, and many other cases until the actual time of delivery. Furthermore, this limits the option to foresee business risks and mitigate those.
Other than these trade documents also come in separately from the shipment. So, even though you got the shipment, you won’t be able to claim it until you get the proper documents for that. Moreover, people can easily forge documents to manipulate certain valuable points, which in term leads to disputes.
Furthermore, it mainly happens due to interactions within the stakeholders, trade procedures, variations in the regulations in countries, and lack of proper security protocols. Thus, you’ll see more and more document frauds between trading companies.
How Blockchain Trade Finance Use Case Can Help
On trade finance blockchain platform, you can easily solve this issue. Furthermore, the blockchain trade finance use case is more than capable of handling delivery issues. You can use the blockchain for trade finance platform to digitize all the trade assets using crypto-tokens. Moreover, you can also use it to denote custody or change the ownership of the bearer alongside the shipment process.
All you’ll have to do is link the transfer between the two trading companies and establish a chain of provenance. Furthermore, any relevant party can also issue the trade documents directly on the blockchain trade finance platform without any hassles.
Moreover, tokenizing assets on the blockchain for trade finance platform offers better risk management option instead of relying on the physical documents. Coupled with the real-time tracking option of the trade finance blockchain they can reduce the risk further as they will know exactly where the shipment is.
Furthermore, if you start using blockchain trade finance use case for exchanging documents such as a bill of lading, you would reduce the hold-up timing of the cargo. Moreover, you’ll also be able to prevent losses due to document manipulation using trade finance blockchain easily.
Reducing Risks and Increasing Revenues through Payment Instrument Digitization
Different trade receivables act as a negotiable instrument for the supplier or even the buyer. Instruments such as drafts, checks, bills of exchange, and notes can get you the security you need. However, you would need to file them in the bank or use other financial institutions for it.
Furthermore, this ensures that you have the funding to make the sale or at least transfer all the instruments using discounts, forfeiting and factoring.
However, in many cases, banks have to deal with a lot of deceivable factors. These are limited availability of the trade information, higher costing of manual screening, and many other factors that make them vulnerable.
As a result, you might face substantial loss such as fake receivable, duplicate financing, costly lawsuits, reputational damage, multi-million dollar fines, etc.
Furthermore, another major pain point in financing is the unavailability of timely trade credits and insufficiency for SMEs. As a result, they receive deferred payment rules from the buyers, but there’s no liquidity to meet up with their capital demands.
Furthermore, the overhead for issuing, transferring, storing and redeeming of the receivable documents make it an inefficient, time-consuming and costly option. So, in the end, you are stuck with an overly slow system for trade financing.
How Blockchain Trade Finance Use Case Can Help
Blockchain trade finance platform can literally help out in this case. In reality, all the payment instruments are actually credit instruments for the trade transaction. So, you can directly issue them on the blockchain trade finance platform as a native asset.
Furthermore, you will also be able to create promissory notes or bills of exchange right on the blockchain trade finance platform between issuing and redeeming companies. If you can directly issue all the payment instruments on the blockchain trade finance platform, then you will get rid of the fraudulent invoicing issue surrounding SMEs.
Moreover, you will also be able to increase the level of liquidity on the blockchain for trade finance platform. This will, in the long run, reduce the level of risks and increase your overall revenue.
Identifying Good Partners through Identity Management
Identity management is one of the important issues of trade finance. Usually, when it comes to international trading, there are hardly any options to meet or verify the company you will be partnering up with.
That’s why in many cases, there are a massive amount of fraudulent activities with the true identity of the company. Many companies claim opportunities that they can’t offer and many share wrong information about their company.
Also, there’s a group of con-companies that pretend to buy or sell goods to companies, but at the end of the trade, they do not pay up or even send the shipment. Also, banks have to fully facilitate trade transactions to cover all the risk of delivery or payment of both parties.
However, with no proper channel for identity management, they sometimes have to deal with massive losses too.
How the Blockchain Trade Finance Platform Can Help
Now with the advancement of the technology blockchain, trade finance platform can offer you identity management system. So, for that, any party who wants to join the network has to prove their identity, and you can preserve those documents on the blockchain for trade finance platform.
Moreover, making sure they are authentic or actually is who they claim to be will be super easy as you will be able to do it in real-time.
Once the creditworthiness of the companies is confirmed, you can ensure that all the history of the documents will be on the blockchain based trade finance platform. Thus, you can manage all of them from one place.
Furthermore, preserving all the identities of companies will also offer a more transparent and effective blockchain based trade finance platform.
Contract and Document Management through Immutable Ledger
As you’ll be dealing with a lot of paperwork in trade finance, it’s quite common for you to manage all the documents and contracts accordingly. Usually, people need to verify certain documents at certain times along the way of trading. Thus, it becomes important that you manage all of them or else even if you make a single error it could cause an issue.
On the other hand, you would have to deal with a lot of legal aspects too. So, any minor issue could lead to lawsuits or large fines. In reality, not many can actually manage all the documents accordingly and also maintain all the rules properly.
How Blockchain Based Trade Finance Platform Can Help
Blockchain-based trade finance platforms can easily manage all your trade-related documents from the network. Furthermore, documents such as regulatory, financial, insurance and commercial all are full proof as you can hash them and make them accessible to relevant parties.
So, everyone will just make changes to the recent version and everything other than that will be immutable.
Usually in blockchain based trade finance platforms will be immutable meaning no one will be able to change anything. However, as it needs to be updated constantly, every user needs to make changes to the recent files. Obviously, for that, you will need certain authorizing access. All the documents would need auditing before getting stored on the ledger.
Furthermore, keeping everything on the immutable channel of the blockchain based trade finance platform ensures a better output every time.
Reduced Transaction Fees with Automated Settlement
As you already know there are numerous players in trade finance. However, not every one of them is necessary for the new trade finance blockchain model.
For instance, banks usually make a settlement and ensure that both parties are getting equal rights. However, these processes or the service the bank offers takes up a lot of time and money.
More specifically letter of credits is few of the financial statements that require a high level of cost. So, in a sense banks are also a medium or middleman in terms of trade financing.
How Trade Finance Blockchain Platform Can Help
The trade finance blockchain model offers a lot of different ways to make the trade. You can use the usual way and do everything on the ledger. In this trade finance blockchain model, you will deal with every single traditional trade finance players.
However, if you and your trade partner have proper trust levels or even confirmed valid identification, not every layer is needed during the trade. You can just execute the contract using smart contract features on the trade finance blockchain platform. That’s why you need to implement blockchain for business.
Furthermore, all you’ll need to do is to set up the rules that you both agree upon and use the native token to make the trade. By doing this, you won’t have to pay up big service fees to any middleman’s. Another possibility is that when you are dealing with stable native assets, they are much more durable than fiat currencies.
So, during cross border payment you won’t have to worry about conversion issues with trade finance blockchain. Moreover, transaction fees in the trade finance blockchain platform are quite small, so it’s a win-win situation for everyone.
Want to know more about Blockchain Transformation? Check out our Blockchain Transformation playbook!
Chapter-5: How Trade Financing Can Work Using Blockchain
Step-1: Use Trade Finance Blockchain Platform to Meet Trading Partners
Let’s start with the very first step. In case of trade financing to go through you would need to meet with other companies to get to an agreement. Furthermore, your selling needs and buying needs would differ from company to company and getting the most suitable partner is the challenge.
Due to the lack of liquidity trading becomes a bit difficult. So, connecting with the right customer isn‘t one of the perks of trading. For example, you may need a shipment of coats, but it needs to be specially made according to your brand. Moreover, to do that you are trading with an overseas company who manufactures coats. However, they aren’t able to modify it according to your needs.
The problem is that it’s not easy to switch to another company when you are in a marketplace without any liquidity. Furthermore, you might not even know about other players that offer a special modification.
However, when it comes to trade finance on blockchain, you can get the liquidity you want for your specific niche. Companies from all around the globe can come together on the platform and choose their best potential trading partner.
More importantly, as everything on the blockchain and trade finance platform is authentic, there’s no chance of any fraudulent company to exist there. Furthermore, this will allow the buyer and seller to use blockchain and trade finance platform to find potential trading partners who are trustable. It will be like a marketplace where there will be a matching engine to match buyers and sellers.
Moreover, everyone will outline their capabilities and requirements to get a better output in trade finance on blockchain.
Step-2: Create a Smart Contract and Initiate an Order
Once you find your potential partner, you will start an agreement with them on the blockchain and trade finance platform. For that, you would need to contact them directly using the peer-to-peer network connection.
Once you know that all the agreements are approved by both parties, you can start to define the rules using smart contracts on the blockchain and trade finance platform. Any trade finance on blockchain platform will offer smart contract features because it’s one of the necessary elements. Furthermore, creating a digital contract on the blockchain and trade finance platform is quite easy.
Moreover, many trade finance on blockchain companies offer templates for setting up the contracts. So, you won’t need technical knowledge to do that either. After that, when both parties view the contract in real time and agree, the buyer will initiate the order.
Step-3: Bank Payment Undertaking Of the Buyer
As you already know by now, both parties bank mainly take care of the payment process of trade finance. So, in the case of trade finance on blockchain, both parties’ banks will also be on the smart contract agreement.
In this way, they will view the contract and the process and then initiate certain steps that need their actions. Furthermore, when smart contract conditions are met, they can settle the payment using the trade finance on blockchain platform. Moreover, the payment will be from the buyer’s bank account to the seller’s bank account.
Step-4: Receivable Financing For the Seller
Usually, trade finance payment takes place within 30, 60 or 90 days. It mostly depends on the shipment timing. Furthermore, the shipments in international trade could take up a lot of time depending on the route.
Moreover, the seller might not have time to wait for that long to get the payment. Instead, they can speed up the process for receivable financing from its bank. How will they do it?
They can sell their invoices to another factoring company and get cash instead, on the blockchain and trade finance platform. Furthermore, the seller’s bank will provide the invoice, and the factoring company will get on the smart contract agreement and pay up the seller.
After that, the factoring company and the buyer will be directly working together on the smart contract using the blockchain and trade finance platform.
Step-5: Shipment and Tracking of Goods
Tracking the process of shipment on the blockchain and trade finance platform is super easy. Additionally, the process is similar to tracking supply chain products. A tracker will let the buyer and seller know exactly where the cargo is. Furthermore, it won’t matter which way the seller is shipping the goods. The tracker will always let them know of the exact location and condition of the goods.
More advanced trade finance on blockchain platforms offers special tracking options. Moreover, they allow you to know certain features such as weather conditions or temperature or the intactness of the goods. Furthermore, you will also be able to track the quality of a product if it’s weather sensitive.
So, once the seller ships the goods, both parties will track the process of the shipment.
Step-6: Buyer Confirms the Trade
Once the buyer gets the shipment and sees the smart contract update, they will contact the shipping company to confirm it. Once every document is proved authentic in the platform, the buyer will confirm the trade in the smart contract.
Furthermore, for confirming the will be an option to click a button to confirm it. In case of any disputes, there will be an option to settle the dispute in the trade finance on blockchain. Moreover, you will get multiple options to choose what type of conflict or complaint you have against the buyer or seller.
After the processing of that, the buyer will then confirm the payment using trade finance on blockchain. However, in the case of different resolution, certain actions will take place.
Step-7: Seller Gets the Payment
The shipment is made, and the buyer confirmed that on the blockchain and trade finance platform. So, the smart contract will automatically initiate the payment for the seller using trade finance on blockchain.
Firstly to do this, the buyer’s bank will debit the amount of money from the account and then send it directly to the seller’s bank account. Secondly, the seller’s bank will confirm the payment on the blockchain and trade finance platform. Lastly, both parties will end the contract as everything went through on point.
Check out our guide on Blockchain for insurance from here!
Blockchain Consortium, Companies And Popular Enterprise Blockchain Platforms For Trade Finance Infographic
Chapter-6: Popular Enterprise Blockchains Suitable For Trade Finance
There are many enterprises implementing blockchain. However, not every one of them is suitable for trade finance niche. Finance is one of the vital use cases of blockchain technology, and many enterprises now offer special solutions for trade finance blockchain platforms.
If you are looking for the best trade finance blockchain companies to fuel your project, then you should definitely check out all options form below. We’ve handpicked the most popular and best suitable enterprise blockchain suitable for trade finance. So, let’s see what they are –
Let’s start with one of the major players in this industry – Hyperledger. Hyperledger is a project of Linux, and it came to be from the year 2020. Furthermore, Hyperledger happens to be a great solution for various kind of industries including trade finance.
Trade finance blockchain companies would definitely find it a fitting match for their project because of the wide integration. At present Hyperledger has more than 185 collaborations in progress. Moreover, with ten different types of projects in the bag, Hyperledger is practically ruling the market.
You’ll be pleased to know that many of their projects support the trade finance niche and offer exclusive features just for that.
What Does It Offer?
Permissioned Blockchain System
The trade finance blockchain technology comes with the permissioned framework. So, when you are joining the network, you would need to verify your identification. Furthermore, you will be able to find your relevant partners easily.
High Scalability with Greater Performance
Trade finance blockchain platforms need to be scalable. Also, they need to cover thousands of transactions within seconds. That’s why Hyperledger offers high scalability with premium quality output.
Need-To-Know Data Availability
Trade finance blockchain platforms have to deal with a lot of sensitive documentation. Furthermore, they would also need to make sure that only the trading partners can see those. For that, Hyperledger offer only need to know data availability in the ledger.
Rich Queries Languages
Hyperledger offers rich query languages, so it would easy for any trading company to search through the database.
Adding up new features in the trade finance blockchain platform would be an easy thing with the modular structure of the network.
Safety Measurement for Sensitive Data
Hyperledger knows that all financial services have to have high-quality security that no one can hack into.
Ethereum Enterprise Alliance
Another great enterprise platform for trade finance blockchain companies is the Ethereum Enterprise Alliance. Ethereum is one of the oldest blockchain technology and the most popular one for that matter on the market. Furthermore, every problem with the bitcoin architecture is non-existence in Ethereum.
Moreover, this platform offers a robust range of functionality for trade finance blockchain companies. However, it’s not solely for financial industries. Due to the demand for high-end enterprise needs, Ethereum formed a consortium with 250+ members. Furthermore, they are a nonprofit permissionless blockchain.
So, you might think that they aren’t best suited for financial causes. However, they offer special restrictive access for parties that need privacy.
What Does It Offer?
Well, first of all, they offer an open source platform for trade finance blockchain platforms.
Trade finance blockchain projects have to deal with the authoritative influence of EEA. It’s because to maintain an open ecosystem there needs to be certain regulations and EEA will maintain that. Moreover, if you point out your guidelines from the start, it would be easier for them to maintain that.
Provide Governmental Support
What can be a better way to launch your trade finance project than to have full Governmental backup? Usually, blockchain platforms deal with law and regulation issues. However, the financial sector needs to be under the law. And EEA offers just that.
No one wants to fall behind, and that’s why EEA will always upgrade their features and add more to the public version of the platform. This way both the private and the public platform benefits. And so will your trade finance blockchain.
Trade finance has to have KYC/AML protocols to know their customers better. With EEA you will get all legal features of like this.
R3’s Corda is one of the commercial blockchain version of the Corda software. Furthermore, the platform is designed to be open source for enterprise users. Needless to say, trade finance blockchain companies should definitely use it.
The best thing about this platform is that it’s mainly for financial sections. Although in recent events there are other implementations as well, still it’s mostly geared for financial sectors. That’s why using it on your trade finance blockchain platform can be the best call.
Corda came to be from the year 2020, and at present has 200+ members in their bag. Furthermore, trade finance blockchain companies can truly use the permissioned type of nature in their projects.
What Does It Offer?
Maybe you are looking for the best blockchain application firewall. Then, Corda is here to save your day. Trade finances need strong protection from document leaks and tampering. Furthermore, with the help of Corda now trade finance blockchain can leverage this awesome firewall to protect their documents.
Another useful feature for the trade finance blockchain projects is the use of an advanced level of encryption. For that they use cryptography; however, this one is far more superiors than any other cryptography in the market. Furthermore, it’s practically impossible for any third party to decode it.
The platform offers high availability for all trade finance blockchain community. It’s up and running 24/7 with the same advanced output.
Monitoring and Recovering Disasters
With the help of R3 Corda, you will be able to monitor your luxury goods location. In case of any disasters, there is a countless way to recover from the platform. Furthermore, there are major tools to even predict such a disaster to avoid it.
From 2020 Ripple has been a top-notch blockchain platform on the market. However back in that time, it was Opencoin. Later in 2020, it rebranded as Ripple. Trade finance blockchain companies would love this platform as their RippleNet connects banks, payment providers, corporations, asset exchanges, etc.
So, if you are looking for any kind financial player, the RippleNet has got your back. Moreover, trade finance blockchain companies would be thrilled to use almost free global transactions too. At present they have more than 100+ organizations working with them.
What Does It Offer?
Discover New Marketplaces
Many financial institutions struggle to find the proper customer and end up getting contracts with fraudulent companies. Not only it’s damaging the reputation of the trade finance companies, but it’s also causing the revenue to shift downward.
To deal with this Ripple is offering new marketplaces from where you can discover potential buyers and sellers.
Ensure More Customers
With the help of a solid platform like Ripple, you will be able to attract more customer to create contracts on the network system. Usually, sellers would be thrilled because they will get payments in a short amount of time using the trade finance blockchain.
Security Protocols and Safety Issues
There are lots of loopholes in the trade finance structure. To make it more full proof Ripple offers best security protocols. To top it all, they offer a special safety feature for the trade finance blockchain platforms.
Simplifying the Process of Payments
Trade finance blockchain platforms always need simplified output from this industry. As the typical nature of trading is quite complex many people face with difficult issues. But with the help of Ripple, no the trade finance blockchain companies can enjoy a simplified process of transactions.
The quorum should be next on the list for trade finance blockchain companies. Furthermore, the trade finance platform is designed to suit high-end outputs with greater speed transactions. Quorum would work best with trade finance as the network architecture is quite suitable for extensive usage.
Moreover, as it’s permissioned which mean, you will have to get private authentication features to enter the platform. Furthermore, this feature really goes hand to hand with the financial industry.
Trade finance blockchain companies would also love the fact the platform is super scalable and won’t crumble down under pressure.
What Does It Offer?
Node Managing Authority
It’s kind of like an authentication process to enter the network. At the entry level, an authority will check whether the party is eligible to enter the network or not. That’s why you will always find trusted verified people on the network.
Trade finance blockchain platforms need to maintain privacy, even during transactions. That’s why Quorum allows anyone to transact privately with another user.
Agreement through Voting
Quorum reaches an agreement through majority voting. And so, it doesn’t run on any typical energy consuming consensus protocols. As everything depends on the vote, it takes a really short time to get the transaction approved.
Unlike the public version of Ethereum, Quorum offers high-class performance. Not only that but it also offers a higher transaction rate than other platforms.
Chapter-7: Blockchain Consortia for Trade Finance
Eight banks came together and formed trade finance blockchain consortia named We.trade. Previously, We.trade was known as Digital Trade Chain. However, to make it more impactful, they rebranded as We.trade. At present they are taking trade finance blockchain support from IBM.
Furthermore, their main intention is to offer blockchain base trade finance for small to medium companies as usually, these companies face the most issues.
Moreover, with the help of Hyperledger Fabric and IBM’s banking industry experience, the blockchain based trade finance will be cheaper and easy to use.
In reality, trade finance blockchain consortia are taking all the facilities from the Hyperledger Fabric v1.0.0. Furthermore, Hyperledger is more than capable of being a trade finance blockchain platform.
At present the members of the trade finance blockchain are –
UniCredit, Rabobank, Santander, Deutsche Bank, Natixis, Nordea, KBC, and HSBC.
The trade finance blockchain consortia will directly run on IBM Cloud. Furthermore, this way the trade finance blockchain process will keep running smoothly.
Moreover, it will also track, manage, and secure international and domestic trade transactions on the blockchain based trade finance. Additionally, you can also track everything using mobile devices too. So, this blockchain based trade finance is super convenient.
There are lots of financial companies that formed the Marco Polo trade finance blockchain consortia platform. Furthermore, there’s also another member acting as just an observer and not taking any part is International Trade and Forfaiting Association (ITFA). Moreover, ITFA consist of over 170 members.
Marco Polo trade finance blockchain consortia exist because they want to offer better bank experience along with offer trade solutions to potential customers.
At present, Marco polo trade finance blockchain consortia are taking a technical backup from R3 Corda and TradeIX. There are several benefit points of this blockchain based trade finance platform. Let’s see what they are –
- Mutualization of Cost: Marco polo trade finance blockchain allows mutualization of the cost across many participants and members on the network.
- No Risk: Using the trade finance blockchain platform is highly beneficial as they offer zero risks because every participant is verified and pinned down with law and regulations.
- Network Effects: Comes with critical mass necessary solutions to promote a strong network structure.
- Collaboration: Sharing expertise and playing with technology across the industry gives rise to innovations. Moreover, the trade finance blockchain platform promotes it.
At present the members of the trade finance blockchain are –
Bangkok Bank, Natixis, Commerzbank, SMBC, DNB, ING, Standard Chartered, BNP Paribas, OP Financial, and NatWest.
Batavia is another one of the trade finance blockchain consortia. At present, they are collaborating with IBM for implementing their trade finance platform. It’s a small consortium of banks with only five banks at present.
At present the members of the trade finance blockchain consortia are –
CaixaBank, Erste Group, UBS, Bank of Montreal, and Commerzbank.
Batavia strives to exist because they aim to offer cross border trading networks along with the creation of multi-party. Moreover, they want to allow an open ecosystem of exporters and importers where both parties can find relevant partners for trade.
Furthermore, during their trial period, many live projects are also getting conducted such as transportation modes in different regions.
Also, Batavia traded various sizes of transactions and products goods to test how their platform works in a different situation. So, using Batavia trade finance blockchain consortia customers can trade without any errors with full transparency. Additionally, the single trade finance blockchain platform is also connecting more efficient partners together.
Voltron trade finance blockchain consortia are based on R3 Corda platform. However, they are also collaborating with CryptoBLK for technological support. Again, Voltron comes with 12 banks that want to streamline the process of trade finance in the international marketplace.
At present the members of the trade finance blockchain consortia are –
U.S Bank, Natwest, Bangkok Bank, Mizuho, BNP Paribas, BBVA, Intesa Sanpaolo, ING, HSBC, Scotiabank, SEB, and CTBC bank.
You all know how letters of credit is a fundamental need for trade finance. That’s why to make it even full-proof Voltron offers a secured trade finance blockchain platform. Using the platform the banks can issue letters of credit with relevant documentation without worrying about any mistakes.
As both parties can preview everything live, they can also come to an agreement or point out any errors before they seal the deal. Furthermore, corporate customers’ could directly upload the documents only with their respective partners. So, not every people can view all sensitive documents on the ledger.
HKTFP is a Hong-Kong based trade finance blockchain platform. The platform is a collaboration of banks and Hong Kong Monetary Authority. Moreover, the trade finance blockchain platform works on a proof of Concept based on special features for trade finance only.
At present the members of the trade finance blockchain consortia are –
Bank of China, HSBC, Hang Seng Bank, ANZ, Standard Chartered, DBS, and Bank of East Asia.
The primary goal is to get every single document and process digitized. Moreover, with having a single form of true documentation, there would be no frauds. Furthermore, they also want to link up to other trade finance blockchain platform in order to broaden the network of trading.
Also, HKTFP is a scalable solution as the marketplace of trade finance suffers from a lack of liquidity. Another great issue they want to solve is the high pricing. So, with the help of the platform, you can finally trade in low costing in those regions.
To power the platform they are using Hyperledger Fabric.
Komgo is another trade finance blockchain consortium. Their primary goal is to offer efficiency and security through simplification, automation and promote specific industry based functionalities.
At present Komgo wants to offer a decentralized blockchain platform to solve data exchange issues for the trade finance industry.
For commodity trade, they want to bring out data exchange and security, but they want to streamline it on the platform fully. Using their platform the buyer and seller can meet and connect seamlessly through secured channels. At present they are using Ethereum to power their blockchain network, and they are also taking tech support from ConsenSys’s Kaleido.
Furthermore, there are fifteen diverse stakeholders of this consortium which includes commodity traders, banks, inspections companies, and energy majors.
The trade finance consortia members are –
Gunvor, Shell, BNP Paribas, Citi, Société Génerale, Macquarie, Mercuria, ING, ABN AMRO, Rabobank, Crédit Agricole Group, MUFG Bank, Koch Supply & Trading, SGS, and Natixis.
Chapter-8: Real-World Companies Using Blockchain for Trade Finance
Japan’s Mizuho bank is fully taking on the trade finance blockchain platform. Recently, they completed one of the first trade finance transactions between Japan and Australia without any hassles. Moreover, according to them, every documentation and data were shared smoothly between the two parties.
Furthermore, Mizuho is actually working with two other parties – Sompo Japan Nipponkoa Insurance and Marubeni Corp. In reality, their trade finance blockchain solution is able to reduce a significant amount of time for trading.
At present they are taking tech support from IBM Japan for developing the trade finance blockchain platform. However, Mizuho thinks they still have a really long way to go before the project is absolutely perfect. So, hopefully, we’ll be getting a great trade finance blockchain solution form them soon.
Barclays is another one of the companies that are changing the traditional ways of trade finance. Along with the company Wave, they are working on a trade finance blockchain platform that would deal with global trading issues.
Furthermore, on their very new trade finance blockchain platform letter of credit transaction happened between Seychelles Trading and Ornua. Moreover, both of these parties exchanged trade documents using the Wave platform without any issues. Additionally, they used SWIFT to pay up their funds.
The new trade finance blockchain platform makes sure every party on a contract would see and transfer shipping documents and titles using their secured decentralized network. Thus, the new system can really speed up the process and reduce the overall costing.
Moreover, it’s also able to detect any fraudulent activities within the documentation. At present, Barclays is the only company exploring the potential of the Wave platform. But they also want to collaborate with other banks or financial institutions to fully utilize the potential of this wonderful trade finance blockchain platform.
People’s Bank of China
Another great trade finance blockchain platform is working its way to the world. This time People’s Bank of China is leading the project with a huge concern for the environment of the typical trade business. Guangdong, Hong Kong, and Macao Dawan District Trade Finance Blockchain Platform is the name of the trade finance blockchain initiative.
Furthermore, with this platform, they aim to create an ecosystem for the cross-border trading across Hong Kong, Guangdong, and Macau Bay Area.
Moreover, their platform is able to reduce the costing to be less than 6% for micro to medium enterprises. At present, they work with 7-8%. Even though you might think it’s not much of a reduction in cost, but when you are dealing with millions even 1% makes a huge difference.
Again, it would not only be for domestic trading but will also cover overseas companies too. Their platform will also verify authenticity before giving access to the platform.
Scotiabank is exploring the world of trade finance blockchain with the help of AlphaPoint’s blockchain platform. Furthermore, collaborating with them they are finally using the project to send out trading documents as a trial. At present the trial is fully positive, so we can assume it’s working quite well.
AlphaPoint deployed their ledger system that can offer digitization of assets, managing pre and post-trade paperwork and create trade venues. Furthermore, during the trial, it worked on both Microsoft Azure’s platform and AlphaPoint’s own platform.
Moreover, the trade finance platform is well equipped to go with legacy systems. However, it may take up a lot of time to fully change the old systems as the structure of the trade finance blockchain is quite complex.
The trade finance blockchain platform is also more than capable of handling thousands of deals within a second every day! It will also support petabytes of data!
SEB is using CGI’s trade finance blockchain solution. Furthermore, their solution Trade360 is perfectly capable of handling the load of trade finance transactions and regulations. SEB offers numerous range of financial services across multiple countries. However, they want to utilize their full potential of investment and corporate banking in full swing.
This is where their partnership will come into play. Trade360 is a cloud-based platform for the financial sectors only. Moreover, they offer lucrative software, architecture, and support for any of the financial needs for global trade.
Furthermore, the system supports regulatory compliances, which is quite necessary when it comes to trading. In reality, the platform can offer up to 30% increase in revenue and faster output for the SEB company.
Also, there will be a secure private cloud community to back you up in every way. Furthermore, it also offers real-time reporting so; you will be able to check the status in real-time.
Kbank or Kasikornbank Public Company Limited is trying our Letter of Guarantee trade finance blockchain. As technological support, they are taking IBM’s Hyperledger solution. Furthermore, their primary goal is to simplify and fasten the process of Letter of Guarantee. This will include –
- Enhancing all consumer experience.
- Offer strong security measures.
- Less costing for both parties.
Kbank is Thailand’s one of the largest issuance of Letter of Guarantee. But due to the highly expensive nature not many are able to get the treatment they need. Furthermore, they also offer many financial features such as international trade, commercial banking, and even investment banking. In this case, they have to deal with a lot of security flaws and disputes.
At present they just want to digitize the process so that it would be a more convenient and time-saving option for all their customers. Furthermore, the trade finance blockchain would be completely paperless, which would reduce the level of temperament in this department.
Dubai Trade and Dubai Custom
Dubai is one of the enthusiast cities to accept the usefulness of blockchain technology. That’s why to make it even more convenient they are starting to explore trade finance blockchain for every import and export business in Dubai.
IBM is working with them full time to offer them the trade finance blockchain solutions. Furthermore, the BAAS provider will also work with shipping companies, banks, and airline to make it a joint effort. Moreover, Dubai Trade and Customs will be leading them for this project. Their primary target is to improve the custom and reduce the theft situation in case of shipping.
As they are using Hyperledger technology, they will get more access to the modular environment and would be able to broaden the network when needed. In any case, the platform will be large cooperation or project in the trade finance blockchain niche.
Chapter-9: Concluding Words
Trade finance is one of the major industries that play a huge role in our economy. However, due to the lack of proper maintenance, the so-called working system is not working out anymore. With increasing bad experiences and many hurdles in global trade, the world economy can’t fully become united.
In this guide, we have described how the use of blockchain technology can revolutionize this sector. Obviously, blockchain technology is not perfect. However, it’s far more superior than the legacy systems. With the help of proper trade finance blockchain, we can only hope for a better international trade experience.
80% of Crypto Trade Volume Tracked by Blockchain Surveillance
Ever since governments worldwide started showing adversity toward cryptocurrencies like bitcoin, a few startups have dedicated their business model to blockchain surveillance. Two weeks ago, Chainalysis revealed the company is monitoring 21 different tokens that stem from Ethereum. On Tuesday, the firm Ciphertrace announced that it’s now tracking 700 cryptocurrencies providing “visibility into 87% of the global trading volume.”
Also read: Berlusconi Admins Disappear — Darknet Users Rush to Find Alternatives
Chainalysis Now Tracks 21 Popular ERC20 Tokens
Blockchain surveillance teams have been ramping up operations in order to appease governments and law enforcement agencies worldwide. On October 3, blockchain forensics firm Chainalysis told the public that the company was now tracking ERC20 tokens like maker (MKR), dai (DAI), and Basic Attention Token (BAT). Chainalysis’ cofounder Jonathan Levin said that regulators and investigators were interested in monitoring these tokens since they started being used in illicit and fraudulent activities. For instance, in September 2020, the ERC20 exchange Etherdelta was hacked for thousands of dollars when a hacker used a malicious code injection attack and drained ERC20 tokens from people’s wallets. Two years later, burglars robbed the trading platform Cryptopia’s ETH and ERC20 tokens stealing more than $16 million.
Chainalysis stressed that lots of businesses have been showing interest in investigating the ERC20 landscape, so the company built ERC20 support in a “matter of weeks.” The firm detailed that over 130 customers in 35 countries use the company’s system to monitor digital currency transactions. The ERC20 support added 21 well known tokens to the Chainalysis framework. By the end of the year, the company says it will be tracking a total of “39 ERC20 tokens in addition to nine other cryptocurrencies — covering 90% of the market by trading volume.” Chainalysis emphasized that the ERC20 support is also available for Chainalysis Reactor, the company’s investigation product.
“[Chainalysis Reactor] is already being used by law enforcement to investigate hacks and other illicit activity across blockchains,” the firm explained in a blog post.
Ciphertrace Combs 700 Blockchains, Accounting for 87% of the Cryptoconomy’s Global Trade Volume
The blockchain surveillance company, Ciphertrace, has also increased its monitoring and the business now tracks 700 different cryptocurrencies. Ciphertrace believes it is one of the world’s “most comprehensive” cryptocurrency intelligence teams out there and the latest update was considered a “giant leap.” Digital assets being monitored include LTC, USDT, BCH, ETH, BTC, and ERC20 tokens as well. “[The infrastructure] provides visibility into 87% of global trading volume with hundreds of millions of attribution data points,” Ciphertrace disclosed. The company’s announcement added:
The Ciphertrace platform maintains the industry’s most accurate pool of attribution data. This includes 522 million attribution data points — such as account type, account holders, contract types, contract owners and other metadata — on cryptocurrency addresses.
Various government agencies worldwide have been utilizing Blockchain forensics for quite some time and the business model has become very profitable. In the U.S. alone, the IRS, DEA, ICE, FBI, and other three-letter agencies continue to hire firms like Chainalysis, Elliptic, and Ciphertrace. All of these crypto surveillance companies believe the software deployed has powerful de-anonymizing capabilities that can help financial institutions and government agents discover illicit behavior. Ciphertrace divulges that the company leverages monitoring schemes like advanced APIs, interactive visualization, a graph database, and pattern recognition in order to de-anonymize digital currency transactions.
What do you think about Chainalysis tracking ERC20s and Ciphertrace monitoring 700 cryptocurrencies? Let us know what you think about this subject in the comments section below.
Image credits: Shutterstock, Chainalysis, Ciphertrace, Fair Use, and Pixabay.
Did you know you can verify any unconfirmed Bitcoin transaction with our Bitcoin Block Explorer tool? Simply complete a Bitcoin address search to view it on the blockchain. Plus, visit our Bitcoin Charts to see what’s happening in the industry.
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