Trade financing is the most crucial part of global commerce. Such financing provides credit services to secure a transaction to exchange goods. There is a large amount of finance in this area, for example, in 2015, this area was valued at 10 trillion US dollars. But such an expensive area also has problems that have become visible in recent years due to the pandemic and wars.
Traditionally, trade financing processing (like M&A) has relied on a network of intermediaries, extensive documentation, and often sluggish processes that hinder productivity and are susceptible to external threats. But now, this issue can be solved with the help of blockchain technology, offering a more efficient, secure, and transparent way to conduct trade finance transactions. Let’s look at the basics of blockchain in finance, its potential benefits, challenges, and exciting prospects for the future.
The Fundamentals of Blockchain in Finance
Companies are accustomed to a traditional centralized system in which the registry is managed by one company or authority, leading to much manipulation within the market. Blockchain operates on a decentralized network of computers called nodes. These decentralization nodes are needed to verify and record transactions, which ensures that one entity cannot control the entire network.
Blockchain security is built on cryptographic encryption methods. The transaction is recorded in a tamper-proof manner that prohibits other persons from changing the information. Immutability is how data is written to a blockchain and inspires trust and security in the data stored in the blockchain.
Benefits of Integrating Blockchain into Trade Finance
Now you have learned a little about how blockchain works, let’s take a look at the advantages it can bring to trade finance:
- Enhanced Security. Since transactions on the blockchain are always recorded the same way, they always remain unchanged. It turns out that they cannot be changed or deleted, greatly reducing the risk of fraud and ensuring an entire transaction history.
- Transparency. Blockchain provides the ability to view all information in real-time. This allows you to avoid disputes and problems during a trade finance transaction.
- Fraud Prevention. Blockchain methods and features reduce the risks of double spending and other fraudulent transactions.
- Quicker Transactions. Everyone is familiar with outdated trade finance processes that take too much time, which sometimes leads to losses. Blockchain optimizes these processes, reducing the time required for a transaction.
- Cost-efficiency. Blockchain technology does not require intermediaries and paperwork, unlike conventional methods. The absence of 3 persons and documentation reduces the financial costs of the organization.
As you can see, the blockchain method of making transactions is much more efficient and safer from all sides.
Challenges and Considerations for Blockchain Adoption
We have figured out how effective blockchain is in Trade Finance, but let’s be objective and look at the problems associated with this technology:
- Regulatory Challenges. Since blockchain technology is fairly new to the trade finance industry, the regulatory framework for this method is still evolving. Trade finance transactions constantly require compliance with different international regulations, which is difficult to reconcile with blockchain technology.
- Industry Adoption. For the successful use of this technology, it is necessary for many financial institutions and shipping companies to adopt this technology, which is still difficult to achieve.
- Blockchain Limitations. Blockchain is not suitable for all types of transactions and is not universal for trade finance.
Great efforts are being made to solve these problems. Industry consortiums, government initiatives, and technology innovations are constantly in the process of bridging the gap between regulatory requirements and blockchain capabilities.
The Road Ahead: Future Prospects of Blockchain in Trade Finance
Let’s look at the future of blockchain technology in Trade Finance and how the industry can prepare for such changes.
- Financial Trends. As cryptocurrencies grow in popularity, the adoption of blockchain in trade finance is expected to follow broader financial trends. As blockchain technology develops, it becomes more generally accepted in the field of trade and financial trends.
- Blockchain Innovation. Over time, blockchain has continually improved its scalability, privacy features, and compatibility with financial systems. Blockchain innovation improvements will further facilitate the adoption of blockchain in trade finance.
- Industry Preparation. Since industry and government see great potential in blockchain, as a part of industry preparation, they are constantly pursuing initiatives and partnerships that will greatly impact the future application of this technology in the financial sector.
Blockchain is a good alternative to conventional transaction methods in trade finance. Despite the problems of blockchain, which must be resolved over time, it has the security, transparency, and efficiency needed for this field.