Blockchain in Trade Finance Illustration

What is an example of a Blockchain transaction?

Context: Let’s use the example of a European car manufacturer looking to buy primary aluminium from a European aluminium producer to be pressed into car panels. The relationship between these two buyers is new and as of yet commercially unproven.

The two parties, the buyer and the seller agree on transaction details such as quantity, price, grade of the aluminium and delivery details via the Marco Polo network, ensuring they are both aligned on the commercial terms, quickly and efficiently. The seller has also requested a conditional payment commitment from the buyer’s bank, a tier one European trade finance bank, to help mitigate the risk of non-payment upon delivery and fulfillment of the contractual obligations, given that this commercial relationship is new.

Upon the conditions of this transaction being recorded as met on the blockchain, this automatically triggers an irrevocable payment obligation of the buyers bank to effectively guarantee payment on the agreed date for the agreed amount. Not only is the seller able to get the comfort of a guarantee to be paid on time by a tier 1 bank, they are also able to utilise this guarantee and approach their own bank with a request for financing via discounting of the receivables, thus supporting their own working capital requirements.

At maturity, the buyer’s bank is then able to deduct proceeds from the buyer’s bank account to retire the outstanding financing directly with the supplier’s bank. All parties to this transaction are able to rely on the digital information held on the platform, rather than posting hard copy documents and accepting it as a single source of truth, providing greater levels of transparency and efficiency across the life of this transaction. Although each of these platforms target the trade finance industry, each has identified a niche area within which they are able to offer a competitive alternative to the traditional way of doing business. Whilst it’s true to say there are currently no platforms which are truly considered ‘mainstream’, by leveraging the significant ecosystems which are being created, parties are beneficiaries of the technological capabilities of blockchain and expected to open up an estimated 1.1 trillion US dollars of new trade flows within the next few years.

Are there any dangers with using Blockchain?

With all the hype surrounding blockchain, it’s forgivable to think this really is a solution that will solve the world’s problems, a ‘silver bullet’; if you will.  In reality, there are many applications touted for which it really is not suitable. That said, for those where it is relevant, blockchain really is a revolutionary technology. However, care must always be exercised. Most common concerns surrounding blockchain include things such as the threat of hacking, so called 51% attacks, lost private keys, loss of data, to name a few.