Why trade finance is a good use case for blockchain
Trade finance is shaping up as one of the most promising early use cases for blockchain technology.
The arrival of blockchain is prompting banks to search for analogue processes across the global economy which could be digitised to reduce financing risk. As a cumbersome process using multiple paper-based contracts with settlement typically taking weeks, the $US4 trillion ($5.3 trillion) trade-financing industry is set to be revolutionised by distributed ledger technology in the coming years.
Many of the world’s largest banks and various start-ups have been pumping funds into blockchain research and development. They are now branching out of their laboratories to explain the opportunity to customers.
In the trade finance space, this means importers, exporters, government agencies, shipping companies, logistics and transport operators and insurers – whose buy-in will be required for a new system to get off the ground. Blockchain could be used to digitise sales and other legal contracts, allow the location of goods to be monitored and facilitate payments in close to real time.
For R3 CEV, the consortium of 51 global banks investigating blockchain applications, trade finance has risen towards the top of potential use cases and has become one of the group’s main areas of focus.
Niki Ariyasinghe, R3’s associate director for product strategy in APAC, says over the next 12 to 18 months, various trade finance pilots will be tested in the market, and within three years, real trade in physical goods could be underpinned by smart contracts executing payments on a blockchain.
“I think you will see an actual, live in market proposition within two to three years,” he said last week at an panel, Emerging Digital Futures: Global Trade, hosted by Commonwealth Bank of Australia.
Bank launches pilots
R3 is working with its members – which include CBA, Westpac, National Australia Bank and Macquarie Group – to create common standards that banks and their customers can plug into.
CBA has completed more than 25 blockchain-related experiments over the past year and now reckons trade finance is one of the areas offering the most potential for blockchain, which refers to networks of computers holding synchronised copies of information.
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