DLT in Trade Finance – Use Case Import/Export
One of the most rewarding DLT-Use-Cases in transaction banking is undoubtedly the area of trade finance with the import/export of goods, since many different participants are involved in the trade process. Starting with the importer and exporter and their respective banks, through intermediaries such as correspondent banks and suppliers to supervisory authorities such as inspectors and customs officials. Figure 1 shows the traditional trading process without the Distributed-Ledger-Technology.
Figure 1: Trade Finance – Current-state process depiction (WEF, 2016)
First, the importer and exporter conclude a contract on quantity, price and delivery and payment terms and have the transaction secured by a Letter of Credit from the import bank, which sends it via its correspondence to the export bank for verification. By countersigning the Letter of Credit by the exporter, the flow of goods is initiated, the consignment is checked for contract conformity and compliance with legal requirements by the goods inspector and customs officials as well the goods are handed over to the supplier against a Bill of Lading. After a further customs verification, the goods are finally delivered to the importer, who confirms receipt to his bank and thus releases the payment transfer from the import to the export bank, which in turn is processed via the correspondent bank.
As this process involves many interfaces between participants who do not maintain a relationship of trust with each other and use information systems that are independent of each other. There is much room for inefficiency due to information asymmetry. On the one hand, this inefficiency results from the time delay in the transmission of information, its repeated verification by different parties and possible errors in the transmission of information. On the other hand, the asymmetry of information through non-interoperable systems makes it possible to manipulate, for example, freight documents or invoices.
A significant reduction of these inefficiencies as well as the potential for fraud can be achieved by using a private DLT solution in combination with current information systems (Figure 2). Decentralisation, immutability, and Single Point of Truth ensure that all participants can view transaction-relevant data in real time from a trustworthy source, eliminating data transmission delays and the associated potential for error and double-checking of simple transaction data. Verifications can thus be limited to critical process steps such as checking the conditions set out in the Letter of Credit. The mediating function of the correspondent bank also becomes obsolete. The programmability of the DLT contributes to a further increase in efficiency, as the contractual conditions are recorded in Smart Contracts and processes can be triggered automatically upon their fulfilment. For example, the transfer of the invoice amount from the import to the export bank after the importer has confirmed the receipt of the goods (or in an alternative scenario the forwarder has confirmed the delivery) with his digital signature in the form of a private key. The transparency of the DLT, on which all information related to the hedging and legally compliant settlement of trades is documented, prevents manipulation and saves the banks from preparing the information necessary for anti-money laundering for the regulator, as the latter can be granted direct access to the Distributed-Ledger.
Figure 2: Blockchain opportunity for trade finance (Hofmann et al., 2019, WEF, 2016)
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