The World Economic Forum (WEF) has thrown its support behind blockchain technology to expand trade finance availability across the globe, touting the technology as a way to address the “paper monster,” tap into data and support governments’ export/import initiatives.
Released last week, the World Economic Forum and Bain & Company’s report, “Trade Tech – A New Age for Trade and Supply Chain Finance,” declared that the current trade finance gap – calculated at $1.5 trillion by the Asian Development Bank – could be reduced by $1 trillion if distributed ledger technology (DLT) sees greater adoption by industry participants.
Emerging markets and small- and medium-sized businesses will see the greatest impact from blockchain in trade finance operations, the WEF predicted, with smart contracts and digital customs documentation offering the greatest disruption potential.
“Implementing blockchain-based solutions can eventually do more for SMEs in emerging markets than removing tariffs or closing trade deals,” said the WEF’s Head of Supply Chain and Transport Industry Wolfgang Lehmacher in a statement.
Citing Bain & Company analysis, the WEF warned that just as the demand for trade finance remains largely unmet today, the demand for digitization of trade finance processes – and for DLT to enhance that digitization process – similarly remains unmet. Reliance on paper between brokers, freight forwarders, government agencies, other logistics players, buyers, suppliers and financial service providers has created a “paper monster” limiting trade finance availability and efficiency.
Researchers predict that an estimated 40 percent of traditional trade finance worth $0.9 trillion will move onto distributed ledger technologies that can lower fees and enhance service. The report also expects $1.1 trillion of new trade volume to emerge as a result of distributed ledger technology’s ability to remove barriers that currently exist in the “paper monster” model.
The letter of credit (LOC) is an oft-mentioned legacy tool in the trade finance market that could see transformation from blockchain. Already, the LOC has seen a decline in share of global trade finance value since 1970, the WEF noted, citing World Bank data. Newer technologies like tokenization, smart contracts and IoT devices can further distance trade finance from legacy solutions like the LOC, particularly with their ability to tap into data.
Information on companies’ payment histories, delivery performance, reliability and other factors can all play a key role in mitigating trade finance risk. With technologies like artificial intelligence and IoT bridging trade finance players to this kind of key data, blockchain may play an important role in hosting that information in a secure way.
The benefits of DLT-powered trade finance can be vast, but not only for SMBs. According to the WEF, governments stand to gain significantly from blockchain in this market, not only via a reduction in paper, but also through the ability to connect siloed regulatory bodies – like central banks, port authorities and agricultural bodies – to streamline compliance efforts.
Despite the potential, however, not everyone is convinced blockchain can make the impact its proponents claim, and the WEF itself acknowledged challenges to the transformation that blockchain could bring.
“Many corporate participants have been unwilling to invest in integrating with freight forwarders, government bodies and document preparers, and many banks have been reluctant to invest as long as corporate adoption remains low,” the WEF stated in its report. “So, although trade is getting more efficient for large multinationals and companies in developed countries, small companies in poorer countries are paying a high price.”
Significant shifts, including the migration of banks away from the center of trade finance, won’t necessarily be easy to endure.
“The benefits of adopting DLT in trade will affect everyone from banks to companies to governments to consumers,” said Bain & Company Expert Vice President Gerry Mattios in another statement. “But action has to be taken in a collaborative way and with an ecosystem approach in mind. Individual actions won’t bring the expected results.”
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