Blockchain is most commonly associated with digital or cryptocurrency like Bitcoin.  While cryptocurrency has the spotlight, Blockchain might well offer greater value for a broader range of trade and business uses.

The global movement of goods and services is complicated.  A typical shipment across two continents requires as many as 25 sets of documents that constantly change hands between buyers, sellers, shippers, agents and others. This intensely manual process lends itself to documentation risk that can lead to economic loss when discrepancies occur.  Blockchain technology can significantly reduce this risk.

What is Blockchain?

Blockchain is a distributed database holding encrypted ledgers that reside on a network. These databases contain a set of transactions or records called “blocks” that once verified become part of a permanent record or “a blockchain.”   The use of Blockchain allows digital information to be shared or distributed across the network.  Participants in the network must agree to the validity of transactions before they are recorded in the “digital” ledger.

The networks can be public, like the open internet or private, through a corporate network.  In both public and private ledgers, all validated transactions are recorded permanently and cannot be changed retroactively. No one party can control the ledger.

In a public ledger, the validity of a transaction is achieved through complex, resource-intensive computational equations.  Anyone can join a public Blockchain.  In a private ledger, access is granted to members. Information is verified only by those with permission, and shared only to those with access. 

At its core, Blockchain provides secure, verifiable and independent distribution of information. Any document that can be digitized can be inserted into a Blockchain.

How can businesses benefit?

The use of Blockchain in business can be applied to any multi-step process or transaction where traceability and visibility of information is required.  For this reason, Blockchain’s future will likely involve supply chain management solutions in both public and private networks. 

Public networks may evolve through trade finance applications where the Blockchain acts as a clearing-house for invoices—particularly for small-to-medium sized companies.

In 2017, as much as US $1.5 trillion in demand for trade finance was rejected by banks. Increased regulation, Know Your Customer (KYC) concerns and a lack of information were the main reasons given for declining the transactions.

 As a result, the transaction often never occurs—severely limiting growth for companies.  Blockchain can reduce these risks by verifying parties as “good” or “bad” based on their previous  captured transactions and reduces reliance on centralized clearing mechanisms. This helps facilitate more trade, increase working capital options and ultimately reduces enterprise risk. 

The opportunity for private Blockchain solutions in supply chain management may be even greater as the technology develops. Its distributed nature means solutions could be integrated into an organization’s existing technology environment.

 Consider it like Excel working on top of an operating system. The Blockchain application would work with existing enterprise software across multiple companies in the supply chain. 

There would be no need to change each company’s software infrastructure. Rather, data would be accessed through an Application Programming Interface (API), available through most enterprise applications.

The benefits could be extensive:

  1. Less or no manual intervention because paper contracts could be digitized and automated as smart contracts.
  2. More secure and verified transactions.
  3. More efficient because there is less documentation and delays common in manual retrievals.
  4. Faster settlement of transactions.
  5. Decreased costs.
  6. Significant drop or even elimination of disputes and fraud.

What are the limitations?

While Blockchain can reduce or eliminate some risks associated with trade, it’s important to recognize its  limitations.

For example, Blockchain has no influence on payment risk.  Most global trade is done on open account terms meaning the seller opens themselves up to the risk of non-payment. This can be tough in global trade where recovery rights are uncertain or prohibitively expensive.  

The reasons for non-payment can be grouped into two categories:

  1. Fraud/intentional deceit - unwillingness to pay.
  2. Solvency of the buyer - ability to pay.

Blockchain can reduce or eliminate #1 but has little or no impact on #2.  This is true for both public and private Blockchains.

Just because a member is in the system doesn’t guarantee they can meet their financial obligations.  They might quickly identify that there’s a problem but it can’t predict a liquidity problem or insolvency risk.

This problem may be worsened by organizations who may:

  • Plan to aggressively expand sales.
  • Extend long open account terms increasing the time the asset sits on the balance sheet.
  • Have significant concentrated risks associated with a few key buyers.
  • Take on their first international sales.

As the network matures and enables more transactions, it becomes a mechanism of trust where good actors remain, and bad actors are eliminated. This will reduce reliance on third-party credit rating companies.

Companies will always need to be concerned about protecting their receivables.  Secure payment terms such as Line of Credit (LC’s) are one option; however, this can be costly.

Trade Credit Insurance will continue to be a vital tool for those wanting to protect against non-payment.  In fact, Blockchain solutions have the potential to add the insurer and broker as members, further reducing risk and administration related to an insurance contract.

Its impact on global trade

Blockchain technology promises to significantly improve the way global trade is done. The technology enables companies to reduce costs and increase the security of transactions. The opportunity for supply chain networks to increase their overall liquidity is immense.

However, successful implementation will require that all parties fully understand what Blockchain can do, like dispute and fraud reduction, as well as what it cannot do—most notably eliminate payment risk.