The many promises of Blockchain in Trade Finance
I frequently write on Quora. For those of you who use this platform would agree with the diversity and wealth of knowledge available on such platforms.
A very common question asked is the challenges and application of blockchain within the financial industry (perhaps because it’s one of the early adopting industries) and promised benefits. As enticing as this question could be, the answer is even more interesting, due to the extent of application of the technology specifically within the stock markets. I’ll focus my views on trade finance.
The challenges first…modern trading systems are power-house for centralised information processing. The not-so-desirable aspect of such systems is that the principle of demand and supply doesn’t ascertain the price. What further makes it questionable is the risk of price manipulation by collusive trading tactics. Not to forget the vulnerability of such systems to hacking due to security risks.
So what makes such systems.. vulnerable? Usually firms are working with 20+ platforms. Typical activities are logging into different systems, carrying out due diligence on legal agreements, applications, and diverse processes, coupled with sharing firms’ confidential trade data with third-party applications. Now on to the role of banks in this process… banks who are offering financing through these channels (third party applications) have no choice but to depend upon the data integrity and security of such systems. They must also integrate and operationalise with a myriad of different applications from third parties. The process is exhaustive that can eat up months of due diligence. In several cases, the bank may still be processing the data on their end due to lack of trust and intrinsic risks involved.
The rapidly developing blockchain technology that is inherently decentralised, emerges as a solution to the problem. The most exciting bit is it’s promise that the recorded information is impossible to be meddled with.
Application of the above issues in the digital asset trading clearly requires a simplification of the process resulting in increased reliability. In a research study carried out by Sejong Cyber University, Seoul, Republic of Korea, an experimental trading system was implemented, demonstrating the possibility of blockchain as a promising solution also indicated by past studies.
So, how does blockchain addresses the challenges of modern trading systems, widely believed to be tamper-able. First, the decentralised nature of the blockchain facilitates innovation in the transaction process. What this means is that the complex mediation processes are simplified whilst automating all existing transactional processes..resulting in rapid transactions. Next comes the reliability…the nature of the blockchain is fundamentally not tamper-able hence integrity of information and transactions remain intact.
By creating a viable, and decentralised transaction records, blockchain leads to fundamental simplification and cost reduction for most parts of transactions. That in turn makes transactions secure and reliable. Blockchain keeps an immutable record of all the transactions, that can be traced back to its originating point. This is called provenance- an essential process in trade finance because reducing the risk of fraud. When compared to modern trading platforms, blockchain offers much better ways of establishing and verifying identity. The biggest simplification offered by the technology in discussion is providing unique, non-forgeable identities for assets, along with an inviolable record of their ownership. The outcomes are transfer of trade assets without a need of intermediary and increased confidence in provenance.
Any comment, feedback, improvement suggestions are appreciated.
Thanks for reading.