Trade finance has been an essential aspect of international trade for centuries, providing merchants with necessary financing and risk management tools to move goods and services across borders. From its early days when merchants relied on letters of credit or bills of exchange to secure funds and manage risks, the industry has grown considerably to meet today's ever-changing needs.
Recent advances in blockchain technology and web 3.0 (also known as decentralized web) have created exciting opportunities to revolutionize trade finance. Web 3.0 permits the creation of decentralized peer-to-peer networks that facilitate secure and efficient transactions without needing intermediaries. Powered by smart contracts and tokenization technology, web 3.0 could automate many processes involved in trade finance, cutting costs, increasing transparency, and improving efficiency.
Trade finance is rapidly advancing, and web 3.0 technologies will have an enormous impact on its future. Their ability to simplify processes, reduce transaction costs, and open up new investment avenues promises to revolutionize trade finance and boost global economic growth.
This technology could allow two parties to create digital agreements in a trade scenario. Both the export and import banks could quickly review documents without having to produce any paperwork. The export bank could approve payment details and issue smart contracts to cover terms and obligations.
As long as the terms of the smart contract are fulfilled, the export bank will be able track the goods through the entire process. The contract would be completed once payment has been made again through blockchain.
This automation will save $15-20 billion annually. This automation will not only save money, but it will also have a profound impact on many businesses that aren't currently served by trade finance. It will create new sources of liquidity, which are less restricted, and more transparent, while still ensuring trust and transparency.
Forward Contracts & Smart Contracts
Forward contracts are agreements between two parties to buy or sell a specific asset at a predetermined price at a future date. They are commonly used in trade finance to mitigate the risks associated with fluctuations in commodity prices, interest rates, and exchange rates.
Web 3.0, also known as the decentralized web, is changing the way trade finance operates by leveraging blockchain technology to create new financial instruments and streamline the process of executing trade finance transactions.
Tokenization is another way to automate financial instruments. Tokenization is the process of creating a digital representation of a financial asset or trade instrument on a blockchain network. The token can be used to access the underlying asset or service and can be traded just like any other asset.
By using smart contracts to execute forward contracts, the process of buying and selling commodities can be streamlined, reducing transaction costs and eliminating the need for intermediaries. In addition, the use of blockchain technology can increase transparency and traceability in trade finance transactions, improving trust and reducing the risks associated with fraud and errors.
To automate the process of selling a forward contract, a farmer uses the smart contract that is programmed to execute based on certain predetermined conditions. For instance, the smart contract could be set to execute automatically on a specific date, and only when certain conditions are met, such as a minimum or maximum price threshold for the commodity.
For instance, a farmer could tokenize the commodity they have and create a token that represents a share in the future yield of their crops. This token can then be traded on a blockchain network, and investors can purchase it as an investment in the future value of the commodity.
Web 3.0 is also enabling the tokenization of trade finance instruments, such as bills of lading and letters of credit. Tokenization involves creating a digital representation of an asset or instrument on a blockchain network. These tokens can be traded on a decentralized exchange, creating new investment opportunities and increasing liquidity in the trade finance market.
Overall, the use of web 3.0 technologies in trade finance is transforming the industry by improving efficiency, reducing costs, and increasing transparency and security in trade finance transactions.
The Evolution of Shipping and Trade Finance
Shipping and trade finance have a centuries-long history that dates back centuries. Initially, trade was done through barter; goods were exchanged for other products or services. With increasing complexity of transactions over time, standardizing mediums of exchange became necessary - leading to currency's development.
Currency was invented, revolutionizing trade and globalization. But as commerce became more complex, so did its need for financing. In the 19th century, bills of exchange and letters of credit became popular financial tools that let traders finance deals while reducing the risk of non-payment.
Shippers and trade finance are inextricably linked, as shippers transport goods around the world while trade finance provides necessary funding for deals. Unfortunately, current systems are highly centralized with intermediaries like banks or insurance companies playing an essential role in facilitating these deals.
What Is Wrong With the Current System?
The current system of shipping and trade finance faces numerous issues. It is highly centralized, leaving it vulnerable to fraudulence, corruption and inefficiencies; furthermore, it relies heavily on paper-based transactions which slow down processing time and raise costs; finally, intermediaries play a significant role in driving up transaction costs while decreasing transparency.
What Impact Will Web 3.0 Have on Shipping and Trade Finance?
Web 3.0 holds the potential to revolutionize shipping and trade finance by eliminating inefficiencies from today's system. With its decentralized architecture, Web 3.0 eliminates intermediaries, making transactions faster, cheaper, and more transparent.
Here are some ways in which Web 3.0 will impact these sectors:
Smart Contracts: Smart contracts are self-executing agreements between buyers and sellers encoded directly in code. They offer secure, transparent transactions without the need for intermediaries, making them ideal for shipping industries where smart contracts automate tracking goods and payments to reduce fraud risk and enhance efficiency.
Decentralized Marketplaces: Decentralized marketplaces enable buyers and sellers to engage directly, bypassing intermediaries. This reduces transaction costs while increasing transparency. In certain industries such as shipping, decentralized marketplaces can enable shippers and carriers to communicate directly, eliminating intermediaries and increasing efficiency.
Tokenization: Tokenization is the process of creating a digital representation of an asset on the blockchain. This creates new financial instruments and gives individuals access to capital markets. In shipping, tokenization could enable new forms of trade finance such as supply chain financing or trade finance on the blockchain.
Supply Chain Visibility: Blockchain technology creates a secure and transparent supply chain, where all parties can view the status of goods in real-time. This helps reduce fraudulence risks and enhance efficiency levels.
Supply chain visibility allows parties to identify and address supply chain issues quickly. Companies are able to monitor the location, condition, and ownership of goods - thus minimizing the risk of loss or damage during transit.
Digital Identity: Blockchain-based digital identity solutions offer a secure and unbreakable method to verify the identities of individuals and entities involved in shipping and trade finance. This reduces fraud risk while also guaranteeing regulatory adherence.
Reduced Costs: Web 3.0 has the potential to significantly reduce shipping and trade finance expenses by eliminating intermediaries and automating processes. This would make transactions faster, cheaper, and more efficient; making trade finance more accessible for small and medium-sized businesses that face high costs or barriers to entry currently.
Web 3.0 has the potential to revolutionize shipping and trade finance by solving systemic problems. By providing secure, transparent transactions without needing intermediaries, Web 3.0 can reduce costs, boost efficiency and enhance openness. As shipping and trade finance are inextricably linked, decentralized web technology could offer a solution that benefits all parties involved. As we move towards a more decentralized future, shipping and trade finance will play an increasingly significant role in shaping our new economy.
Companies using Web 3.0 in the Global Shipping Industry today
Maersk and IBM's TradeLens: Maersk, the world's largest container shipping company, and IBM's TradeLens is a blockchain-based platform that aims to digitize the supply chain and improve transparency and efficiency. The platform allows shippers, carriers, and customs authorities to share information in real-time, reducing the risk of fraud and increasing efficiency.
Everledger: Everledger is a blockchain-based platform that aims to improve transparency and traceability in the diamond industry. The platform tracks diamonds from the mine to the consumer, providing a secure and transparent supply chain. Everledger has also expanded into other industries, including fine wines and luxury goods.
ShipChain: ShipChain is a blockchain-based platform that aims to improve transparency and efficiency in the shipping industry. The platform allows shippers to track their goods in real-time, reducing the risk of loss or damage during shipping. ShipChain also uses smart contracts to automate the process of payments and reduce the need for intermediaries.
Blockshipping: Blockshipping is a blockchain-based platform that aims to improve efficiency in the container shipping industry. The platform uses blockchain technology to create a shared registry of container ships, enabling shippers and carriers to interact directly and reducing the need for intermediaries.
CargoX: CargoX is a blockchain-based platform that aims to digitize the bill of lading, a key document in the shipping industry. The platform uses smart contracts to automate the process of creating and transferring bills of lading, reducing the risk of fraud and increasing efficiency.
These are just a few examples of how blockchain and Web 3.0 technologies are being used in the global shipping industry today. As the technology continues to mature, we can expect to see more companies adopt these solutions and drive further innovation in the industry.
Examples of Tokenization of Trade Documents
TradeFinex: enables bank and non-bank trade finance entities to transform their trade documents (i.e. bills of landing, invoices) into tokens, which can be sold in the secondary markets and generate liquidity. These sales transactions are written into smart contracts. Since the industry lacks widely accepted and comprehensive smart contracts standards, TradeFinex decided to refine smart contracts standards (based on XinFin Blockchain) to provide not just the standardized datasets for tokens but to also meet know-your-customer and anti-money-laundering requirements. TradeFinex is an ADGM-based software provider entity. The ADGM jurisdiction has a defined framework for settlement, custody and exchange of digital assets in secondary markets through clear guidelines for digital assets.
Tradeteq: a technology provider for trade finance asset distribution, completed in September 2021 what it says is the world’s first trade finance-based non-fungible token (NFT) transaction. Launched in 2018, Tradeteq’s platform enables originators to package trade finance products into standardized investments that can be bought and sold through private distribution networks and settled like common fixed-income products. According to participants in the transaction, NFTs significantly shorten the settlement time, enhance traceability and fractionalize investments, making it possible to tap into a larger investment base to create liquidity in the trade finance market.