Global trade is facing a period full of uncertainty due to ongoing trade tension, market volatility, and the continued fallout of the COVID-19 crisis. Nowadays, most bank institutions all over the world are aware of the importance of digital operating models and the possible opportunities and benefits they can bring.
Definitely, digital transformation continues to define better ways to revamp the age-old trade finance functions. The widespread crypto trading platform and a rapid increase of digitalization could significantly transform the global trade finance structure. We can hardly ever imagine a day without an example of blockchain or distributed ledger technology, whether it is trading in yuan or dollars, but how digitalization and integration of blockchain could transform the world?
Table of Contents
What could blockchain do to transform the world of finance?
The main intentions of integration of blockchain are:
- to reduce possible costs;
- to increase the speed;
- to fasten the transparency of cross-border trade;
- Usedigitized accounts on a distributed ledger.
Many banks and international organizations have defined that digitalizing bills of lading, letters of credit, and bank guarantees can bring them more efficiency and greater security. The popularity is increasing in South Asia and the Far East.
Blockchain development will boost the market significantly; for example, it is not necessary to store consignments in ports incurring huge penalties because of delays in updating and transferring bills of lading in order to receive the confirmation of ownership. Moreover, the number of fraud operations will be reduced because automation of a back-office will slash overheads.
All the banking processes look like a global trading utopia that was created with a wave of the magical blockchain wand. However, the industry is still at the beginning of its way, and it will definitely see a real breakthrough in the nearest future. It is necessary to highlight the possible barriers to the way of development, such as a paper-based system that has to be unseated.
The main challenges for blockchain in the financing world
Challenges in international trade finance are the main barrier to the further increase of blockchain in global trade. A large number of trading partners define a complex paper-heavy process as the main way of operations in order to secure the transactions.
Swiss bank UBS and IBM began mutual cooperation in 2016 on a global trade platform based on blockchain. Nowadays, four more banks, such as CaixaBank, Bank of Montreal, Commerzbank, and Erste Group, support the initiative.
Batavia is a new blockchain-based trade platform that was developed by five banks and IBM. The main aim of the platform is to help and support the creation of cross-border trading operations.
Despite the fact the blockchain scalability levels are increasing, it hasn’t reached mass adoption in the financial world. But why? There are still some challenges:
1. Regulation
It is a challenging area in any country because of a low tendency of the government to adapt to a changing landscape in age-old industries. Besides, there is a high need to develop and integrate global business standards, especially when it deals with the structure and is agreed on digital documents.
2. Implementation of the technology
The development of trading platforms can be complicated and expensive. It is a complicated process to build internal business cases to integrate the technology. For example, most of the trade finance and trade credit functions within any company are not necessarily the highest priority. However, a large number of companies, banks, and blockchain are interested in the development of further integration of a more unified approach. Companies and the government have to define tech interoperability as a key phrase.
3. Security and privacy concerns
There are some security and privacy issues that may raise doubts among people interested in crypto investment. It can be possible to identify the participants by analyzing transaction flow even if they use digital certificates. So, it’s not possible yet to stay completely untraceable.
Blockchain benefits
Despite any mentioned complications you can face, financial service providers are confident that blockchain will conquer trade finance and impact the development of a new digital era of decentralized records. But, how could it be? For example, Mr. Mendonca at HSBC, the biggest participant in the trade finance industry, informs that low fees and onboarding charges for using the mentioned platforms will increase the adoption.
The following step for the loyal and potential clients would be the movement of their ongoing flows on the platform.
Charley Cooper, managing director at blockchain, concludes that people can finally have access to a generous source of information on environmental, social, and governance items because of big data. As a result of such activities, there is a huge opportunity to meet sustainable development goals. Thus, the opportunities for further development in the financing world are incredible and endless.
Blockchain may be used in the following financial services:
- insurance;
- sales and trading;
- creating and settlement;
- fund administration;
- domestic retail payments;
- cross border payments;
- credit predictions and credit scoring;
- financing structures;
- reinsurance markets.
The mentioned areas for further integration of trading platforms will result in more accountable transparent governance systems, more efficient business models, greater liquidity, lower costs of capital, access to a broader investor, and reduced counterparty risks. Also, companies will have access to a broader investor and capital base and to most of the other digital financial instruments.
Conclusion
Many businesses have started to operate in global trade in recent years thanks to digitalization and technological development but the main issue for most of them is still inefficient and expensive transactions. The development of a trading platform will help create large multi-modal networks and bring transparency and trust to each stage of the process. There is a high potential for the platforms to transform each company worldwide and maintain business operations with one another. The mentioned advantages for the companies demonstrate that the provided service will help to protect the customers. Also, there is a tendency for businesses to increase the speed of operations and to make them more efficient in the financing world.
