Blockchain and Foreign Trade
A Story of a Successful Application
Blockchain, as previously mentioned, has the ability to impact a variety of industries. Let's walk through its relevance in foreign trade transactions and how it satisfies the important criteria of transparency.
A Letter of Credit
A letter of credit (LC), issued by a bank in the importing country to a bank in an exporting country, functions as a promise to pay for the imported goods given the specified conditions. The process involving verification, approval, and documentation of the LC is usually complicated by differences in country-specific regulatory frameworks.
In India, it takes about 20 to 30 days on average to issue an LC, leading to the following problems:
Delays
Shipment of goods, payments because of the many required verifications prior to the eventual disbursement of funds.
Errors
An increased propensity for errors given that financial agreements are reviewed manually
Consistency
Constrained changes to financials in the presence of differing degrees of control throughout countries
Accesibility
Independent platforms operated and accessed by different parties
Introducing the Smart Contract
Reshaping trade finance one transaction at a time.
To solve the preceding issues with traditional trade financing, Deloitte India has come up with a flexible and scalable design to apply blockchain to a local private sector bank. A “smart contract service” has been developed through the blockchain platform, and this is where parties who are invited to join can gain access to real-time updates of recorded transactions, thus improving the timeliness of effective information sharing. The detailed mechanism of a “smart contract service” will be illustrated in the following diagram.
The Process
The Solution
How does the Smart Contract solve these issues?
With the blockchain “Smart Contract” available, there will be enhanced transparency in the communication process involved in international trading, demonstrated through decentralized contract execution and proof of ownership.
Decentralized contract execution
The stages of documentation or delivery processes will be updated in real time and viewable via “Smart Contract”, thus saving big on monitoring costs.
Proof of ownership
Blockchain will make it clear about which party owns a specific good at a specific point of time to reduce any potential ambiguity or confusion.
The Icing on the Cake
Moreover, because bills will be accurately tracked through blockchain, this protects the importing country from the potential risk of making double payments.
Last but not least, by granting the access of “Smart Contract” to national trade regulatory agencies, regulators will be able to acquire real-time insights into the country’s trade activities. In this sense, future trade regulations can be enacted or modified, depending on the availability of information on a country’s import and export price and quantities, to achieve certain objectives.