Digitization and automation of trade processes has been ongoing for many years, but the banks’ updated processes are still largely based around the logistics of handling physical documents.
A lot of processes share similar characteristics, but requires completely different IT systems and procedural steps to manage. An example here would be documentary collection, letter of credit and consignment. All of these processes follow roughly the same five steps:
1. Extension of credit to customer
2. Informing the customer of credit status
3. Banks open a communication channel regarding
4. Updating the status of goods from freight forwarder
5. Execution of full or partial payment of funds based on certain criteria.
Blockchain technology could bring the benefits of automation to these trades. Through the use of cryptographic keys and multisignature wallets, one can create a replacement for traditional trade finance documents, which are stored on the blockchain as a smart contract. The document is updated by blockchain transactions as it moves through the steps of the trade process.
Two cryptographic keys are used to sign a blockchain transaction, one private and one public. This is analogous to how a signature on a physical document or a cheque proves validity in the physical world, only with an added layer of security. Ownership of the private key provides access to the digital assets stored at an ‘address’, which is analogous to accessing a bank account using a personal pin. Both keys are needed to create a transaction output, which means transferring your assets to another ‘address’.
Wallets are a service which do not store the assets themselves but they can generate, manage and store the needed cryptographic keys. Added functionality enables a wallet to require multiple signatures before the digital assets in them can be accessed, meaning that multiple parties can be involved in the same trade process.
Case Study: Wave
Blockchain-based supply chain startup Wave emerged from the TechStars FinTech accelerator and was able to secure a partnership with UK bank Barclays at the start of October this year. The company describes its service as a way to replace traditional bill of lading documents which are used by trading partners to provide information on shipments.
Wave incorporates industry standard workflows, replacing printed documents with versions that are stored electronically in blockchain transaction metadata. Sharing many similarities with the ideas presented in the chapter on Value Registry, Wave use blockchain technology to manage the ownership of each document or goods in transport.
As the goods are being shipped from one receiving port to another, that change of ownership is recorded as an transaction with the port’s private key, and the smart contract governing the trade will note that an update has taken place. Partial payment will then be executed automatically to the designated port.