In this article, Hussam Alkokhon discusses how blockchain technology is transforming trade finance while addressing the challenges and opportunities in its adoption.
The views and opinions expressed in this article are those of our authors and do not necessarily reflect the official policy or position of the ICC Academy or ICC.
Blockchain technology is transforming trade finance by providing a secure and tamper-proof system for recording transactions. This innovative method ensures that records cannot be modified afterward without altering all subsequent blocks, increasing integrity and security. This technology addresses many pain points in trade finance, an industry largely dominated by paper documents and legacy processes.
Trade finance faces challenges such as a lack of transparency, complex paperwork, and lengthy settlement times. Traditional systems are slow and vulnerable to fraud, highlighting a pressing need for digital transformation. With blockchain, trade stakeholders can expect a system that is more transparent and auditable.
Read: What is trade finance?
What is blockchain?
Blockchain can be defined as a ‘decentralised, distributed ledger that permanently records transactions’.
Imagine blockchain as a large book, where each page represents a block and every entry on the page corresponds to a transaction. The pages are sequentially linked to ensure that any alteration or removal of a page (or block) is immediately noticeable. This interconnected structure maintains the ledger’s integrity, detecting suspicious activity and preventing tampering.
A real-world application of blockchain includes tracking records such as raw material purchases, financial transactions, or inventory management in healthcare systems.
Understanding key blockchain components
To recognise the transformative potential of blockchain in trade finance, it’s essential to understand its fundamental components:
| Key blockchain components | Description |
|---|---|
| Distributed Ledger | A decentralised database that is shared among multiple parties, allowing for real-time updates. |
| Blocks | Digital records that contain transaction data, linked together in ordered sequence to form a chain. |
| Consensus mechanisms | Protocols used to achieve agreement on a single data value among distributed systems, ensuring all parties validate the transaction. |
| Cryptographic hashing | A process that converts data into a fixed-length string of characters, enhancing security and integrity. |
| Decentralisation | Reduces reliance on a central authority, making transactions more secure and less exposed to fraud. |
| Smart contracts | Self-executing contracts with the terms of the agreement directly written into code, automating processes and reducing the need for intermediaries. |
| Immutability | Once recorded, transactions cannot be altered or deleted, fostering trust among stakeholders. |
| Transparency and privacy | Transactions are visible on the blockchain, while cryptographic techniques ensure privacy. |
| Tokenisation | The process of converting rights to an asset into a digital token, facilitating easier transfer and ownership tracking. |
Read: Digital Trade 101
Blockchain and trade finance
In 2023, the FinTech blockchain market was valued at $7.2 billion and is forecasted to reach $325.6 billion by 2033, growing at a compound annual growth rate (CAGR) of 46.4%. This rapid growth, coupled with the steady growth of global trade in Q1 of 2024 is likely to increase the adoption of blockchain technologies to transform traditional trade finance systems.
According to The World Economic Forum, blockchain has the potential to increase global trade by up to $1 trillion over the next decade by improving efficiency, reducing costs, and enabling seamless cross-border transactions.
Certificate in Digital Trade Strategy
Challenges in implementing blockchain technology
Despite its transformative potential, the implementation of blockchain in trade finance across industries and organisations will present a wide range of challenges and dependencies. Understanding these obstacles is crucial to ensuring long-term success and driving digital transformation across the sector.
| Regulatory and legal difficulties | Varying regulations across jurisdictions can hinder the adoption of blockchain solutions, complicating compliance for cross-border trade. |
| Integration issues with existing systems | Legacy systems pose significant hurdles, as integrating blockchain with current infrastructure requires substantial investment and technical know-how. |
| Scalability and technical considerations | Many blockchain networks face scalability issues, limiting their ability to handle high transaction volumes efficiently. |
| Adoption barriers among stakeholders | Hesitation from stakeholders to embrace new technology, coupled with a lack of understanding or awareness of its benefits, can stall progress. |
Opportunities arising from blockchain technology implementation
Despite these challenges, the implementation of blockchain in trade finance presents numerous opportunities:
| Improved transparency and traceability | Blockchain’s core characteristics – transparency, decentralisation, and immutability – enable real-time tracking of transactions, reducing disputes and building trust in secure systems. |
| Increased efficiency | Automation through smart contracts can significantly reduce settlement times and streamline operations, leading to faster transaction processing. |
| Enhanced security | The decentralised nature of blockchain minimises the risk of fraud and unauthorised access, thereby bolstering security. |
| Reduced paperwork and administrative costs | By digitising documents and automating processes, organisations can lower operational costs associated with trade finance transactions. |
Real-world applications of blockchain in trade finance
Several real-world applications illustrate blockchain’s potential in trade finance.
Case study 1: The Global Shipping Business Network (GSBN)’s eBL solution
GSBN uses blockchain technology to address inefficiencies in global trade, replacing carbon-intensive Original Bills of Lading (OBL) with secure, immutable electronic Bills of Lading (eBL). Widely adopted by major shipping lines like COSCO and Hapag Llyod, eBL streamlines data sharing, reduces emissions, and enhances trust among stakeholders.
GSBN’s initiatives, including eBL tokenisation with Ant Digital Technologies, enable trade settlements using stablecoins, CBDCs, or tokenised deposits. This innovation bridges the $2.5 trillion trade finance gap, particularly benefitting SMEs, and is recognised under the Hong Kong Monetary Authority’s Project Ensemble as a transformative solution for global trade finance.
Case study 2: Enigio transitions to digital documents
A leading multinational corporation partnered with Enigio to modernise its trade finance operations by replacing traditional paper-based processes with secure, flexible digital documents. Despite prior digitalisation of internal systems, the company’s reliance on physical trade documents cased delays, increased costs, and introduced risks in complex, multi-party transactions.
Enigio provided a solution that digitalised key trade documents, including Shipping Instructions, Commercial Invoices, and Bills of Exchange, ensuring they were both human-readable and machine-processable. Adhering to the KTDDE Framework, the digital documents retained legal integrity and required no additional systems or integrations for supply chain partners.
This shift eliminated courier dependencies, reduced transaction times and costs, simplified operations, and enhanced security by enabling easy document verification and transfer. Enigio’s approach demonstrates how digital documents can future-proof trade finance in diverse, global supply chains.
Enigio’s trace:original document framework has these six layers:
- Human-readable content (PDF): Provides a traditional, text-readable document layer, often OCR-compatible.
- Machine-readable content: Structured data formats like YAML, or JSON enable automation and seamless integration.
- Data standards (schema): Ensures compliance with current and future standards for compatibility and consistency.
- Attachments: Additional files in various formats can be appended, which enhances flexibility.
- Electronic signatures and seals: Adds legal validity and verifies authenticity via metadata from trusted providers.
- Blockchain-based integrity tracking: Uses blockchain to ensure document immutability, fraud prevention, and traceable audit trails.
Read the Key Trade Documents and Data Elements on the Frontlines report by ICC DSI.
These examples give a small insight into how effective blockchain can be in transforming trade finance systems.
Future outlook of blockchain and trade finance
As blockchain technology continues to evolve, its influence on global trade finance will only increase.
The move toward digital transformation is accelerating, with more organisations recognising the need for secure, efficient, and transparent transaction methods. As regulatory frameworks evolve and more stakeholders embrace this technology, we can anticipate a future where blockchain is integral to trade finance processes, fundamentally reshaping how transactions are conducted and managed.
Despite the challenges, the opportunities blockchain presents are immense. By addressing these roadblocks, the trade finance sector can achieve greater operational efficiency and foster a more transparent and secure global trading environment.
