It’s an exciting time for the world of business. Sectors that have seen little to no innovation since the beginning of the digital age in the late 50s are now finally letting go of their tedious, labor-and-paper intensive processes and embracing innovation. In international trade, for instance, distributed ledger technology (DLT), more popularly called blockchain, is being looked upon as the answer to some of the industry’s long-running issues.
As with many other business communities, blockchain has spurred quite the hype and hope among the players in trade finance. The possibility of tracking transactions and exchanging assets in real-time, in a secure and trusted environment, and without intermediaries makes it a thoroughly appealing tool to counter the inefficiencies that plague one of the oldest forms of traditional finance.
In recent years, numerous projects have sprung up to take advantage of blockchain technology in enhancing all aspects of trade finance, from the financing of transactions to the physical movement of goods. Major institutions have also taken note of blockchain's potential for the sector.
According to Deloitte, trade finance can be significantly improved by leveraging the technology to drive efficiencies, reduce cost and open up new revenue opportunities. Likewise, the World Trade Organization expects international trade to look radically different in the next 10 to 15 years if it succeeds in creating an ecosystem that is conducive to the wider development of blockchain.
It is certain, therefore, that blockchain-based solutions such as PDX have a lot to offer trade finance. However, to understand their benefits entirely, it pays to know what the blockchain technology is, and what it brings to the table.
Blockchain in Managing Transactions
A blockchain is a data structure that enables the creation of a digital ledger, on which transactions can be distributed amongst independent nodes in a decentralized network using cryptography. Every participant on the network can securely access and amend the ledger without authorization or facilitation from a third-party.
Since a blockchain network is updated anonymously by each participant to reflect the most recent state of a transaction, it eliminates the need for multiple copies of the same information stored on separate databases across different institutions.
Record inconsistencies are therefore nonexistent, and the lack of intermediaries fosters transparency between parties, unlocking funds that would otherwise be held up waiting for verification processes.
Blockchain in Trade Finance
Today, trade finance is focused on providing liquidity while mitigating credit risk in domestic and international trade transactions. Unfortunately, however, the systems currently used by financial institutions and their corporate clients to manage trade are siloed, manual, opaque, and most significantly, expensive. Blockchain can play a significant role in transitioning these antiquated models.
Below are the key offerings of the blockchain technology for trade finance.
1. More Efficiency with Peer to Peer Transactions
Besides exporters and importers, trade finance involves several go-between parties, such as logistics facilitators, export credit agencies, insurers, and banks. Data to facilitate one transaction, which is often in the form of paper documents, is carried from one port to the next along with the cargo in transit, checked, signed and faxed to the various actors, all while maintaining very little visibility of the entire process. These manual means are time-consuming and error-prone, and bottlenecks occur frequently because all parties have to take separate measures to guarantee credibility. Delays can also have adverse cost implications, which are further exacerbated by distant markets and financial institutions that lack direct correspondent relationships.
Enter PDX Coin.
PDX is a cryptocurrency that is at the core of a powerful new banking and financial services ecosystem based on encrypted and permissionless peer-to-peer (i.e. no middleman) payments and money transfers.
And unlike most fiat and digital currencies, PDX has the backing of underlying tangible assets, that is, physical reserves of crude oil and natural gas, and other energy assets. It offers all of the advantages of blockchain-enabled digital currencies while providing a verifiable asset base to protect its value, stability and security as a medium of exchange.
Transactions will be recorded in a blockchain distributed ledger, and, as a result, these transactions will be trustless, censorship-resistant, permission less, and private. Unlike other forms of asset control or money transfer, once a transaction in PDX is confirmed by the blockchain network, it will become irreversible.
By removing third-parties, PDX makes by-the-minute transactions a reality. The decentralized blockchain ledger keeps the same information about trades publicly visible and accessible to all parties involved, eliminating the back and forth exchange of the same documents and the many steps measures of verification.
All actors can have confidence that the data they are dealing with is valid from the beginning. Add smart contracts to the mix, and you have a model that enables the automatic triggering of trade actions when all underlying rules are fulfilled.
2. Accurate Risk Measurement for Trade Finance Approvals
One of the main reasons for the rejection of trade finance requests is the lack of reliable information. Without the data needed to measure risk accurately, businesses in the sector often miss valuable opportunities to fund their endeavors, a problem that balloons for SMEs.
Recording transactions on a blockchain creates a pool of data that financial institutions could use to answer questions about a prospective partner's historical performance. Transacting parties could also be digitally linked to legal identities that are universally accepted across the globe, which would make it possible to develop a map charting out the history of all trades performed across participants. Such tools can be very useful for combating fraud because all parties involved in a trade would be publicly known and validated.
3. Streamlined Compliance with Regulations
Regulatory oversight is critical in the global financial system. For trade finance, 25 percent of all rejected requests are based on Know-Your-Customer and money laundering concerns. It is no surprise, therefore, that the cost and complexity of ensuring compliance have become key considerations when fulfilling transactions.
PDX Coin could streamline compliance by facilitating live information sharing with regulator nodes, as well as making as much data available as possible for retrospective analysis. Regulators in the blockchain could rest easy knowing that the records they are assessing are genuine, accurate and up to date. Moreover, all regulating bodies involved in specific trades can exist in one blockchain, ensuring that all parties are kept openly compliant at all times.
4. Reinforced Trade Security
PDX Coin uses cryptography to verify the movement of data across nodes. In trade finance, cryptographic verification means financial institutions can share information that is only accessible to users that have the authorized keys.
Under this approach, nodes on the network maintain both public and private state databases and only execute ledger-update smart contracts if their keys give them access to said contracts, either by them being public or part of a privately accessible network. Therefore, trade participants can be assured that all network transactions are cryptographically secure, yet openly accessible to all pre-authorized members.
Will PDX Coin Fill the Gaps in Trade Finance?
Global commerce is developing exponentially, and to keep up, trade finance must leverage emerging technologies. PDX Coin offers efficiency, accuracy, traceability, transparency, and security, while significantly reducing the cost of transactions.
This means that trade finance can be digitized without the need for third parties, and trading parties can easily track the movement of their assets without concerns of fraud or manipulation.
However, PDX alone won't fill the gaps in trade finance. The technology's hard-coded features are bound to make processes more inclusive and available, but to take full advantage, the financial world needs to realign existing standards to encourage mainstream adoption. The key to unlocking PDX's potential is to ensure it fits into the right places, with little additional cost or disruption to day-to-day business.
To put it simply, integration is the most important step towards transforming the archaic $8 trillion global trade finance sector.