In this section, we will explore and implement the trade finance use case. Let’s consider an international trade process. To carry out an international trade, several parties or organizations need to coordinate with each other. They typically include, but not limited to: buyer (importer), seller (exporter), banks, shipping and logistics firms, port and customs authorities. The international trade process of today is often time-consuming and ineffective due to several regulations and documentation at each stage of the process. This not only makes the trade process ineffective but also adds a huge burden of cost.
Secondly, there is lack of visibility around the entire process, and each party to the trade maintains their own truth of information. There is no shared consensus and often arise lack of trust especially if they have not conducted business with each other before.
As creating the entire trading process may not be pragmatic within the scope of the book, we will implement a very simple trade finance use case that will involve exporting goods from seller to buyer and cover the process of creating and authorizing LOC and shipment using Hyperledger Fabric blockchain technology.
“Trade finance refers to financing a trade. In simple terms, a trade is an exchange of goods and services between buyers and sellers or importer and exporter. Trade can be a domestic or international trade. Banks or financial institutions provide a different form of financing avenues to support a trade. Financing does not only involve lending money but also making sure appropriate documentation is carried out so that the trade process is efficient and parties to trade can do business with confidence and trust.”
We will introduce a fictitious company named Free Trade Enterprise (FTE) – providing a trade finance application to conduct free and fair trade, transparent to all the parties. The application will be implemented using Hyperledger Fabric blockchain platform. The application will enable parties to the business execute a trade in a secured fashion by means of consensus and provenance, so as to provide transparency and accountability thereby reducing the time of financial trade from days to hours.
The FTE provides a marketplace model where trading can happen through shared consensus by the parties involved in the business. The marketplace uses many technologies apart from blockchain to make trading smooth and transparent. The technologies could include artificial Intelligence to match prospective sellers with buyers based on buyer’s requirements, rating, and past trades. For new buyers, recommendation systems could pick up best-rated and safe sellers and trusted associated parties and provide optimization of trade based on similar requirements.
Internet of Thing (IoT) technology can be used to automatically track goods and shipments at various intervals. For instance, goods that require to be transported over some optimum temperature, sensors can be employed that update contracts automatically if the temperature is dropped to a certain level. GPS coordinates can be tracked at various intervals to ensure real-time event tracking of trades.
As you see the possibilities are endless and one can leverage a combination of these technologies, backed by consensus through blockchain for next generation trade platform.
The users of our trade finance application are categorized into four distinct entities:
- Buyer (registered with FTE)
- Supplier (registered with FTE)
- Importer and exporter bank (part of larger Banking Consortium)
- Shipper (Shipment and Logistics firm)
A buyer (importer) registered with FTE wishes to buy 5 cartons of rich baked almonds with each carton containing 500 packs. FTE provides a Fabric blockchain platform where parties to the trade can create relevant documentation using smart contract. The buyer initiates the process by making a purchase inquiry to the seller. The seller views the purchase order and registers a sales order against it with certain terms and conditions about the sale. Once the sale contract is established, the importer bank will issue a letter of credit (LOC) to the exporter bank. This is one way of providing credit to the buyer on presentation of relevant documents, like bill of lading, by the seller. Once the exporter bank receives and validates the terms in the letter of credit, the seller approves the same, which initiates the shipment process. The shipping company will scan the goods and prepare the bill of lading (BOL) document, signifying the initiation of shipment process. Once the buyer receives the goods, it endorses the bill of lading document thereby indicating the completion of the trade.
In the above process, we are not dealing with any physical documents like purchase order, LOC or BOL but creating a smart contract and updating the status as the trade progresses. As we move towards a digital world, we envision a future where digital contracts would replace physical documentation as legitimate and legal artifacts.
We will implement the above flow using Hyperledger Fabric and start from the LOC creation process. We will assume that buyer and the seller have entered into an agreement to perform a trade involving the purchase of rich almonds. So, our smart contract is ready with purchase and sale order details.