by  SoftServe Team

Smart Contracts Modernize Trade Finance and Close the Trade Finance Gap

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World Economic Forum

Such disparity between the number of applications and the number of approvals for global trade financing disproportionally affects small and medium enterprises (SMEs), who also struggle when liquidity is tied up in open trading accounts.

In addition to low approval rates, trade finance is bogged down in an antiquated system that relies on paper trails, including bills of lading and letters of credit, which are transferred among traders and banks. Such slow processes are particularly problematic for exporters who turn to open account trading — the shipping and delivery of goods prior to payment, which can result in payment being delayed up to 90 days after shipment.

Digitalization of trade finance through the adoption of blockchain and smart contracts addresses many of the issues afflicting trade finance while opening the door to a new client base, SMEs, which otherwise have been unable to access affordable, low-risk trade finance. Blockchain and smart contract solutions:

  • Provide transparency to speed the initiation of shipping and shorten the trade cycle
  • Allow real-time views of the process for regulators
  • Facilitate transactions between untrusted parties without intermediaries

How do smart contracts work?

A smart contract is like any other contract between two parties: it sets the rules of a transaction and defines the terms of an agreement between two parties. The main difference is that a smart contract exists as a code programmed onto a blockchain. Once the established conditions are met, the program runs, and specified actions are executed. For example, in the world of trade finance, once goods arrive in a warehouse, a smart contract automatically executes payment.

Self-execution of smart contracts means that funds are released immediately, without a third party needed to verify receipt of the goods, process payments, or evaluate paperwork. This disintermediation accelerates the process, increases liquidity, and prevents fees from accumulating as more parties get involved.

Since smart contracts exist on a blockchain, they are distributed among numerous nodes, rendering them inalterable once they are programmed. The immutability of self-executing smart contracts mitigates two common problems in trade finance: fraud and the duplicative financing of a bill of lading.

Additionally, a blockchain serves as a history of ownership and transactions that provides transparency as to where goods originated and through which hands they have passed. This quality makes it easier to comply with AML/KYC guidelines and to verify that goods are as described. The distributed, immutable ledger of a blockchain makes it easy to verify a partner’s past transactions, evaluate their trustworthiness, and determine their suitability for short-term financing.

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Implementing blockchain and smart contract solutions

Facilitating trade finance with smart contracts requires proper infrastructure and consultation from experts who know how to smoothly migrate to the cloud, develop smart contracts, and build blockchain bridges. SoftServe’s team of blockchain experts has years of experience working with clients to identify appropriate blockchain and smart contract solutions and accelerate speed to market.

As an AWS Partner Network (APN) Premier Consulting Partner, SoftServe has the expertise to simplify your cloud migration and build blockchain and Web3 solutions on the most widely used cloud platform for blockchain development. Our experience ensures that the confidentiality and security of your data are top of mind as new solutions are implemented.

Learn more ways SoftServe and AWS can develop blockchain solutions to optimize financial services, increase security, and find new revenue streams by reading our white paper, Blockchain’s Applications in Banking Beyond Bitcoin.