Using blockchains to solve issues in trade finance

Trade finance (or supply chain finance) refers to

the optimization of cash flows of all participants involved in global and international supply chains (i.e. trade). The goal of supply chain finance is to ensure, through financing or risk mitigation, fund settlement (i.e. that buyers pay sellers) and to free as much working capital as possible. 1

Although trade finance is an essential part of the global economy (one-third of world trade is optimized through trade financing 2), it is an incredibly inefficient process.

Issues in traditional trade finance platforms

Traditional trade finance consists of closed, monolithic, and proprietary solutions by a large number of diversified (centralized) entities (banks, corporates, regulators, governments, transportation, and insurances). Furthermore, many of the processes are still manual and paper-based. Moreover, many processes happen across borders thus involve different laws, regulations, and currencies.

This leads to a range of issues:

  • High costs: Especially because of this manual processing, trade finance is expensive.
  • Constantly changing lists of allowed/forbidden products: The more regulators are involved the more difficult it gets to keep up with changing laws in regards to product and service availability.
  • Large transaction volumes: Trade finance generates an enormous amount of transactions (around 140,000 SWIFT messages per day 3)
  • Slow settlements: As in the case of traditional security issuance, because every stakeholder validates transactions independently, settlement times are long. Settlement times increase further for every additional stakeholder. More about traditional security issuance and how they compare to blockchain-based tokenization here.
  • Counterparty risks: The more (centralized) stakeholders are involved the longer it takes to for a transaction to be confirmed and thus increases counterparty risk. Moreover, because humans stand behind contracts, the fulfillment of these contracts (e.g buyers paying sellers) depends on these people’s goodwill and thus further increases counterparty risk. In this context, it is worth pointing out that in 2013 around 80% of all trade finance was settled through open accounts 4 whose fulfillment relies purely on the goodwill of the other party.
  • Ongoing reconciliation: Because every stakeholder stores transactions independently, data inconsistencies, which must be corrected through ongoing reconciliations, are likely. This is again a similar situation as in the case of traditional security issuance . More about traditional security issuance and how they compare to blockchain-based tokenization here.
  • FX risk: Trading across countries and currencies exposes the involved companies to exchange rate risks.
  • Limited possibility for banks to tailor offerings: Banks have troubles providing the right financial support to the right companies along the supply chain because banks lack full insight into the trading activities (trade data) happening between all the involved companies. This lack of information stems from siloed, proprietary, manual, and paper-based supply chain trade finance systems of the involved stakeholders. This makes it difficult for banks to get a full overview of supply chain transactions and thus lowers their potential for involvement.
  • Errors and slow processing: Many documents involved in trade finance and supply chains are paper-based and their processing is manual. Such human processing leads to errors and an overall slow processing
  • Fraud: Manual and paper-based system not only lead to accidental errors but also to conscious errors – fraud – such as double invoicing.
  • Lock-in of working capital: Because of manual, paper-based processing and slow settlement times, a lot of working capital is locked away from companies somewhere along the supply chain.
  • Lack of real-time information: Manual and paper-based system make the availability of real-time information impossible.
  • Limited interoperability: Systems involved in trade finance vary across companies as well as within companies for different steps along the supply chain (finance). For instance, companies use different systems for invoicing, financing and documentation. The more systems there are involved, the lower the interoperability between them.
  • Slow and incomplete audits: Like in the case of traditional security issuance, because there are multiple (manual) steps and stakeholders with incompatible data involved, it is difficult to obtain a full audit trail of the movements of good. More about traditional security issuance and how they compare to blockchain-based tokenization here.
Issues in traditional trade finance platforms (1/3)
Issues in traditional trade finance platforms (1/3)
Issues in traditional trade finance platforms (2/3)
Issues in traditional trade finance platforms (2/3)
Issues in traditional trade finance platforms (3/3)
Issues in traditional trade finance platforms (3/3)

Based on these issues, blockchains are a great solution for trade finance. And several companies are working on such
blockchain-based trade finance platforms. Examples include Batavia and Marco Polo.

Marco Polo is based on TradeIX and the Corda blockchain (R3).
Batavia was created by Bank of Montreal (BMO), CaixaBank, Commerzbank, Erste Group, UBS and IBM and executed their first real-world transaction in April.


  1. Adapted from Standard Definitions for Techniques of Supply Chain Finance ↩︎
  2. Adapted from Standard Definitions for Techniques of Supply Chain Finance ↩︎
  3. https://www.gtreview.com/magazine/volume-16issue-1/sponsored-navigating-challenges-global-trade-%EF%AC%81nance/ ↩︎
  4. Standard Definitions for Techniques of Supply Chain Finance ↩︎

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