Blockchain is famous not only because of bitcoin or cryptocurrency trading, but also because of the technology behind it. It’s one of the most unique technologies that uses cryptographic principles to bind and secure blocks of data. Moreover, it’s a decentralized system in which no central authority is needed.
Introducing Blockchain and Trade Finance
This is why the trade finance market is now considering blockchain technology for their transactions. Here are the advantages of using a blockchain in trade finance:
Trade finance includes parties like service providers, export credit agencies, insurers, importers and exporters, trade finance companies, and banks. In one transaction, many parties are involved before it is completed, so the time it takes to accomplish this might be a while.
But with blockchain technology, transactions can be completed in less than an hour or so. Since no intermediaries or third parties are involved, less processing time is needed. Moreover, because all information or data are digitized, the relevant parties can expect faster transactions.
Also, smart contracts can be available for parties using the blockchain. No third parties are involved since computer protocols digitally enforce, verify, or facilitate performance or negotiations. As a result, commercial actions can be triggered automatically, just like how, for example, the Bitcoin Code trading app can execute automatic trades. The transaction speed will then be increased while decreasing the costs.
When blockchain technology is embedded in trade finance, all the parties can have access to the papers involving every transaction. From the point of origin to the present transaction, the process is recorded by the blockchain. As a result, everyone who is involved in it can view it anytime, anywhere.
When trade finance uses this kind of technology, all transactions are available for audit by financial institutions since information is already digitized and ready to view. Because transactions are visible for all parties, they can see whether or not there are irregularities or mishaps in the process. The risk of fraud will then be reduced.
No matter how complicated the transactions are, blockchain technology can record commercial agreements and the many details of the process.
When you’re doing business, one of the many things that matter most is your ability to keep track of your commodities, goods, or finances. If you’re relying on traditional record-keeping, then you are not up-to-date about where your product or finances are. But with the help of blockchain technology, you can trace the origin and whereabouts of the trade.
Not only will it be traceable on your part, but also with the future new owner as they can also track where your assets or goods currently reside.
Transactions are also automated so you will know when it’s debited and logged, unlike traditional trade, which takes place for hours since you’ll have to wait for the papers to know what steps have taken place for such a transaction to be completed.
Moreover, with blockchain, you will know who is responsible if your goods, assets, or finances are delayed. You will track in real-time when it was stored, processed, and received by new owners.
Because blockchain technology uses cryptography for verifying every trade, various financial institutions can share authentic data. This complicated cryptography feature is not easy to manipulate, so hackers or cyber-attackers cannot easily decipher such software rules.
A blockchain can be secure in trade finance for the following reasons:
- Decentralization – When making a transaction using blockchain technology, the data used or borrowed are distributed to each user on the network. For instance, if you make any transaction, a block is created by nodes to update the blockchain then adding the newly created block on the blockchain. So every block you change requires changing subsequent blocks. The nodes that update such data are not comprised of just a couple of numbers, but of thousands. As a result, you can not defraud any transaction or beat them.
- Cryptography – This deflects any fraudulent attacks with its mathematical algorithms that are complex in nature. It properly hides the real identity of the processed data, which is known as hashing. For every transaction, there’s password protection from the hash of the previous and current block. So when you try to change even one item in the hash ID, it will become a different one. Therefore, fraudulent acts cannot prosper because they need to change the whole block.
Global commerce is developing fast, and trade finance must keep up with the latest technology. With blockchain technology, trade finance can become more efficient, secure, transparent, and traceable.
Transactions can be automated with third parties being out of the equation, so less time is needed for transactions to be completed. Moreover, the parties involved can easily track the whereabouts of their goods or assets without the fear of them being manipulated.