Blockchain is a type of distributed ledger technology (DLT), a shared database of transactions maintained across a network on the internet.
Each transaction records amounts, dates and has a unique digital signature, and can occur without a central processor, meaning costs, times and fees are reduced.
Its most famous use case is for bitcoin and other cryptocurrencies, however, its presence in the finance sector has become more prominent in recent years.
Creating efficiency and transparency
With much of the trade finance industry still heavily reliant on paper-based transactions, from letters of credit to bills of lading, reaching the point where payments are processed can be slow.
Through digitization, a shared ledger allows everyone in the supply chain to view the documents, limiting the likelihood of fraudulent behavior as nothing can be edited or tampered with, while also reducing the reliance on manual processes. Documents can be simultaneously viewed by all counterparts, with instantaneous review and approval slashing wait times.
One of the key selling points for blockchain is the use of smart contracts, those that can automatically execute when terms of the agreement are met. Smart contracts allow for the transfer of currencies or assets between parties, with the ability to make banks and financial institutions redundant while speeding up transactions.
Security is heightened as transactions have to be verified individually through cryptography before authentication.
The decentralization of data means that transparency is increased, with a greater ability for participants to calculate risk tolerances as regulations are tightened. Greater transparency means that compliance with both KYC and AML regulations is made significantly easier.
The limitations of using blockchain
However, the implementation of blockchain in supply chain finance is unlikely to be universal in the short-term. Moving away from reliance on paper processes and introducing digitalization in trade is the precursor for adoption of DLT.
“Blockchain will be the future of Supply Chain Finance as it become the distributed platform for trade, but there is a long way to get there,” said Andy Suen, lead engineer at Harbor.
Because of the fragmented nature of the supply chain, with numerous stakeholders involved, from financial institutions, major corporations, upstream and downstream firms and logistics businesses, the level of collaboration required to build and maintain a successful DLT solution would be unparalleled. Without consensus across the entire network, efficiencies possible through blockchain are unlikely to be achieved.
Such a platform would reach its peak utility when only a vast plurality adopts the idea, which is unlikely to reap financial benefits in the short-term.
Having greater transparency into your supply chain counterparts’ activity is almost universally beneficial, however, without agreed data-sharing standards, the idea of sharing sensitive information could raise alarm.
Certain regulators are also not on-board with blockchain technology, for example countries that only recognize paper-based documentation.
Meanwhile the decentralized nature of blockchain means that territorial and jurisdictional questions can be raised.
Here and Now
The use of blockchain technology in international trade will prevail in due time but how is this relevant to most corporates involved in international trade?
Harbor is taking a pragmatic approach to support today’s businesses in undertaking their digital transformation journey. Our platform is built upon the latest cloud technologies and hides complexities of the new technologies we adopt behind the abstraction layer. This allows companies to focus on doing what they are good at while enjoying the flexibility of supply chain finance in a fully integrated workflow.
“A crawl, walk, run strategy is more appropriate when it comes to optimization of Supply Chain processes in your company,” said Joaquin Jimenez, Director at Harbor. “Moving away from paper to a fully digital and integrated reality is already a big step.”
In the digitization process there is a great deal of work to be done first before a blockchain environment is even an option. Reviewing the very foundational processes within the company are the priority, like Order-to-Cash and Purchase-to-Pay. Each step of the order process needs to be migrated to a digital equivalent, with the right automation, workflow, business rules, controls and audit trail.
“Blockchain and DLT will not do that for you, nor tell you how to do that,” Jimenez said.
Straightforward and robust digital platforms like Harbor can offer value in the here-and-now. With the HarborTrade platform companies can streamline and simplify their purchase process, while obtaining the right financial terms to support their working capital goals and balance sheet objectives.
Harbor is a Supply Chain Finance provider offering working capital solutions to improve the cash conversion cycle. Our programs allow for early payments to suppliers so that buyers can optimize their own liquidity through trade credit.
The HarborTrade platform not only injects liquidity into the supply chain, but it allows for better vendor and procurement management by allowing buyers and supplier to interact, creating streamlined processes. With improved cash flow and administrative efficiencies, users of the HarborTrade platform can quickly adapt to the changing global economy and leverage technology to remain competitive.
Harbor facilitates trade both domestically and internationally with offices and representatives in Miami, Los Angeles, New York, Hong Kong, The Netherlands, Germany, and Mumbai.