Sunday, July 14, 2024

Digital Trade Finance A Game-Changer for Emerging Markets

While there are several problems with global trade including war, supply chain bottlenecks, terrorism, inefficient operational procedures, outdated technology, and so on, emerging technologies such as Artificial Intelligence, Blockchain Technology, and the Internet of Things are helping to shape the future of digital trade finance. Trade finance is undergoing a monumental change with the addition of new disruptive technologies. 

These technologies are reshaping how goods and services are being tracked around the world, opening up new possibilities and opportunities for global digital trade finance. From optimizing shipping routes to tracking deliveries in real-time, these technologies are game-changers and make up for top trade finance trends to watch in 2024. Today, we will take a look at the current condition of digital trade finance for markets and its future with the addition of AI and blockchain.

The New Era

Digitalization of trade finance is vital if international trade aims to move into the 21st century. Some of the world’s largest financial institutions, such as Standard Chartered, JPMorgan, Citibank, and Bank of America, among others, believe in the digitization of trade finance and have announced different trade finance initiatives by partnering with fintech companies to accelerate the digitizing process. 

For example, JPMorgan recently invested in, a developer of an AI tool that can help reduce the time required to review trade finance documents, reducing the time taken by humans from three hours to about 10 minutes. This strategic investment is aimed at optimizing JPMorgan’s trade finance operationality.

On the other hand, Citibank has partnered with MAesrk to develop the digital equivalent of bills for lading and bank guarantees. Shahmir Khaliq, global head of services at Citi, mentioned in an announcement, “Digital asset technologies have the potential to upgrade the regulated financial system by applying new technologies to existing legal instruments and well-established regulatory frameworks,” 

This is to say that big players in trade finance are taking different approaches but are ultimately queuing up for a digital trade finance future. To that extent, many experts rightly believe that if these initiatives are brought to fruition, trade finance could largely be democratized, further helping small and midsize enterprises or SMEs by eliminating the previous struggle of securing small, short-term loans to engage in overseas commerce.

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Growth In Sustainable Trade Finance

While the benefits of digitization in trade finance are unparalleled, there are challenges such as including escalating trade tensions and the reluctance of many players to democratize information and services. Additionally, global trade shrunk by 4.5% in 2023 as compared to an all-time high in 2022, amidst geopolitical strains and shifting trade patterns.

However, digitization presents a global solution to several of these problems as AI and other technologies can help build a more efficient international trade finance, as stated by Rouben Indjikian, lecturer in trade finance and commodities at Webster University Geneva. Technology isn’t a silver bullet but can help in multiple ways including helping read and digitizing invoices and bills of lading. Additionally. AI can help establish creditworthiness and ensure an easy track of services and products.

Moreover, smart contracts built on blockchain technology can help in automating payments to optimize the clearance of pending dues, without even bringing tokenization of real-world assets to the mix. LGR Global’s co-founder and CFO, Ari Aaltonene, mentioned, “AI and machine learning hold immense potential to significantly enhance the accuracy of credit risk assessments in the trade finance sector,”

Interestingly, LGR Global has launched SilkRoad Coin, a utility token designed to power import and export between East to West economies as one of the first real-world business use cases. This project marks the beginning of the tokenization of the trade finance industry and showcases the true potential and the future of digital trade finance.

Obstacles in Digital Trade Finance

Apart from the geopolitical obstacles, there are nonpolitical challenges too. For instance, on a micro level, companies want to safeguard their intellectual properties. These companies are hesitant to share their record of transactions or manufacturing activities to prevent other businesses from leveraging this information to their own benefit. Disclosing these details on the blockchain network can ensure the anonymity of the records, but will ultimately make the records and information public knowledge. 

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“Everybody wants to protect their information,” says the DSCI’s Muma. “I don’t want to disclose to you my manufacturing activities for today,” for instance, “because if you know that I’m running at 20% of capacity, you’re going to negotiate me down.”

Apart from that, regulators will also need to approve the digital transformation of trade finance. However, the UK’s recent adoption of ETDA shows a potential solution. This legislation enables electronic trade documents such as digital bills of lading to be used the same way as paper documents if proper security protocols are followed. Singapore and certain parts of the US governed by Delaware Law are also now willing to accept digital records instead of papers, reflecting a positive future. 

Tokenization in Digital Trade Finance

In the realm of trade finance, banks, and fintech companies are delving into the realm of tokenization, marking a significant leap into uncharted territory. Tokenization involves converting ownership rights of real-world assets into digital tokens, which can be recorded, tracked, and traded on distributed digital ledgers, often utilizing blockchain technology. This innovative approach extends beyond traditional assets, encompassing diverse commodities such as real estate, art, carbon credits, and even receivables of small and medium-sized enterprises (SMEs).

“Tokenization, combined with the programmability of smart contracts [that run on blockchains], simplifies trade finance,” says HBAR’s Higdon. In time, it might allow “farmers and SMEs to focus more time on their core business rather than how to fund themselves appropriately.”

According to HBAR’s Higdon, the combination of tokenization with smart contracts streamlines trade finance processes, potentially allowing farmers and SMEs to focus more on their core business activities rather than navigating financing complexities. For example, Fresh Supply Co, a recipient of HBAR grants, has developed a platform in the agrifood sector that collects data throughout the production and delivery process, managing credit risks and tokenizing assets like salmon or avocados. This enables farmers to leverage their produce as collateral for lending, facilitating access to much-needed credit and ensuring prompt payments upon delivery.

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Major financial institutions, including Standard Chartered, are also taking note of tokenized trade finance. Standard Chartered’s confirmation of investors purchasing $500 million worth of tokenized trade finance assets demonstrates growing interest and investment in this innovative approach. However, scalability remains a concern, with challenges such as automatic transition into blockchain space and potential price volatility due to assertive crypto investors.

Despite these challenges, the potential benefits of tokenization are evident. While complexity may pose a barrier for some SMEs, tokenization holds the promise of increased participation in global trade activities. As CEO of Uluky, Alex Axelrod acknowledges the transformative potential of tokenization, emphasizing its role in empowering smaller enterprises in the global trade landscape.

Road Ahead

While the future of trade finance lies in digitalization, it will require much work. First and foremost, the interoperability among diverse organizational systems, such as banks, shipping companies, and insurance firms needs to be enhanced. This enhancement can be achieved with the help of blockchain technology and it will act as a crucial aspect in the transformation process. Additionally, several experts believe that a metamorphosis is underway which probably can’t be stopped.

This digitalization of trade finance will have interesting consequences. For example, online trade finance platforms will be accessible to new players and will help diminish the trade finance gap. This metamorphosis will digitalize the entire supply chain industry, including logistics, bills of lading, customs, and trade financing alike. Projects such as Silk Road Coin are leading this transformation and making trade finance faster, more scalable, and more accessible. 

Author bio: Ava James stands out as an expert content creator with a focus on blockchain, trade finance, and a range of cutting-edge technological subjects. Boasting ten years of expertise in the fintech industry, she has a talent for making intricate topics accessible and engaging to a wide readership via her thought-provoking blogs and articles.

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A Aadithya is a content creator who publishes articles, thoughts, and stories on a blog, focusing on a specific niche. They engage with their audience through relatable content, multimedia, and interacting with readers through comments and social media.

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