To start off, we break down the complex nature of the topic, by defining it in simple terms. Blockchains, a word, we are constantly engaging in our day to day vernacular, is simply a digitized, decentralized, business balance sheet of all cryptocurrency of virtual currency transaction.
How it all started
Originally accounting method utilized blockchain. Since then, trade has found blockchain to be highly useful. Many believe that Blockchain has the potential to cause the biggest stir in the finance industry since the advent of electronic trading in the 1980’s.
Blockchain or distributed ledger technology(DLT), can verify any transactions, code as well as insert any type of document on the internet. The main advantage of this technology is that it creates a permanent record, whose authenticity can be verified by anyone using the blockchain instead of a specific group of people.
Blockchain in Trade
Blockchain is capable of accumulating a variety of industry in one single platform. Exporters, Importers, bankers, government agencies can make transactions securely, on a single blockchain with least charges. Blockchains in its use in trade, have the potential of digitizing the paper-based system of trading process, cutting the middleman and helping in direct trade.
Blockchain reduces fraud where it maintains records on a permanent basis. It makes payment execution really simple. This digitization of documents also reduces loss and delays that is a major problem with manual document system. Counterfeiting of such documents is near impossible. Apart from advantages of blockchains in the trading process, storage and trade processing also finds a beneficial use of blockchain. Expostores, for example, trades with the help of blockchain. Electronic Invoices created by them helps in the supply chain, which both buyers and suppliers can view any time.
Warehouses, used for storing trade items are conducive to illegal activities. Since receipts are not digitally produced, multiple receipts can be produced. Blockchain, hinders this process, by restricting the number of receipts generated, along with digital access key, pertinent only to the owner. Transparency is also amongst the few benefits offered by Blockchain. Since all the transaction records are stored on a permanent basis. There is sustainability in the trade system with the help of certificate of origin. Reducing the extensive paperwork needed in the manual process, blockchains have reduced costs and proved efficient in the growth of the supply chain.
Now, trade finance is a critical function in international commerce for many banks and financial institutions. The $16 trillion international trade depends on the easy accessibility and durability of this system. The recent trend of legal actions and fraud involved in the trading world, blockchain as a solution is irreplaceable. Statistically, it has been estimated that banks reject 60% of SME finance applications, due to the lack of confidence in them. This fear of risk has limited the size of the world trade market to $4 trillion to about $5trillion only; thereby adversely hindering the growth of global commerce.
Taking India into perspective, Trade Receivable Discounting System(TReDS)guidelines of RBI, can be cited as a blockchain application in mainstream commerce. This TReDS seeks to set out a system that would ultimately ease liquidity shortfall, especially for MSMEs; by the use of invoice in the financial market, for their supplies to big corporate institutions.
Even when the use of blockchains seems enormous, there still remains a few hurdles. Scalability of blockchain, for non-bitcoin applications, has not yet been proven effective. The complex nature of blockchain requires more understanding of this technology. Banks like ICICI and Emirates NBD Bank have been among the few that have implemented the use of blockchain, along with companies like Infosys.