HOW blockchain ALREADY ADDS VALUE IN TRADE
Exciting use cases for blockchain in international trade
International trade is undergoing change. The digital transformation in the trade of commodities and goods such as agricultural products, precious metals or chemical products is accelerating fast. An important driver of this innovative development is the blockchain-technology, also known as distributed ledger technology (DLT).
With our EARLY BRANDS innovation & technology scouting we already see how blockchain supports more and more exciting applications in international trade. In this innovation spotlight, our innovation and technology experts highlight three areas of application in which blockchain is already in use – and has a high practical value:
# 1 PEER-TO-PEER TRADING
Trading commodities like grain or livestock is as old as mankind – and it has never really changed: mostly, it is realized with the help of central exchanges, marketplaces, brokers and wholesalers. They act as matchmakers of supply and demand or clearing houses that seller and buyer trust. They don’t trade directly with each other here. But trading through an intermediary involves special transaction costs such as brokerage fees or wholesale margin. An alternative is trading over-the-counter (OTC): here, trading takes place directly between the seller and buyer, with no additional transaction costs. However, it comes with direct risks for sellers and buyers such as default of payment or delivery. Blockchain technology has the potential to revolutionize international trade by allowing the benefits of the two trading options without their drawbacks.
With blockchain, buyers and sellers trade directly with each other in a secure way, without middleman and with low transaction costs. The distributed ledger technology makes it possible: here, all data and business processes are stored, counterfeit-proof and traceable in real-time for buyers and sellers. The agreed trade conditions are automatically and unalterably recorded, via a smart contract transactions are executed automatically when the conditions are met – or, if necessary, reversed. As a result, blockchain is both a digital trade contract and a supervisory body. It enables a new, disruptive option how buyers and sellers trade in the 21st century. The Swiss startup Cerealia provides an example from practice: for the first time in history, the trade of Black Sea wheat has been conducted via blockchain by using Cerealia’s platform. Secure and fast without a central intermediary, with significantly reduced transaction costs for the commodity companies Transoil and Solaris. The blockchain-technology is also being tested in other industries for trading of physical and non-physical products: US-startup LO3 Energy enables direct trading of energy based on blockchain. In this way, local producers and consumers trade decentrally generated energy from wind, sun, water and biomass with each other, in near real-time. This makes energy trading more flexible, easier, faster and cheaper. Siemens recognized the startup’s potential early and integrated the blockchain-based system into its local microgrids. This combination of physical infrastructure and blockchain technology offers disruption potential for energy trading, while providing the much-needed grid stability when decentralized renewable energy are increasingly integrated.
# 2 SUPPLY CHAIN TRACKING AND TRACING
Across industries, companies face the challenge of meeting the quality and transparency requirements for their products along the supply chain. Whether food or fashion industry: all companies face the increasingly critical view of consumers and governments. They demand full transparency where and under what conditions products were manufactured. For companies, this means that individual steps along the supply chain should be traced well beyond their own final production, right down to its origin. With complex supply chains including dozens or hundreds of suppliers and suppliers’ suppliers, distributed all over the world, this is not an easy task. For example, how do brand companies in the fashion industry ensure that their direct suppliers from Vietnam, China or India use cotton as a raw material that has been produced under environmentally and socially acceptable conditions? Across industries, companies are increasingly gaining experience with blockchain in order to create transparency to create customer trust and to ensure that quality standards along the supply chain are met in an efficient and secure way.
For the first time, organic cotton has been traced back to its origin based on blockchain-technology: international fashion companies such as C&A, Zalando and the Kering Group have teamed up with blockchain startup Bext360 in a pilot project to trace the integrity and authenticity of pure organic cotton along the supply chain. From the farm to ginning and further processing. All stations and relevant data are stored on the blockchain counterfeit-proof. In addition, other technologies are being used such as RFID and biotechnology which in this case generate the necessary data that is automatically stored on the blockchain. Easily comprehensible to consumers, for example by using a QR code on the final product. This also works for other products such as coffee, fish, wood or minerals that are traded internationally. The blockchain startup Everledger, for example, gives diamonds a unique and tamper-proof identity through the blockchain-technology. This ensures that only legally mined diamonds are traded, and quality certificates cannot be manipulated. Provenance provides a solution for the traceability of sustainably fished tuna from Indonesia based on blockchain in combination with smart tagging. This will allow traders and customers worldwide to ensure that their tuna comes from fishermen who meet well-defined standards. Without the blockchain, the effort for this is too great in the fragmented market with many small-scale fishermen. Cargo risks are also reduced with the help of blockchain and logistics processes are optimized: Blockshipping enables the tracking of shipping containers in real-time by automatically storing location data of the individual containers including fill levels on the blockchain. This new transparency enables logistics companies to reduce overcapacities and save costs.
# 3 BLOCKCHAIN-BASED TRADE FINANCE
To hedge international trading, the exporter and importer often use the possibility of trade finance through banks. Financial instruments such as letters of credit create a high degree of security for companies in the trading business. However, trade finance has so far been associated with a high administrative and communication burden. Required documents such as waybills, invoices etc. are processed manually, documented and exchanged between the parties. As a result, it often takes a week or more to complete a transaction that funds export goods. Blockchain-based digital platforms take trade finance to a new level: With blockchain-based trading, the identities of the trading parties are clear, and the documents are transparent and counterfeit-proof. Many administrative activities in trade finance are automated. As a result, trade finance is significantly accelerated, simplified and more transparent – with reduced costs at the same time.
Banks are increasingly working on blockchain-based solutions such as Easy Trading Connect from ING, Société Générale and ABN Amro. In cooperation with industrial companies, international trading transactions are organized and processed on the platform: the food company Louis Dreyfus has carried out its trade of soybeans from the USA to China on it. Voltron was also developed by a banking consortium to digitize global trade finance based on blockchain. The first live transactions demonstrate the benefits: transaction processing of soybeans from Argentina to Malaysia or polymers from India to Peru took only one day instead of one week. We.trade and Batavia are further examples: the transaction process for the trade of cars from Germany to Spain was thus accelerated. At the same time, smart contracts automatically trigger transactions as soon as specified steps in the supply chain are met.
In summary, the practical examples and developments show: from direct trade to supply chain tracing and tracking to trade finance – blockchain offers attractive application opportunities around trade. Our EARLY BRANDS innovation and technology experts are already exploring and implementing innovative business models and services based on blockchain for leading companies. Together with strong startups and tech partners. We recommend dealing with the topic early – and getting to know the individual opportunities for your company at an early stage, testing them and gaining experience with the exciting blockchain technology. Let yourself be inspired by the possibilities of blockchain. Think trade new together with us and keep your finger on the pulse of the times…
Catch the Future…!