New 'blockchain' concept will prevent fraud

When it comes to trade finance
and technology there is no
bigger buzzword at present
than the blockchain – and
while not yet in use in Africa,
interest is growing fast.
According to Steve Chemaly,
a director at Norton Rose
Fulbright Africa, a blockchain
is a distributed
ledger that
records
and verifies
transactions.
Everyone on
the blockchain
has an
identical copy
of the ledger
but no one
can edit it.
It provides
collective,
unfalsifiable evidence and
verification of the transactions
recorded in the ledger.
“The implications for
electronic trade finance
platforms are significant,” he
told FTW. “For example an
electronic trading platform
designed to process accounts
receivable (invoice finance
or factoring), and letter of
credit transactions could use
blockchain to substitute paper
documents with a digital
alternative or any form of a
single distributed and shared
ledger. This will process
transactions faster and more
reliably. The distributed ledger
provides single, immutable
records of a trade, capable
of verification by all parties
involved in the transaction. It
prevents the fraud that can
occur where a
seller submits
the same
accounts
receivable
invoices for
financing.”
With
blockchain
banks can
easily create
new marks for
themselves in
trade finance
by providing digitised letters
of credit or trade finance
instruments for the movement
of both digital and physical
goods.
Barclays and the Israeli
start up Wave have been the
first organisations to execute
a global trade and finance
transaction using blockchain
technology, but the trend is fast
gaining ground and others have
followed in quick succession,
all proclaiming blockchain
transactional success.
But where does this leave
the conventional letter of
credit – which has been
around for more than a
century – as a payment
instrument?
“The innovation that has
begun and will continue is
that it will be digitised and
loaded onto the electronic
trade platforms together with
the invoices, bills of lading
and other trade documents,
which will result in a better
instrument,” said Chemaly.
“This will significantly reduce
the cost of a trade transaction
by avoiding the costs arising
from handling the vast paper
trail required to facilitate its
supply chain. The blockchain
technology, which uses a
distributed ledger, enables
all parties to the transaction
to view the relevant title,
shipping and other trade
documents. The documents
can be accessed and uploaded
from any device, including
mobile ones.”
According to Chemaly,
questions of how this
will actually work in the
context of an import/export
transaction have recently
been addressed by HSBC
and Bank of America Merrill
Lynch in the application of
their recently launched proof
of concept project.
“The importer will input
the information that it would
like to see the exporter
provide, and the exporter
and/or its bank will upload
such information. This
information can be tracked
and viewed by all parties
to the transaction. The
exporter can upload images
of the trade documents for
storing on the distributed
ledger. Once the images are
loaded, the data is embedded
and cannot be altered.
Applying this proof of
concept, each of the parties
involved in the letter of credit
transaction (the exporter,
importer and both of the
banks) can view images
and data in real time (even
using their mobile devices)
to see what the next actions
to be taken are. Confidential
data would be encrypted,” he
explained.
According to Chemaly, this
technology is expected to
be used in Africa within the
next five to eight years.
“Strate, which is the
Johannesburg Stock
Exchange clearing system,
in consultation with the four
major South African Banks,
are already testing this proof
of concept for purposes
of settlement of trades on
the Johannesburg Stock
Exchange,” he said.
INSERT
Letters of credit
will be digitised
and loaded onto
the electronic trade
platform.