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Trade finance cottons on to blockchain

Trade finance cottons on to blockchain

The first global trade transaction between two independent banks combining blockchain, smart contracts and the Internet of Things has been undertaken.

It was a hot sunny day on 14 September when a ship set sail from Houston. Few people knew that the container destined for Qingdao, China marked a ground-breaking transaction between us, Wells Fargo and Brighann Cotton, that combined these emerging disruptive technologies.

Unchanged for decades

Trade finance is a paper-based and labour-intensive exercise that relies heavily on the use of Letters of Credit (LC).  It takes days, even weeks, to physically move the documents advising the exporter that the importer has the necessary funds to pay for the goods. The importer undergoes a similar ordeal awaiting notification of the goods’ arrival at their destination before authorising payment. Use of documents means that there are delays to the notification of title transfer. Funds and insurance are therefore unduly tied up at both ends.

Blockchain technology has the potential to change all that.

The use of blockchain technology creates transparency between buyer and seller, a higher level of security and the ability to track a shipment in real time. The advancement from paper ledgers and manual processes to electronic trackers on a distributed ledger reduces errors and accomplishes in minutes what used to take days.

Cameron Austin, General Manager of Brighann Marketing Inc, said: “The combination of these emerging technologies could eliminate many inefficiencies currently experienced in international trade. The benefits of lower costs and improvements to security through reduction of errors, risk and time, enable a company to achieve greater efficiency and have more predictable working capital.” 

How it was done

An animation of the blockchain trade finance process   

Blockchain:
Skuchain Inc.’s Bracket technology was used to produce a blockchain-based LC called a blockchain bracket obligation. It had the same underpinning documentation as traditional LCs.

Internet of Things (IoT): The trial incorporated a GPS device to track the cotton’s movement. All parties could see when it left Houston and when it left the ship. This linked payment and risk to the actual physical flow of goods. Historically these were linked to the paper flow.

Smart contracts compared the ‘metadata’ entered on the Skuchain system and confirmed Brighann Cotton Marketing Australia’s documentation matched that of Brighann Inc. (USA).

Electronic distribution: All documentation (except bills of lading) is electronic. There’s no expense on couriering original and duplicate documentation around the world. The transfer of information is almost instant. The smart contract’s ability to compare metadata could potentially remove the need for physical document checks by humans, which would bring greater accuracy and faster approval, helping to save time and money.

One system allows the process to become completely transparent to designated parties. All players can track the transaction’s progress. All parties understand the location of the goods and their liabilities.

A secure solution: GPS and information from the shipper provide notification of the cotton’s arrival and when it leaves. This signals when funds can be released and insurance is needed or no longer required as specified in the contract. With blockchain, documents can’t be lost and the provenance of each document is established. Invoices can’t be duplicated and it is impossible for unauthorised parties to submit documents. This protects importers, exporters and their banks from fraud.

The trial with US$35,000 of cotton demonstrates that blockchain, IoT and smart contracts will add value to the traditional process. Once trials like these are validated, such technologies have the potential to improve business by reducing costs, risks and time.

For more information or to speak to one of our Trade specialists, visit commbank.com.au/tradefinance or call 1300 654 112.

This technology solution is still in prototype and in the process of being proven. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances. Applications for trade finance are subject to the Bank's normal credit approval. Fees and charges may apply. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit licence 234945