Global trade has long been viewed as one of the most conspicuous areas for instrumental application of distributed ledger technology (DLT), with both trade finance and supply chains relying on antiquated, unreliable systems of record keeping and trust management. Financing cross-border commerce is a delicate business. In order to supply liquidity, banks need to maintain trust in all parties involved in a transaction, which engenders the need for onerous auditing of paper trails.
The foundational trade-finance service that banks offer to parties involved in international commerce is the provision of letters of credit. Those are guarantees from one bank to another — covering the period of shipping the product — that the payment for the goods will occur as soon as they arrive at their destination. The bank has to know that the contractor is in possession of the goods it is about to ship and also has to know that these same goods have not already been pledged to another bank — another incarnation of a double-spending problem.
Small and medium-size enterprises (SMEs) often have a hard time proving their creditworthiness to financial organizations. The default way to go is to file a port-issued document called a bill of lading, which banks are oftentimes reluctant to accept for not being able to verify them. Needless to say, a system this clunky also presents fertile soil for fraud, as it becomes nearly impossible to take stock of all the resources involved. Transparency of trade finance transactions and detailed information on every step of the supply chain will ensure that borrowers ask for the exact amount of resources they need to perform a particular deal, thus eliminating one of the most widespread fraud schemes.