The Role of Blockchain in International Trade Finance: An Analysis

This report examines the application of blockchain technology in international trade finance, focusing on how it can streamline processes, reduce costs, and enhance security. The research investigates the use of blockchain in various aspects of trade finance, including tracking ownership of cargo, digitized wallets and tokens, and smart contracts. It analyzes different blockchain platforms like Hyperledger, Ethereum, and Corda R3, and discusses relevant transnational trade theories such as trade finance theory and transaction cost theory. The report reviews the current literature on blockchain in trade finance, including its impact on Letters of Credit (LC), Supply Chain Finance (SCF), and other financial instruments. The research methodology involves a pluralist approach, combining literature analysis, interviews with industry experts, and case studies. The analysis includes two case studies, Contigroup vs. Glencore and Wanxiang vs. Impala, to illustrate the practical application of blockchain. The report concludes with recommendations for future research and the adoption of blockchain in trade finance, highlighting its potential to revolutionize the industry by reducing turnaround times, digitizing processes, and improving transparency.

The Accounting & Finance Subject Group
Blockchain's role and application in International trade finance.
Submitted in partial fulfillment of a master’s degree in accounting and
Finance
Students name and ID:
Mourad El Mazouni
Supervisors name:
Date:

Table of Contents
Abstract............................................................................................................................................5
Chapter 1: Introduction....................................................................................................................7
1.1 Research background.............................................................................................................7
1.1.1 Trade Finance: A Definition...........................................................................................7
1.1.2 Traditional Trade Finance...............................................................................................8
Blockchain: Definition of Blockchain.....................................................................................8
1.2 Research scope: Relevance and knowledge gap in research...............................................10
1.2.1 Practical problem formulation..........................................................................................11
1.3 Knowledge gap and research contribution..........................................................................12
1.4 Research Aim and Objectives:.............................................................................................12
Research questions.........................................................................................................................13
Thesis Structure.........................................................................................................................13
Chapter 2: Theoretical foundation.................................................................................................15
2.1 Trans-national trade of goods life cycle..............................................................................15
2.2 Blockchain in international trade context............................................................................16
2.2.1 Tracking ownership of cargo........................................................................................16
2.2.2 Digitized wallets and tokens.........................................................................................17
2.2.3 Smart contracts.............................................................................................................18
2.3 Blockchain platforms...........................................................................................................18
2.4 Blockchain technologies......................................................................................................19
2.4.1 Hyperledger:.................................................................................................................20
2.4.1 Ethereum.......................................................................................................................20
2.4.1 Corda R3.......................................................................................................................20
2.5 Transnational trade theories.................................................................................................20

2.5.1 Trade finance theory.....................................................................................................21
2.5.2 Transaction cost theory.................................................................................................21
Chapter-3 Literature review...........................................................................................................22
3.1 Blockchain Overview..........................................................................................................22
3.2 Modes and method of payment in international trading finance.........................................23
3.3 Blockchain and trade finance...............................................................................................24
Letter of Credit (LC)..............................................................................................................26
Supply Chain Finance (SCF).................................................................................................27
Structured Trade and Commodity Finance............................................................................27
Overview of Export and Agency Finance (ECA)..................................................................28
Trade Credit and Political Risk Insurance.............................................................................28
3.5 Trade finance scope (Problems that can be addressed through Block Chain).....................29
Chapter 4 Research Methodology, Design and methods...............................................................30
4.1 Research design...................................................................................................................30
4.2 Research Approach..............................................................................................................31
4.3 Research philosophy............................................................................................................32
4.4 Research Sampling..............................................................................................................33
4.5 Data Collection....................................................................................................................34
4.6 Data Analysis.......................................................................................................................35
4.7 Ethical Considerations.........................................................................................................36
4.8 Research Limitations...........................................................................................................37
Chapter 5: Research Analysis and Discussion of Result...............................................................38
Case Study 1: Contigroup vs Glencore......................................................................................39
Case Brief:.............................................................................................................................39
Chief Issue:............................................................................................................................39

Solution offered by the use of Block chain technology:........................................................40
Case Study 2: Wanxiang vs. Impala..........................................................................................41
Case Brief:.............................................................................................................................41
Chief Issue:............................................................................................................................41
Solution offered by the use of Block chain technology:........................................................41
Qualitative Data Analysis..........................................................................................................43
Chapter 6: Conclusion and Recommendations..............................................................................46
Conclusion.................................................................................................................................46
Recommendations......................................................................................................................47
References......................................................................................................................................49
Appendix........................................................................................................................................55

Abstract
Aim:
The main aim of this research paper is to identify that how the block chain technology can be
applied for efficient handling of the complicated documentation process which is being carried
out prior to any financial transaction that is an inevitable part of the operational process of
international trade finance.
Research importance:
This study provides an overview of an emerging field – Blockchain adoption to revolutionize
trade finance – in which not much research yet exists, and most publications remain very vague.
The next actions that researchers, developers, regulators and businesses interested in blockchain
need to take are pointed out and reasoned.
Research method:
The research adopts a pluralist approach to examine the subject matter based on three
approaches: analysis of the extant literature about blockchain technology concerning trade
finance transactions; perception analysis based on interviews with financial services executives,
subject matter experts, and researchers; and a theoretical interpretation using through the lens of
transaction cost and cross border trade finance theory A pluralist approach that compares and
contrasts multiple plausible perspectives on reality is crucial to the emergence of rigorous
scientific knowledge (Azevedo, 1997; Van de Ven, 2007) as it can provide complementary
insights and possible synthesis of them to study an emerging business phenomenon.
Furthermore, using multiple perspectives on a complex business problem decreases the
likelihood of unintended bias in interpretations. Thus the case study and survey strategy of
research has been followed in this research. In this survey strategy of primary data collection the
interview of the management of a blockchain service provider for the international trade finance
has been done to understand the documentation benefit using the blockchain technology for the
trade finance.
Research findings:

As of September 2019, Blockchain based systems painfully lack the enterprise maturity needed
to take over trade finance activities. Nevertheless, blockchain technology in the trade finance
process is about the digitisation and automation of the current process thereby reducing
turnaround time from about 7 – 14 days to just 24 hours or near real-time, thus making faster
settlements. This digitization takes away the paper process of dispute resolution, contract
agreement, document presentation, confirmations, verifications, approvals and the tracking and
tracing of shipments.
Finally, the disintermediation provided by blockchain applications has the potential to disrupt
traditional financial services transactions through the use of smart contracts and distributed
ledgers for clearing and settlement process.
Keywords:
Blockchain technology, Trade finance, use of Blockchain in import-export

Chapter 1: Introduction
1.1 Research background
Over the past decades, the global economy has been influenced by the rapid growth of
financial transactions that entail trillions of dollars (Hyvärinen, Risius&Friis, 2017). In the USA,
the Automated Clearing House System generates more than 350 billion dollars per annum which
adds up to the 20% of electronic payments made in the country. With the stiff competition
among business entities, financial institutions are no exception in adopting various technologies
to remain relevant in the market. The new and innovative technologies are storming the market
everyday and changing the spending and paying habits of the consumers. Technologies such as
Blockchain have been positively impacting on the operations of the business organization. The
financial operations play a major role in the business activities and hence implementation of
Blockchain has been making changes in the positive way in the businesses through ease of
transactions and other benefits (Ishmaev, 2017). Delimatsis, (2018) identifies two phases of
blockchain-based financial transactions which can be classified into an initiation phase that
requires the client to access blockchain network before buying or selling transaction; the
verification stage of the financial set in the blockchain ledger by various Stakeholders. The
proposed research aims to determine Blockchain's role and application in improving and current
processes in the International trade finance.
1.1.1 Trade Finance: A Definition
Trade finance is defined as a collective set of financial products and instruments firms use to
facilitate commerce and international trade. Trade finance actually makes it more convenient for
importers and exporters to conduct business using trade. Trade Finance is a broad category
where many factors come into play to make financial transactions for corporate affairs. While the
financial transactions takes place between the buyer and the seller of the services, external
facilitators such as banking organisations, exporters and importers, custom officials and
insurance companies in terms of international as well as domestic trade help in the financial
transaction. The external institutions such as banks as well as insurance companies help in
facilitating the trade financing. However, the whole concept of Trade finance is much boarder

category, as it’s an umbrella term. Typically, it covers many financial models and solutions that
companies and banking institutions use to make the transactions for trade feasible. It involves
numerous actors, including importers, exporters, banks, carriers, customs officials, and insurers.
1.1.2 Traditional Trade Finance
There are various issues such as information exchange, the trust levels is not up to the mark,
there is lack of transparency and authenticity conflicts which are associated with the trade
finance systems. These issues need to be adhered to and sorted and in order to overcome the
problems the traders and the suppliers need to build trust and transparency. The authenticity of
the external institutions such as banks and other places need to be addressed by the traders so
that there are no trust issues later on. Delayed exchange of information, unprecedented low trust
levels, transparency and authenticity conflicts associated with traditional trade finance systems
are often considered as the prime factors. This substantially contributes to unwarranted risk and
hinders the efficiency and profit margins in international trade business operations. The
exploration and integration of Blockchain technology for trade finance will help to overcome
these issues so that trade processes can be simplified. At present trade finance consist of various
inefficiencies which make it highly vulnerable to the frauds. For example, the paper processing
in the transactions systems must be replaced or upgraded with blockchain based solutions so that
transaction time and efficiency can be improved.
Blockchain: Definition of Blockchain
According to Gelsomino and et.al. (2016) block chain is defined as the decentralized and open
ledger which allows users to track transactions by using cryptography and distributed databases.
It is the interconnection of information blocks which stores digital information in public
database. These digital information holding blocks are capable to store transaction information,
participants involved in the transactions, date, time which are regulated and characterized by
digital signature. The Blockchain data structure allows creation and management of digital
transaction ledger which can be easily shared and accessed on a digital network via
cryptography. Thus, the participants can help themselves by updating or modifying the ledger
statement without any centralized authority. The blockchain technology ensures that trade
finance operations are secure and transparent so that there is direct link between trade parties and
market efficiencies. For instance the smart contracts in block chain allow organisations to trigger

commercialization on the basis of market demand or criteria. (Korpela, Hallikas and Dahlberg,
2017). This quick and efficiency management system is widely used in international trade
finance system.
(Source: Benefits of blockchain in trade finance, 2019)
With the help of distributed database technology which is a BTC transaction can be reflected to
the participants in just 20-30 minutes. Hence, its greatest advantage is that it eliminates the need
of protecting and maintaining multiple copies of same information on several numbers of
databases. This way the time taken to conduct the procedure is not very long and makes it easy to
use for the participants. The user can maintain a set of information and at the same time can help
the transaction to be conducted in a secure manner within a given time period of 20-30 minutes.
One of the key difficulties observed in the international trade finance is to manage huge volume
of documents. Blockchain can help in reducing these difficulties through the maintenance of high
volume data in the database and keeping a proper record of the subject. The maintenance of high
volume through database of blockchain would help the participants to ease their problem and
also save time for the users as well as keep it secure. It not only enhances the complexity but also
Ill
ustration 1: Benefits of blockchain in trade finance

makes the transaction and trade costly in terms of paper flow. Blockchain technology can help
international traders to reduce this cost and process inefficiency involved in the paper flow by
replacing it with digital data (Cong and He, 2019). With the use of this technology international
traders can use a single digital document which is capable to manage all necessary information
and can be accessed and modified by all participants at the same time. It also enhances the
transparency and transaction time by unlocking capital. This reduces the chances of fraud and
ensures that the participants are not cheated in any way. This will ensure that the authenticity of
the trade is maintained and not fraud takes place during the transaction (Dowling and et.al.
2018).
Traceability is another benefit provided by the Blockchain methods. It also enables to
automatically verify the authenticity of the assets so that frauds can be reduced in international
boundaries (Dowling and et.al. 2018). Thus, from the security perspective also this advanced
technique enables the secure exchange of trade associated data among various financial
institutions. This challenge can be mitigated with the help of blockchain and thus would help in
restoring order for the traders. The traceability is increased through the database and the
participants could locate the information about the transactions easily and hence that will ensure
that the transaction information is also authentic. The traders can help themselves through the
process technology of blockchain and ensure no data is breached or is false through the benefit of
traceability. Frauds take place in huge numbers and therefore, blockchain technology will
gradually reduce the number of fraud incidents and track information of all the transaction made
by the traders and the external parties’ contribution. In the traditional trade finance systems, the
delayed exchange of information, unprecedented trust levels, transparency and authenticity
related conflicts are often considered as the prime factors which lowers the efficiency and profit
margins in the international trade. The exploration and integration of Blockchain technology for
trade finance will help to overcome these issues so that trade processes can be simplified. At
present trade finance consist of various inefficiencies which make it highly vulnerable to the
frauds. For example, the paper processing in the transactions systems must be replaced or
upgraded with blockchain based solutions so that transaction time and efficiency can be
improved.

1.2 Research scope: Relevance and knowledge gap in research
The research topic is highly relevant for the present context. With the rapid year-over-
year growth of transnational trade transactions, both in terms of volume and amounts , there has
been rapid growth in the trade finance services. However, with this growth the existing paper
based and long processing system give rise to various security vulnerabilities. Thus, it is vital to
understand the blockchain solutions so that efficiency can be improved and fraud vulnerabilities
can be minimized. With the traditional finance systems banks and trade participants are required
to manage their various types of related documents individually. Thus, it is required that database
used by every participant reconciled with the other so that documentation errors can be
eliminated. There is great need that Blockchain technology and its operational aspects must be
analyzed and understood so that the organizations dealing in international export and import can
utilize its benefits and can make their transactions very quick and transparent (Scott, 2016).
The study of Blockchain technology will encourage its usage in trade finance by lowering
its complexity and unnecessary expenses involved in the document management or flow. The
financial growth in the global market depends upon robustness, availability and flexibility of the
financial mechanism. However, the complex and time process of scalability in trade finance
lowers the growth rate (Civelek and Özalp, 2018). The relevant research in the field of
application of Blockchain technology in international trade can resolve this issue and concerns.
Another significant reason for the execution and study of this type of study is that with the
advanced digital technology the data security and information exchange has been one of the
challenging parameter for the trader (Blossey, Eisenhardt and Hahn, 2019). This challenge can
be overcome by using a m ore advanced financial system which is better in terms of security,
transparency and processing time. The Blockchain technology provides an effective solution for
this purpose.
1.2.1 Practical problem formulation
Rapid globalization has outpaced the trade finance industry’s ability to standardize and digitize
its system of record-tracking. The exchange of commodities—each with its own unique
regulations, shipping specifications, and certification requirements—is currently managed across
different borders and jurisdictions using an ineffective, antiquated paper-based system of record
tracking that is often prone to significant issues. Among these issues are fraud, security
vulnerabilities, and inefficient payment methods that leave stakeholders waiting for payment for

an inordinate amount of time. It has been difficult to make significant technological
improvements to trade finance operations for various reasons, including the number of diverse
stakeholders located across the globe and the complexity and volume of business transactions.
Fractured processes cause billions of dollars’ worth of annual losses in income and missed
opportunities.
The security and implementation problems are mainly concerned with public blockchain. The
private or hybrid blockchain have less vulnerabilities to experience such issues. The public
blockchain systems tends to have higher transparency and decentralization which enhances the
vulnerability of cyberattacks. However as compare to private networks public systems also have
benefits that when number of users is very high then it allows decentralizing the data access.
Thus, it depends upon the user requirement that what benefits and applications can be used. For
example applications related to commodity trading needs extreme degree of privacy instead of
emphasizing on transparency. Thus, for commodity based transactions hybrid blockchains are
preferred. Thus, the major problem associated with the block chain use is to effective
implementation in commodity industry.
1.3 Knowledge gap and research contribution
Very limited studies have been conducted on the issue. Previous researchers have
highlighted the benefits of Blockchain technology for the international trade. However, there has
been a wide gap in its application in import and export. The existing researches only emphasise
on the benefits and operational aspect of the quoted technology. Further, to highlight the
significance and impact of end to end finance networks in the international trade this study will
determine the benefits and challenges in the application of exchanging trade related data within
finance network. It has been also observed that role of financial institutions is often neglected in
the probable challenges of international trade. This research study will also examines the role of
financial institutions and how these institutions are taking steps to shift from the traditional
financing methods to the Blockchain technique. This study will contribute in analysis of highly
automated infrastructure which can enable more advanced and efficient solutions related to
finance (Kshetri, 2017). Thus, it will help to develop a new level of interaction platform among
service providers, financial institutions, corporations, customers and business to business
networks.