Sadie Keljikian, Express Trade Capital
The trade finance world is all abuzz about blockchain technology, which sources claim will change the industry for the better.
Blockchain, a variety of digitized ledger system originally established for Bitcoin, provides a new, simplified way of verifying and monitoring transactions. All pertinent parties can access and update data entries and must approve each transaction. Then, the system encrypts each transaction into a “block,” or digital code. The software then backs up information from each block in a short code or “hash,” and attaches it to the subsequent block. The backup hash makes any tampering with the ledger immediately evident.
A system to encrypt transactions could be incredibly useful in trade finance because of its implications for securing supply chains. Manufacturers have recently struggled with supply chain transparency. This is largely due to the fact that consumers have become more concerned with where their money goes. There is potential for dubious practices in any supply chain, but certain goods are difficult to monitor. Among these are conflict minerals, which are one of the recent concerns among consumers.
The tin, tantalum, tungsten and gold industries have recently fallen into the hands of rebel warlords. The resulting turmoil is painfully reminiscent of the diamond mines in Sierra Leone. Given the option, many consumers prefer to purchase ethically manufactured products. Blockchain allows for transparency, even in cases of complex, multinational supply chains.
With a blockchain system, the details of every single transaction are both accounted for and secure. This means that all materials, labor, and shipping costs can be ascertained through a transparent, secure tracking mechanism. Consumers who seek to avoid the products for ethical reasons will have the tools to make more informed buying decisions. Mineral purchases are listed with a “stamp” indicating origin of the mine or smelter, making background checks throughout the supply chain far simpler. Among the obvious benefits, consumers and retailers will be better able to reward producers who supervise their processes and products thoroughly. In short, the promise of more transparency and security offers the hope that consumers can make more informed decisions. Presumably, the public availability of supply chain details will make it harder for unscrupulous businesses to continue operating in obscurity.
From the perspective of the manufacturer, the effects of blockchain technology are a mixed bag. A system for tracking transactions reduces the cost of due diligence when sourcing suppliers. As a result, manufacturers, wholesalers and retailers can make more educated decisions overall. Manufacturers can also use blockchain to investigate pricing in less familiar areas of their supply chain, allowing them to negotiate better terms. This is good news for the manufacturer and, potentially, bad news for suppliers of raw materials. Suppliers may struggle to adjust prices as needed, since they will be in more direct competition with others.
On the other hand, manufacturers may not be comfortable with the public nature of blockchain systems. Although the system is secure insofar as it cannot be tampered with, the ledger is publicly available, meaning discretion will no longer be an option. The system is also fairly new, so there are not yet enough test cases to get a thorough sense of what difference it will make. For those who prize transparency above all else, blockchain seems to offer a panacea to the opacity necessary for complex, multinational supply chains. Transactional efficiency is another major advantage.
In short, blockchain technology offers a promising solution to problems with ledger accuracy and supply chain transparency. Advocates say the system will be instrumental in streamlining and modernizing international trade and finance. Only time will tell if the system will live up to expectations in practice.
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