How Blockchain Can Restore Trust in Global Trade
During a time when transparency matters more than ever, enter blockchain.
Global trade does have a problem, with a global trade finance gap of about $1.6 trillion globally (source) and 56% of SME trade finance proposals are rejected. The root of the problem lies in the lack of trust between counterparties who don’t know each other and the typical solution is the letter of credit (LoC), that is outrageously costly (up to 4–15%).
It harms businesses and consumers alike. Those involved in international trade — whether manufacturers, trading houses, transportation companies or banks — are seeking ways to ease the situation and cut time and costs.
The process — from issuing to approval of the letter of credit, which usually takes between seven and 10 days — could be reduced to less than four hours when using blockchain.
A common trade finance offering provided by banks, and increasingly by alternative financial services providers, is known as factoring, and involves a bank paying the seller of goods before the buyer of those goods makes the payment. Naturally, banks charge rates — typically 4 percent to as high as 8 percent — to the supplier for this service, but assume the risk that the buyer delays payment or even defaults. Despite that protection, factoring is a costly undertaking for suppliers, eating significantly into margins and introducing an element of insecurity to the payment picture.
And setting risk aside, processing costs related to manual work, document collection and coordination of remittances are high.
Blockchain has the power to reduce risk, costs and time for both parties, without the need of a bank cutting your profit margins.
Modultrade, our initiative, tries to reduce risk by enforcing trust on the platform we are developing. We aim for helping MSMEs to meet, commit and execute trade globally easily, in a trustful and efficiently manner. The use of smart contracts acting as an escrow service is our main focus because they have the power to reduce risk and costs for both parties. The simplified workflow of the smart contract is as follows.
1) The Buyer deposits funds into the smart contract which acts as an escrow agent.
2) Funds are locked in the smart contract until release conditions are met to impose trust.
3) Funds are released to the Seller upon successful delivery in a specified time horizon.
4) Funds are released to the Buyer if no delivery occurs in a specified time horizon.
A fee is still required when using the escrow service, however this will be a much lower fee than traditional fees charged by banks to deliver this service. ModulTrade just requires a 1% fee, which will be paid with the internal currency MTRc (ModulTrade token), issued by ModulTrade. The MTRc token will act as an efficient instrument of value exchange in the ModulTrade ecosystem.
Begin to restore trust in Global Trade!
Find out more about ModulTrade and our Token Sale at https://en.modultrade.io
Join us on telegram: https://t.me/ModulTradeIO
Follow us on Facebook https://www.facebook.com/modultrade/ and Twitter https://twitter.com/ModulTrade for latest news and developments.
