Abstract
This paper explores a potential paradigm shift in trade finance utilizing blockchain technology. Traditionally, the centralized operating model has governed trade finance and the manner in which traders handle business processes. However, such heavy reliance on centralized authorities has made for poor performance, the lack of flexibility and transparency, and vulnerability to malicious alteration. The blockchain, as a distributed ledger technology (DLT), has attracted growing attention and has the potential to disrupt legacy finance procedures such as payment by letter of credit (L/C). International trade players may benefit from the technological reengineering of financial processes through the implementation of blockchain- and smart contract-based platforms. From the conceptual perspective of a paradigm shift, this study analyzes the feasibility of blockchain innovation in trade finance through modern blockchain-based L/C initiatives. Moreover, this study also explores blockchain applications in terms of logistics tracking and how it integrates with trade finance procedures. This study contributes to the understanding of a blockchain paradigm shift with a multi-case study. The results may illuminate the potential future application of blockchain finance and provide researchers with an illustrative example of other finance-related capabilities. Studies of trade-related topics such as customs clearances, insurance, and logistics applications need to be addressed in the future to create a comprehensively trustless environment and facilitate the automation of trade.
Highlights
The advent of blockchain technology has drawn increasing attention of academia and practitioners alike
Recent projects were explored to demonstrate that blockchain letter of credit (L/C) are a potential tool for improving incumbent trade finance processes
We focused on six major dimensions of the blockchain, namely, transparency, information transmission, traceability, disintermediation, cost, and the incorporation of Internet of Things (IoTs) for the analysis of the impact of blockchain-based trade finance, in supporting an L/C payment process
Summary
The advent of blockchain technology has drawn increasing attention of academia and practitioners alike. Recent topics focus on discussions of how the blockchain may help business operations and the role it plays in various contextual sectors [1]. One such topic of interest is trade finance, international trade involving different types of trading parties. Trade finance relies heavily on paper-based business operations involving information transmission, asset transfers, goods handovers, and payment processes. Business parties build trust with a centralized operating mechanism, such as payment by letter of credit (L/C) [2]. Efforts on building trust among trade stakeholders, eliminating friction because of information transmission/confirmation through emerging technologies, are of the utmost significance in terms of achieving environmental sustainability in the corporate milieu. L/C involves various types of business activities and suffers from issues such as tedious document processing, higher issuance cost, and forgery/counterfeiting
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