Multi-tier Supply Chain Financing with Blockchain

Abstract

We compare a Blockchain-based Supply Chain Finance system with traditional bank-based Supply Chain Finance solutions, using a three-tier supply chain model. Our model features financing frictions due to moral hazard with respect to product quality and dynamic updates of collateral-asset-value forecasts. The key advantage of a Blockchain-based system is its ability to create claims to collateral assets at higher supply chain tiers, while a bank-based system allows only creating claims to the immediate buyer's collateral asset. Interestingly, despite this advantage, a Blockchain-based system does not emerge as the dominant financing choice, even if the higher-tier buyer has the same profit margin and the same parameters of the collateral asset process as the immediate-tier buyer. We identify two causes of this surprising result: risk spillover from the higher-tier to the immediate-tier buyer and accumulation of more noise in the collateral asset when using the higher-tier buyer's collateral asset for financing. We provide conditions for the Blockchain-based system to be equally attractive and conditions for the Blockchain-based system to be preferred.