Global trade finance expands a business's reach and possibilities by broadening its horizons. Any business that can play on the global field instead of remaining local can enjoy exponential growth, especially when it takes advantage of modern technology to increase operational efficiency.
For most of history, businesses primarily relied on traditional institutions for financing and investments. While this has been largely successful, introducing cryptocurrencies to the global financial market has expanded the possibilities available to the average business.
Today's businesses are not restricted to conventional investment options and can explore cryptocurrency allocation, spreading funds between new and established options. Diversifying an investment portfolio using new and upcoming projects can increase the chance of high returns while simultaneously protecting against potential losses by spreading risk across different assets (source: https://www.techopedia.com/cryptocurrency/new). In addition to investments, there are also several applications for digital assets in global trade finance.
The Role of Cryptocurrencies in Global Trade Finance
Unfortunately, the global finance trade gap has widened to record levels. This gap describes the difference between requests for financing to boost imports and exports and the approvals for these requests. According to the Trade Finance Gaps, Growth and Jobs Survey conducted by the Asian Development Bank (ADB), the global trade gap hit $2.5 trillion in 2023. This is a 47% increase from the $1.7 trillion recorded in 2020.
Cryptocurrencies and blockchain technology are crucial to increasing global trade and closing the widening gap. When applied efficiently, this technology can help to reduce the rising figure and boost business financing for small and medium-sized enterprises (SMEs) by addressing several problems plaguing the traditional method.
Transaction Efficiency for Cross-Border Payments
One of the most critical roles digital assets can play in trade finance is simplifying international transactions. Cryptocurrencies allow users to instantly send and receive funds over the blockchain, regardless of geographical location. While processing traditional transactions can take several days, possibly longer when initiated on a weekend, crypto transactions are much faster.
Another essential advantage is the transaction cost. Depending on the asset and blockchain network used, cryptocurrency transactions are very cheap. A major criticism of traditional cross-border payments is the cost of remittance, where the amount eventually received is significantly depleted. This makes business difficult for SMEs, reducing their likelihood of longevity.
Currency fluctuation is another problem that cryptocurrencies can help resolve. Doing business internationally can be costly for SMEs if they have to convert local fiat first to another currency and lose some value. Stablecoins help to minimize exchange rate volatility and reduce the reluctance some overseas entities may have with international SME transactions.
Smart Contracts
A smart contract is a program designed to self-execute when predetermined conditions coded into the contract are met. Smart contracts help with automating blockchain functions, reducing the need for human effort or interference in most processes.
Another benefit of blockchain smart contracts is transparency. These contracts help to build trust between two or more entities since either party can audit the blockchain to view transaction details. Also, trades and transactions powered by smart contracts are considered more trustworthy by all parties since there is no need for human effort.
Furthermore, smart contracts almost completely eliminate extensive documentation. The contracts can help automate and digitize documents such as a bill of lading, improving trade efficiency and eliminating the need for paperwork.
An exciting function of smart contracts is their application in the crypto-gambling sector. Online casinos that allow players to deposit and wager using digital assets can use smart contracts to automate gameplay, especially for tournaments, and pay winners their due after games.
Supply Chain Management
Companies that have to send physical products across borders benefit from using blockchain technology for supply chain management. The blockchain improves transparency and helps to enhance traceability. Via blockchain, all parties to a transaction can track the movement of a product and can trace its origins. The blockchain's immutability ensures that recorded data permanently remains, such that any party with access can verify it at any point.
Applying blockchain technology to supply chain management benefits businesses dealing with complex supply chains, especially in sectors like pharmaceuticals and agriculture. In 2018, IBM and Maersk launched TradeLens, a blockchain-based platform designed to improve efficiency and transparency in global supply chains. Using blockchain technology, TradeLens significantly reduced processing times and paperwork and successfully simplified shipment tracking and verification.
Major diamond producer De Beers also used blockchain technology to verify the authenticity and origin of diamonds. Through a partnership with blockchain platform Everledger, De Beers created a transparent record of diamonds on their journey from the mine to the market.
Another example of a real-life use case is the JPM Coin created by major financial services institution JPMorgan Chase. The company developed the asset to help institutional clients complete secure and instantaneous cross-border payments via blockchain technology.
According to a report from the World Economic Forum (WEF) in 2021, trade platforms that apply blockchain technology can reduce their costs by up to 90% compared to conventional or traditional methods. In 2018, a WEF white paper concluded that blockchain could boost trade by more than $1 trillion over the next decade.
Limitations
While the positive effects of cryptocurrency on finance are obvious, stakeholders must consider several challenges and limitations to the global adoption of crypto.
Integration with Traditional Systems
The benefits of cryptocurrency and blockchain technology are difficult to leverage fully if integration with conventional systems is difficult. To many, blockchain is still too complex. Transitioning to blockchain or simply connecting the traditional and crypto sectors can be difficult and require heavy investment.
Regulatory Problems
Many jurisdictions do not support the crypto sector and may introduce laws that stifle growth. Unsupportive laws from regulatory agencies and other authorities can restrict a company's capacity to introduce blockchain solutions, eventually suffocating adoption.
Scalability
Although there are layer-2 networks that significantly improve throughput and scalability, many blockchains are too slow for the kind of adoption required for global use. In many cases, network congestion can substantially reduce transaction speed and increase fees and charges.
Conclusion
Most businesses have much to gain from exploring and adopting digital assets and blockchain technology. These tools will help to revolutionize global trade with faster and cheaper transactions while reducing the global trade gap. However, for any significant progress regarding adoption, all stakeholders must tackle limitations to adoption and create a standard most jurisdictions can follow so one jurisdiction's reluctance to support crypto does not hinder another's.
