Blockchain Tokenisation in a B2B Trade Finance Supply-Chain Sector

Blockchain and its offshoot; Cryptocurrency, is no longer news to the world of business especially as awareness and adoption of the technology keeps growing and penetrating different industries and economies, thereby creating a paradigm shift from legacy and de facto systems in business processes. This has also given rise to federated/private blockchain now referred to as DLT (Distributed Ledger Technology) due to the shortcomings of public Blockchains which makes it anti for business adoption. One of such industry that is fast catching up to its adoption is the Supply-Chain industry which needs tokenization to serve its Trade finance process for Business-to-Business supply-chain sector.

B2B Trade finance market via Banks and its Challenges

Statistics from World Trade Organization;

The Bank of International Settlements (BIS) has noted that there is no single, comprehensive source of statistics allowing for an evaluation of the exact composition and size of trade finance markets (BIS, 2014b). However, it found that the market for trade finance, considered in its widest definition, is very large — certainly well above US$ 12 trillion annually out of US$18 trillion of exports (or imports).1 For bank intermediated short-term trade finance, the BIS determined that “a flow of some US$ 6.5–8 trillion (…) was provided during 2011, of which around US$ 2.8 trillion was L/Cs [letters of credit]”. It added that “about a third of global trade is supported by one or more bank intermediated trade finance products”, and that “[t]he remainder was financed by inter firm trade credit” (non-bank-intermediated)

With the attendant risk of; non-payment, tampering of goods, currency fluctuation, doing trade especially internationally has been made financing a bit safe via Trade Finance which shows because it is backed by strong collateral and documented credit operations.

Understanding the Token Economy and Blockchain tokenization for B2B Trade Finance

According to Wikipedia, a token economy is a system of contingency management based on the systematic reinforcement of target behavior. The re-inforcers are symbols or token that can be exchanged for other re-inforcers.

For a token economy to work, it needs these basic requirements aside others;

i. Token: This is could be a tangible or virtual object that is used as reinforcers. On their own they are worthless so they need to be backed or exchangeable with other valuable things. They represent the value or rewards.

ii. Back-up re-inforcers: As stated above, Tokens have no intrinsic value rather they are exchanged for valuable things. This is the ultimate goal of the possessed token. The token is purposely created for this. This back-up re-inforcers could be material things like fiat-currency or money, gift, etc. It could also be a service or priviledge.

iii. Targeted behavior/Action: The ultimate goal of tokenization is to make sure the participants in the group conform to agreed rules or act in a certain way. Conforming to this means you will be rewarded in the value the token represents.

Token economy has been in existence before the advent of the Blockchain technology. We see this in service oriented industries like hotels, transportation where you gain access to an exclusive service for point(s) earned or given an exchangeable customized card. We also see this in academic institutions where points are awarded for being in class, completing a task and any other expected or targeted behavior required of the student with the acquired points exchanged for a physical service. I honestly think such points should be transferable to another user in order to fit the description of being in the classification of a token economy else it is just a loyalty point system. Another example of a token system would be an entry ticket/wristband to an event which entitles you to some privileges while inside the event which would be classified as a Utility token in the blockchain world. So how does this fit into blockchain tokenization?

Good question! But first let’s understand Blockchain token or which some people also regard to as Cryptocurrency. A Blockchain token is a digital asset. It is an object of value itself, or representation of any other asset on a digital ledger. These sets of tokens are also classified as Application Stack Tokens. Bitcoin, Ether and all other Protocol Layer Tokens are called “Coins”.

Application Stack Tokens could be classified as work/utility, security or asset-backed token. Our focus will be on the asset-backed token.

Asset-backed tokens are backed with tangible assets like bonds, stocks, properties, gold, car, etc. The tokens represent the physical assets and transferring from one person to another confers the new holder as the owner of such asset.

For a B2B supply-chain, this token represents the worth of the goods being transfer. Say Company A needs a shipment of a vessel of Brent Crude Oil and Company B has such shipment which cost about $100m. Company B demands that Company A pays the token equivalent of $100m fiat-currency (which is the asset backing the token). Such token could be Bitcoin or any other approved cryptocurrency acceptable to Company B which has enough market liquidity meaning there should be ready buyers of the token in the exchange market.

You might ask why a business should go through such bottleneck of converting tokens to make payment instead of paying in fiat-currency directly using Trade finance provided by the banking system. Let’s look at the advantages of tokenization/cryptocurrency for business-to-business trade.

i. Letter of Credit: One of the major functions of banks during trade financing process is to issue letter of credit which could be collateralized and also shows that the Buying Party is able to make such trade. With the aid of Smart Contract holding onto tokenized asset on the Blockchain, parties involve in a trade could easily by-pass such middle-man role being played by the Banks and deal directly.

ii. Peer-to-Peer payment: With a token form of payment, peer to peer payment is fast and simple. No man-in-the-middle to facilitate the transfer of the fund thereby reducing delay in transfer of wealth to businesses for goods or services rendered.

iii. No Charge-backs Fraud: using token payment guarantees no chargeback situation that Fraudsters take advantage of to rob businesses off their goods or services. Once a payment is made, it enters the blockchain wallet account of the Business. No unauthorized debit to in your wallet account as obtainable in the banking world.

iv. Low transaction fee: Using financial institutions to carry out trade processes increases the running cost of businesses. This is because these institutions charge their clients some fee in order to issue Letter of Credit/Proof of fund on their behalf to their trading partners/bank. These charges go as high as 2% of the transaction amount involve. With cryptocurrency or token payment system, charges are negligible as payment is made for just processing of the transaction on the network and can be as low as 0.01%.

v. Conform to new business practice: Slowly the business landscape is changing with better and easier process of conducting business. Businesses that choose to go with the time and tide are better seen as conforming to new practice and easy to deal with. The adoption of tokenization as a form of payment expands the reach of businesses in acquiring new business clients.

vi. Use it as Store of Value or Means of Payment: Another good advantage of this is that, businesses can also use such token as either a store of value due to the inflating nature of the token growing in price and value or use it as a means of making and receiving payments from Business partners.

vii. Censorship Resistance: A tokenized B2B supply-chain could be the panacea for innocent suffering businesses under Sanctioned zones/countries to do international business without being restricted or having their funds seized.

Summary

There is no doubt that the supply-chain B2B trade finance environment is about changing but only a matter of time. The real estate sector is already on fire as it has caught the blockchain tokenization fever. We might not witness a sharp paradigm shift but a hybrid of the conventional trade finance system and the use of tokenization for effective and gradually onboarding of users to the business process of the future.

Thanks to Adeleke Taiwo(CoFounder, VesselTrust) for the contribution.

Charles is a blockchain solution architect, web and mobile developer with a decade experience in the IT world creating applications and running several startups. Passionate about great ideas that have “Proof of concept” and scalablilty. #Fitfam gym dude and enjoys swimming when he is not in front of his laptop, bar, cooking, playing ping-pong or snooker.
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