According to a newly released report from the World Economic Forum (WEF) and Bain & Company, distributed ledger technologies (DLT) could add as much as $1 trillion to global trade finance over the next ten years.
Titled ‘Trade Tech – A New Age for Trade and Supply Chain Finance’, the report highlights the economic benefits of integrating DLTs into existing supply chains. According to the researchers, an additional $1 trillion in financing will be added to global supply chains by 2028 as a direct result of increased DLT integration. This figure represents new capital that would have otherwise been missed out had DLT never existed.
“Distributed ledger and other technological innovations promise groundbreaking advances in trade and supply chain finance by reducing costs and ease of use,” the report reads.
International trade and global value chains have been critical for both the wealth of nations and the reduction of geopolitical tensions. Yet, archaic processes pose a significant obstacle for SMEs. Transforming paper-based documentation into electronic formats and applying smart tools and technologies could help to reduce trade barriers and improve processing times at borders, particularly for small small- and medium-sized enterprises (SMEs) in higher risk developing countries.
According to an Asian Development Bank calculation, the global trade finance gap is currently at $1.5 trillion and is estimated to grow to $2.4 trillion by 2025. The researchers further explains that this issue largely arises from limited access to credit and loans for SMEs in emerging markets that are looking to expand their businesses.
This missing funding can be reduced by roughly 30%, or $1.1 trillion in new trade volume, if blockchain “is used more broadly,” since distributed networks are able to share business records across financial institutions along the supply chain and bring transparency to businesses’ credibility. The researchers insist that these technologies “would help mitigate credit risk, lower fees and remove barriers to trade”.
A blockchain-based trade finance system would be particularly beneficial to Asian economies as they account for 7 percent ($105 billion) of the trade finance gap, with 75 percent of the global document-based transactions across supply chains.
Additionally, the researchers note that the governments have also identified DLTs as a major value driver for the future.
“[Governments] should include distributed ledger technology as part of any relevant, forward-looking regulatory considerations, such as cross-border food imports,” the report says. “With some governments already starting to make these moves, the laggards will become increasingly disadvantaged.”
Earlier this month, IBM announced release of its Blockchain World Wire (BWW) payment network which promises simultaneous clearing and settlement of cross-border payments in “near real-time.” Based on Stellar blockchain, BWW attempts to negate banking intermediaries that add complexity and cost to the traditional international payments systems.
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