Financial Technology

Distributed ledger technology: Leading trade recovery in post-pandemic times

By Rajashekara V. Maiya

While the world is gradually getting back to normalcy after having been disrupted by the COVID-19 pandemic, the economy is still recovering from the pandemic-led slowdown. Previous crises, such as the Great Depression of 1930 or the Great Financial Crisis (GFC) some fifteen years ago, were linked to structural weakness and required three to four years for recovery.  

But even when the economy rebounded after the 2008/ 09 financial crisis, for example, global trade grew 6.2 percent in 2011, 2.8 percent in 2012, and 3 percent in 2013, well below the pre-crisis average of 7.1 percent between 1987 and 2007. 

A very different crisis

The pandemic-driven crisis is different because it was caused by a health crisis; nothing much changed structurally in the global economy in those two years. Hence, global trade is expected to go right back to pre-Covid levels quite quickly.  But it will not be easy. Covid-19 caused unprecedented disruption of supply chains worldwide. For example, technology manufacturing was deeply impacted because of semiconductor shortages. Then the war between Russia and Ukraine stressed supply chains further in items like food and crude oil.  Arguably, the fracturing of supply chains dented trade more than any other area of business.

The silver lining is that the pandemic leashed widespread digitisation in every sphere, and in every country. This digital foundation will now drive growth in international and domestic trade just like the internet and mobile did in the post-GFC years between 2014 and 2020. One of the crucial enablers here is Distributed Ledger Technology (DLT), such as Blockchain or Ethereum. It is growing so fast, and so big, that Gartner estimates blockchain to generate an annual business value of US$ 176 billion by 2025 and a mind-boggling US$ 3.1 trillion by 2030.

The Distributed Ledger Technology resolution

The goal of DLT is to root out the friction in trade (and trade financing) transactions, which is impeding their growth. Actually, this is not a new problem; even the 2001 Doha Round of negotiations under WTO stressed the need to reduce friction in trade processes in developing economies. While improvements have been made in the last two decades, they are small compared to the scale of transformation that is possible with DLT, which automates not only within an organisation, but also at inter-organisation, inter-country, and multi-country levels.

To start with, DLT will eliminate two of the biggest pain points in trade/ trade finance processes – excessive paperwork and long turnaround time. The conduct of international trade involves a whole ecosystem of providers, apart from the buyer and seller. There are banks, shipping lines, warehousing companies, logistics providers, customs houses, and certifying agencies, to name a few. Interaction with each participant involves manual paperwork and costs time and money. To cite just one example, opening a simple documentary credit to finance the import of goods can take up to a few weeks; even an inland Letter of Credit (LC) can take eight or nine days.

Then there are other documents, from warehouse receipts to airway bills, piling on cost, delay, and friction in every transaction.  Problems range from lack of agreement on standard documents – which would have cut down their number – to poor visibility of processes to the complexity of managing the banking supply chain and supporting the trade ecosystem. This is quite unacceptable in a world where other transactions are digitized, real-time, and free of friction. 

DLT eliminates most of these issues by bringing all the participants onto a common, decentralised platform. First of all, the platform allows participants to track the status of every transaction. Besides being transparent, the distributed ledger is immutable, and therefore its data is highly secure and confidential. Since all transactions are recorded in digital form, for everyone to see, there is zero risk of loss, theft or rejection. In other words, there is complete trustability.

A booster dose for MSMEs

In a pilot project in India, DLT reduced the time for issuing an inland LC by 75 percent. When paperwork and timelines are reduced, costs also come crashing down. Consequently, more and more small businesses, that are deterred by the cost and paperwork of trade finance, will be encouraged to seek funding, and trade with confidence. That’s a huge outcome for the world, where as much as 60 percent of a country’s GDP, and 60 percent of employment, can come from micro, small and medium enterprises (MSME). Unfortunately, this sector was the worst hit by the pandemic crisis. One way to help these businesses get back on their feet is to bridge their US$ 5.2 trillion trade financing gap. 

Speaking from the Indian perspective, thanks to various government initiatives, MSME financing is set to skyrocket, much like UPI-based digital payments.   Once the Open Network for Digital Commerce takes hold, it will democratise digital commerce to benefit more than a hundred million small businesses. Trade solutions built on the blockchain or other distributed ledgers can be scaled without limit to provide every business with a wonderful launching pad. For banks and other ecosystem participants, the DLT platform offers a way to acquire and engage customers at a low cost. Together, these changes will drive the post-pandemic recovery of trade, which is what every country in the world is hoping for.

(The author is Vice President and Head, Business Consulting Group, Infosys Finacle. Views expressed are personal.)

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