Understanding the Trade Finance Use Case:

Put simply, trade finance is the financing required to fuel the movement of goods and services around the world.

A number of obstacles including borders, inefficiencies in settlement and different regulatory policies make it nearly impossible to create a competitive landscape among financiers in this industry. These same obstacles contribute to making funding highly inaccessible to SMEs.

Matchmaking difficulty within the industry is compounded by lack of visibility for small businesses and the absence of a trustless, cost-effective ledger on which to settle transactions and exchange vital information. Financiers (typically banks) desire to expand their reach in trade finance. Yet, despite sufficient need for funding by SMEs, opportunity in this sector has long been stifled due to an inefficient, centralized system.

XDC Network, should it see the appropriate level of adoption by industry participants, could help liquefy the industry and facilitate a robust, decentralized trade ecosystem - one designed to deliver scalable, efficient, affordable and accessible settlement rails for a variety of tokenized assets.

Positioned to serve as distributed ledger connecting a series of trade finance based applications in a manner that supports a robust and decentralized trade ecosystem, XDC Network is a public resource delivering much needed advancements to the industry. It is the river on which businesses move assets and resources from port to port — digital, trustless and trackable resources.

Advantages of XDC Network-based trade finance

Blockchain offers many possibilities to improve global trade. The massive trade industry will gain from blockchain over time through such benefits as operational efficiencies created by digitized bills of lading, supply chain automation, risk management solutions, new capital markets, and improved access for SMEs — a particular area of focus that has already been built on the XDC Network.

As banks have well-established lending patterns with their clients, there are capital needs that go unmet in the trade finance sector. Rather than leaving available liquidity and trade cooperation to direct partners who will facilitate trade, blockchain technology allows trade to be conducted directly over the internet and not through third parties. The trade finance gap materializes when capital demands exceed available capital. The gap represents the difference between the two, and it ballooned to US $1.7 trillion in 2022.

Those most affected by the gap are SMEs and micro businesses, particularly those in developing countries. Banks rejected more than 40% of trade finance applications from SMEs. Women-owned businesses faced additional challenges as well (Standard Chartered, 2020).

Several factors contribute to these rejections, including SMEs lacking collateral requirements, creditworthiness, and knowledge about trade finance. Other risk factors, like political and currency risks, also contribute to the trade finance gap. Yet, one of the biggest challenges lies with the banks themselves and their lack of resources to extend credit to and audit solvent and viable SMEs.

Thus, the trade finance gap remains a serious obstacle and opportunity. It is one of the top three export handicaps for half of the world’s countries. Traders generally abandon transactions if rejected for trade finance funding, and the WTO is working to address the problem of trade finance shortages.

Those most affected by the gap are SMEs and micro businesses, particularly those in developing countries.

Several factors contribute to these rejections, including:

The XDC Network has unique affiliations with the following global trade organizations:

The International Trade and Forfaiting Association ITFA was founded in 1999 as a worldwide trade association for companies, financial institutions and intermediaries engaged in global trade, forfaiting, supply chain and receivables financing. Its members work together to originate and distribute trade-related risks. XDC Network was invited to become the first and, at the time of writing, only Layer 1 blockchain ecosystem member.

DNI Initiative Membership. XDC Network joined the DNI Initiative in November 2021 and provides the needed blockchain structure and interoperability for financial institutions to communicate across various platforms and ecosystems. The association was formed by the ITFA, and it aims to fully digitize trade documents and negotiable instruments as well as integrate them into existing processes.

Trade Finance Distribution Initiative (TFDi), a consortium of the world’s leading banks and non-bank financial institutions established by the ITFA for the purpose of liquifying trade finance. XDC Network was selected in 2021 as the first and, at the time of writing, the only blockchain ecosystem member.

Trade finance may not be sexy, but it's blockchain's key to success

"As supply chains become increasingly complex, it’s blockchain technology that is up to the task of revolutionizing and modernizing trade finance, offering a transformative solution to the persistent trade finance gap."

- Billy Sebell for Blockworks, March 2024

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XDC Trade Finance in a nutshell