Telrpay: Revolutionizing Trade Finance with Blockchain Technology
by georgey on November 16, 2018Abstract: Blockchain Technology can be effectively used to create a global ecosystem to simplify Trade finance applications. This can be performed cost-effectively through trusted nodes of all ecosystem participants. Telrpay Trade Finance Ecosystem (Telrpay TFS): The innovative solutions of Telrpay will work on the following core functions: ● Distributed Ledger Technology (DLT): A decentralized distributed ledger functioning on the blockchain system. ● Federated Consensus: Self-executing contracts that are triggered on fufilment of certain predefined conditions. They can assume the role played by instruments such as Letters of Credit, Indemnities, Bank Guarantees, etc. to establish trust and goodwill among various participants. ● Trade Finance facilities provided by banks and financial institutions exclusively will be available to SME / MSME segment and micro traders for cross-border as well as domestic transactions at very low costs. Value proposition Telrpay TFS is a platform built on blockchain to offer various kinds of trade finance globally with a high degree of trust and security. It is aimed to create and nurture value through increased collaboration between various service providers in the ecosystem such as Banks, Shipping Companies, Freight Forwarders, Customs & Central Excise, Valuers, Warehouses, Central Authorities, etc. over a single network. For The Business Users: – Simplification of formalities – Less documentation – Zero error rate – Instant transfer of funds on compliance with prerequisites – Systematic maintenance of records – Audit Trial For the Banks: – Minimal documentation – Authentication of each activity by counter-party banks, Freight Forwarders, Shipping / Transport companies, Customs, settlement intermediaries, and other agencies – Eliminates fraudulent transactions – Reduced supervision and oversight General: – Lower transaction cost – Instant validations from corresponding parties online – Easy exchange and settlement of value – In case fiat currency conversions are not required, peer-to-peer fund settlements can be undertaken in cryptocurrencies to eliminate costs and immediate settlements of values. – Transparency at all stages of the transaction Introduction: “Blockchain solves the problems of manipulation and trust.” — Vitalik Buterin, Moscow, 2016 Telrpay TFS will transform the way in which businesses are conducted across the globe. This will be done by leveraging the capabilities of the blockchain technology through redefining of the issuance mechanisms behind letters of credit and similar instruments. The trust deficit that existed in the past between buyers and sellers will now be replaced by structured and highly transparent & participatory trade procedures. This would be made possible as all stakeholders to a transaction will be validating transactions at each stage. It will also encourage financing institutions such as banks, factoring & forfaiting agencies to take quick decisions without worrying about defaults. Providing end-to-end trade finance process at a single place will assist cross-border genuine trade exporters and importers. They will now have easy access to credit issuance, raising finance during different stages of shipment of goods, raising preshipment / post shipment finances and advisory services on an open, automated, and transparent trade finance platform. The Problem: Export/import trade often faces many hurdles simply owing to the lack of trust and transparency among the participants. By removing entry barriers, there will be a spurt in growth of cross-border trade as well as in the domestic market too. Usually, major areas of concern for buyers and sellers are: ● Trust Deficit ● Payment Risk ● Exchange Risk ● Default Risk Trust Trust Deficit remains a significant problem for buyer and sellers. It prevents them from being active players in the global trade network that leads to the following scenarios: 1. Whether the buyer will pay when the goods are shipped? 2. Whether the seller will ship goods once the payment is made? 3. How will the value of the goods be transferred? 4. How will the quality of goods be ensured? Banks have definite answers to these questions by way of establishing Letters of Credit (LCs), Guarantees, and other forms of indemnities to ensure both parties get a fair deal. These are regulated by Uniform Customs and Practices for Documentary Credits as well as other guidelines framed by the International Chamber of Commerce (ICC), Paris and subscribed by countries worldwide. Under the present framework, trade finance business has to face the following key challenges: ● Cost: Customers have to bear high costs for establishing Letters of Credits (LCs). The smaller the value of the LC, the higher the cost as a percentage of the LC. In addition, issuing costs shoot up drastically if the LC needs to be confirmed by a third bank. Major cost components are commitment charges, usance charges, confirming charges, and advising charges. ● Physical verification of documents: Acceptance of a transaction covered by an LC is purely on the basis of the documents submitted by the seller. When credit complying documents are presented under an LC and no discrepancy is pointed out within 5 working days by the issuing bank, the documents are deemed to have been accepted. ● Preparation of documents: LCs will specify the details of documents which are to be submitted for lodging a claim on the issuing bank. Most common documents are the Bills of Lading, Airway Bill, Invoice, Insurance Policy / Certificate, Certificate of Origin, Inspection Certificate, etc. Each LC may have its own terms and conditions. These documents are issued by various authorities. It is a major task for exporters to collect and consolidate documents from various agencies before submission to their bank. Documents originate from various agencies such as Customs, Shipping Companies, Chambers of commerce, Consulates, Inspection Agencies, etc. and there is no unified mechanism today to synchronize data from all these sources. ● Customer experience: Exporters and importers often suffer from a poor end-to-end customer experience. Not only does the issuance of LC-backed trade finance transactions require high coordination efforts among exporters, importers, and issuing and advising banks, the settlement of the transaction follows overly complicated & manual processes, delays, and uncertainties. Importers still face the delivery risk of fraudulent shipments, even if the transaction is backed by an LC and have to monitor shipments. ● Physical movement of documents Despite advancements in technology, original documents are still physically couriered by negotiating banks to the issuing bank. They are exposed to transit delays and loss. Physical submission of documents is necessary since original transport documents such as Bills of Lading & Lorry Receipts are negotiable instruments that represent the ownership/title of goods. Telrpay’s Trade Finance Solution: Telrpay TFS will be a decentralized trading solution that allow businesses to trade peer-to-peer or through existing banking systems. Not only does this reduce complexity and costs of doing business abroad but is immutable, secure, autonomous, reliable, and durable. Trust is replaced by cryptographic proof through decentralized peers that are parties in the trade cycle. ● Enables Issuance of Letters of Credit, Guarantees and other indemnities through Blockchain network that will provide transparent and cost-effective trade finance instruments to the industry. ● Offers a comprehensive range of services to facilitate cross-border trade efficiently. ● Enables exporters & importers to commit and execute trade globally, in a trustful, efficient and reliable manner. ● Aggregates all stakeholders to a network using Distributed Ledger Technology and enable consensus on various legs of a trade cycle without any central or monitoring authority. ● Enables self-executing and event specific Federated Consensus to negotiate various conditions and situations arising at each stage of the trade cycle. ● Drastically reduce documentation procedures and move towards a paperless transaction process. ● Cut short delays in transit, documentation etc. since systematically-authenticated data will be available online for all the participants to take a considerate decision. ● Improves credit delivery since the authenticity of the shipment and current status of the goods will be available to banks/financing agencies. ● At a later stage, management of cross-border payments also can be integrated to Telrpay Solution for a seamless end-to-end trade cycle. The main objective of Telrpay TFS will be to replicate issue of banks’ trade finance instruments such as Letters of Credit, Guarantees, Indemnities etc and implement a provide a transparent and secure way to undertake global trade. The diagram above represents a typical transaction using the LC mechanism. Trust between the exporter and the importer is created by establishing an LC by the importer’s bank on the exporter’s bank. Both the banks agree that on submission of credit complying documents evidencing shipment of the goods mentioned in the LC by the exporter, the other will provide the value mentioned in the LC to the exporter. All intermediaries who are party to a trade cycle need to be in the network and authenticate transactions as a node to make the system successful. Other than banks, agencies such as Customs, Shipping companies, freight forwarders, clearing Agents, Insurance companies. Respective manufacturers, suppliers, warehouses, traders, merchants, etc. should also be available on the network. The buyer (with all parties to the Federated Consensus updating and authenticating real-time information on the status of the goods and other relevant data) can plan further movement of goods once they are received at his warehouse. The buyer can also manage his funds flow effectively. It is our endeavor to find cost-effective and simple solutions to execute various trade finance instruments and bring the benefits of blockchain technology to everyone. Our research team and developers work round-the-clock to evolve Telrpay TFS to handle every requirement of the trade finance business. Next-in-line activity will be the integration of the following modules with Telrpay TFS: 1. Standby Letters of Credit 2. Guarantees & Indemnities 3. Clean Collection Bills Management 4. Factoring & Forfaiting 5. Pre-Shipment & Post Shipment Finance 6. Trust Receipts & Delivery Challan Payment Process: Instructions to release payment for final settlement can be made only after all the respective nodes such as the buyer, the seller, the banks, and other agencies in the network arrive at a consensus that transaction so far is authentic and genuine. This ensures that all the parties themselves know if their interests have been protected at each stage of the trade cycle. Federated consensus between the nodes happens naturally within the system through effective deployments of the consensus (smart contracts), off-chain or on-chain. However, consensus always happens on-chain when both parties submit non-contradictory claims supporting the contract. If all parties arrive at the consensus and approve, the contract will terminate correctly and liquidate itself with payments distributed amongst the parties as previously agreed. In case one or more of the nodes are in disagreement, the federated consensus is not achieved and shall wait for all the nodes to come to an agreement. Technological scalability Telrpay TFS will be built on Chain Core that permits handling of transactions of over 1 million per second. The technology is still in evolving stages and expect further advancement which that ensure scaling. Technology: Chain Core Chain Core is software designed to operate and participate in permissioned blockchain networks. Each network maintains a cryptographically-secured multi-asset shared ledger. Using this ledger, participants can issue digital assets directly to custodians, who can then transfer them to each other in real time with no transactional intermediary. Each Chain Core holds a copy of the ledger and independently validates each update. A federation of block signers ensures global consistency of the ledger. Digital assets share a common, interoperable format and can represent any units of value -- such as currencies, bonds, securities, IOUs, or loyalty points -- that are guaranteed by a trusted issuer. Hyper Ledger Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, Internet of Things, supply chains, manufacturing, and Technology. Hyper Ledger Fabric Hyperledger Fabric is a blockchain framework implementation and one of the Hyperledger projects hosted by The Linux Foundation. Intended as a foundation for developing applications or solutions with a modular architecture, It allows components, such as consensus and membership services, to be plug-and-play. Hyperledger Fabric leverages container technology to host smart contracts called “chain code” that comprise the application logic of the system. Advantages Third-party trust: Blockchain is built on the concept of sharing information across parties without a central authority to manage and processes using federated consensus during transactions. All the data recorded in the ledgers are available to all the nodes taking part in a transaction but the scope can be limited for all nodes or access levels. Updation of books: Since the transactions are peer-to-peer and ledgers are updated in real time, there is no need for any additional reconciliation process. A transaction will be completed only if all the consensus is validated and the defined rules are satisfied. Each transaction will be completed with absolute finality. Transparency: Maintaining an immutable record of the transaction with events in a chronological order being the main pillar of its architecture, Blockchain system guarantees much-desired attributes to banking and financial transactions such as immutability and finality. The ledgers are open and can be validated by each node at any point of time. For example, the seller will be aware of the issuance of LC and its terms and authenticity and can track it till he receives the same. On the other side, the buyer will be aware of the movement of the goods from procurement till it reaches his warehouse. Likewise, banks and other institutions also will be in the loophole always. Reduced processing time: Under the Blockchain system, transactions are made on peer-to-peer manner so that the settlement of funds and updating of records are immediate with absolute finality. Transaction Costs: Transaction costs can be reduced to a bare minimum, just enough to recover operational costs.
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