2022 just got even crazier (in the voice of the famous YouTuber and Tiktoker- Icycol) and crypto was part of the cause. After the FTX bankruptcy and Sam Bankman Fried gallivanting all over, was invited to speak at the NYT deadlock summit amid the crisis he left millions of users in pain of loss. One would think (once again) the Crypto bubble burst. But even the world is in a bigger mess looking at trade and economies.
The World Trade in Chaos
This year couldn’t be more unbelievable as world economic records are shattered. Ugh… I mean negatively. Forecasts from the IMF reported that inflation in 2022 will reach 8.8% from 4.7% in 2021. This didn’t happen in the heat of the pandemic (2.19% according to reports) or are we feeling an after-effect? It was reported that the Russia-Ukraine war is a big player in this.
EURUSD charts this year saw a breakdown below 1USD region to 0.98 which hasn’t occurred since 2002 according to Tradingeconomics
Impact on World Trade
But what does this all mean for world trade and how does this impact an average human? Apart from the fact that those who are hit most are the direct residents of war/disaster-inflicted areas, there is a far-reaching ripple hitting us all. Surprisingly, reports from the World Economic Forum stated that world trade had been in recovery, especially after the COVID-19 pandemic and that the Russian war had little effect. Kate Whiting stated:
“Global trade in goods by volume has returned to growth amid continued disruption to supply chains caused by the pandemic and the war in Ukraine, and was 10% higher than pre-pandemic levels in May 2022.”
We all know that the increase in goods volume means in demand and consequently an increase in production and production cost. An increase in production costs coupled with inflation as stated above means that businesses (especially those that require cross-border movements of raw materials) all over the globe must be struggling to keep cash flow throughout the production process. What is their go-to especially for large corps and SMEs? Trade Finance.
So what is trade financing simply? It is all about investors (Banks majorly) coming to businesses to aid with cash flow when they supply goods to clients at a long distance. Sellers want payments for goods upfront so they can keep producing, and buyers want to keep payments delayed for as long as possible so they can recover funds from the sale of the last batch. Investors come in between to save the day, using invoices and bills of lading as collateral or assurance that goods are being sent, they pay the seller up-front. This means they have the right to the shipment until the buyer redeems it (basically when the shipment gets to him which can be 3 months or more) and with a fee (just as loans work).
Only SMEs Got Hit the Most
Reports from the World Trade Organisation and World Economic Forum stated that 80-90% of all global trade requires Trade Finance. It is a juicy asset class because there are very low reports of defaulters. But it is laced with thick layers of regulations since multiple national jurisdictions are involved. Therefore it is largely paper-based. Additionally, about 40% of SME applications for trade financing are rejected as reported by the Asian Development Bank
“The Asian Development Bank found that SMEs are disproportionately affected by the $1.7 trillion trade finance gap – the difference between the number of applications to finance companies’ participation in international operations and the number of approvals. SMEs account for 40% of such rejections, much higher than their share of applications.”
Do Web3 and Blockchain have anything to Offer?
One would almost conclude that it is going down for blockchain tech and there are no real-world use cases for it- “Only the nerds use it”. That is in light of recent events which included FTX mishandling user funds (just like a centralized bank). The former CEO under whose government the bankruptcy happened walking around unchecked. But, amidst the ugly events, there are pretty great innovators on the blockchain who have been hard at work, building D’apps to aide the world trade. They have achieved feats that seemed almost impossible years ago using blockchain technology. Okse has made direct Crypto to Cash conversions easy with the use of cards all thanks to BNBchain. One big player focused on trade finance that has silently been building over the years is Xinfin Blockchain.
Web Apps focused on Trade
Tradefinex, the flagship platform created on the XinFin blockchain, utilizes the immutability, track and trace feature of the blockchain to help digitize trade financing. They are onboarding players (retail investors) into trade finance. A seller can upload their invoice and all necessary KYC docs to the blockchain and seek financing from the investors on the platform. This platform is recognized and has been lauded for its efforts by the WEF and WTO.
While Ripple has been thrashing it out with SEC, they have been building On-Demand Liquidity (ODL) for banks to aid the transfer of funds across borders. If this is your first time reading this you might want to search online for Ripple’s ODL. They have already partnered with the Bank of America only waiting for a green light from the SEC.
Stellar is another major player pitching deck in traditional finance. Like it or not they are affecting global trade.
What are you Thinking Right now?
The purpose of this article is to lay out one real-world problem that blockchain is solving that you might not know. It is to inform you that blockchain is becoming a pillar in society while some bad actors are defaming it. While they are stealing, some people are building.
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