Trade Finance and NFTs: From Digital Collectibles to the $19T Global Trade Market

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It’s fair to say that the non-fungible token (NFT) market has turned more than a few heads in 2021. The sheer volumes poured through these markets to buy unique digital tokens with ownership verifiable via the blockchain have been unprecedented (even for the cryptocurrency market). 

The market has pulled in $2.5 billion In the first half of this year alone, with NFT artist Beeple making history when Christie’s auction house sold his digital magnum opus for a staggering $69.3 million. However, far beyond their use as digital collectibles and one-of-a-kind art pieces, NFTs represent a wealth of potential throughout numerous vertical markets. And much like how the tech has upended the art sector, the latest vision for NFTs could prove to disrupt global trade and eliminate barriers to international commerce completely.

NFTs and international trade finance

In 2019, the total value of exports globally was estimated at $19 trillion. Businesses in this market often incur enormous annual expenses paying for the complex and costly international financial infrastructure that supports this commerce.That includes two kinds of costly financial infrastructure supporting global exports:

One is internal company databases to track inventory, orders, fulfillment, and several steps in the lengthy supply chain management process that industries are humming across the planet every day. The other is external financial platforms that have been cobbled together piecemeal over decades before the widespread availability of connected computers. Much of the vast computer power these legacy systems deploy remains shoe-horned into managing the financial side of the enormous logistical problem of fulfilling international trade.

The legacy international banking system also uses staggering amounts of paper and water. This is why many experts suggest that upgrading the industry’s tooling to a digital blockchain solution would drastically reduce both its capital drain and environmental impact.

In fact, a 2019 Bank of America study found that if all of the institution’s clients went from paperless to digital bank statements, it would save 37,000 metric tons of GHG emissions and 136 million gallons of blue water consumed. With a greenhouse gas emission rate of around 15 per capita in the United States, that would be the equivalent of making about 2,500 people living in the U.S. carbon neutral.

In addition to cutting costs and saving resources, NFT-powered trade finance solutions would save many supply chain management headaches. The walled corporate database for international trade paperwork has left businesses in an anachronistic situation for the 2020s, where it can take two days to ship a product to a specific location but five days for the paperwork to catch up.

It is possible to imagine a near-future when cryptocurrency startups use NFTs to offer new capability and efficiency with their products to succeed as new entrants to this market. And also conceivable to also envision the incumbent companies and organizations that facilitate payments and finance in international trade — and that enforce international rules and standards — disrupting their current fulfillment lines with the adoption of NFT-based blockchain solutions.

NFTs for Global Supply Chain Management

What particularly suits NFTs of all blockchain solutions to trade finance is the ease with which NFT blockchains can mint unique, serialized records and make those records programmable in a distributed peer-to-peer database with all the properties of the immutable blockchain. 

The global export industry currently deals with inventory management at staggering volumes across the furthest distances and pilots countless items through myriad borders and regulatory tangles. However, by leveraging instantly programmable smart contracts with serial numbers referencing inventory and secured via the blockchain, trade finance firms can immediately navigate these obstacles at vanishingly low costs.

Moreover, functions for currency conversions (supported by current information gathering “oracles”), receivables policies by account, financial policies, and arbitration can all be automated into the token’s smart contract for the unit being shipped.

The provenance of units — their chronological record of ownership, location, and other information — is the non-fungible part of each token that makes it unique and ties it to each unit of inventory in the blockchain management system. For instance, the correct HS Code, or Harmonized Commodity Description and Coding Systems code for international classification of products can be programmed into each token for a supply chain management’s NFT chain. It was first introduced in 1989 and has since been adopted by most countries for international trade.

As the United Nations summarizes it, the HS Code “allows participating countries to classify traded goods on a common basis for customs purposes.” This is an increasingly important aspect of the hurdles of international trade for blockchain engineers to overcome with NFTs, especially as sovereign nations put the brakes on decades of globalism, and regulatory compliance and customs duties increasingly require newer, more agile solutions to keep the shipping lanes flowing.

Individual, customized side chains for accounts can live within a second layer on top of a proprietary corporate settlement network or on a public decentralized blockchain, and settle on a regular schedule and check-in with the main chain to lock in updates. As more smart contract platforms adopt these side-chain solutions to optimize network speed and lower cost, the intersection between programmable contracts and NFTs holds an opportunity for trade finance innovators. And will open up financial bridge infrastructure for more manageable capital inflow so that institutional investors can help pay for and profit from the wave of efficiency.

About The Author

Billy Sebell is the Head of Ecosystem Development for XinFin Fintech and Executive Director of the XDC Foundation. Since joining XinFin, his work has included integrating a tokenization platform for trade finance instruments with a UK FinTech, which will go live with transactions imminently, establishing a bridge to Corda’s ecosystem, and developing partnerships with multiple leading market makers, custodians, and global institutions. Apart from the above integrations and developments, Billy has also continued to spread awareness about the XDC Network’s potential within trade finance globally, highlighting its use cases and integrations with major financial institutions and fintech players.

For more information about the XDC Network, please visit www.xinfin.org

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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