Today, one of the largest contributing factors to the cost of supply chain finance, especially internationally, is the risk associated with the multi-financing of invoices and the due diligence required to lower this risk. Blockchain has gained the spotlight of supply chain industry for a myriad of use cases, none more important than the tokenization of invoices to lower this risk of multi-financing. So how are invoices tokenized, what does tokenizing an asset do, and how is blockchain technology involved?
In a recent report, a large global bank reported $200MM in losses due to fraud from one port in China. The fraudsters simply financed the same invoices for steel many times over. The cause of this expensive oversight? The lack of transparency between and within the banks and the finance providers who all believed they had THE invoice. They had no simple way to determine if the invoices they were receiving were legitimate, unique, and had not been previously financed. Their systems were disconnected, paper-based, and required tremendous coordination to derisk these invoices. They failed to catch any inconsistencies, and they paid a hefty price. In the report, they mentioned recent experimentation with blockchain technology for just this use-case.
Blockchain technology provides a solution to both issues of transparency and the provable uniqueness of invoices. On an immutable blockchain-based network, financial institutions and financing companies can immediately query a distributed database for duplicate invoices. Companies connected can verify that invoice is legitimate, and financial institutions can be sure it has not been financed before, all without sharing the private details of the invoice.
Each invoice distributed across the network is hashed, timestamped, and given a unique identifier to prevent multiple financing on that particular invoice. Data is encrypted when passed through the hashing function eliminating the ability to read any private information. This tokenized invoice is much less risky, and can be financed at a lower discount rate. Still, if the supplier tries to sell this same invoice again through the network, that invoice will have the exact hash output and the distributed database will show a previous instance of financing to all parties.
By connecting traditionally siloed parties on a distributed database (or ledger), information about these invoices can be shared securely and verified amongst all participants – drastically reducing the opportunities for fraud. Duplicate invoices can be detected much faster and the parties responsible can be easily identified and reported to the network as malicious and untrustworthy.
This process could massively reduce fraud in supply chains and eventually lead to much lower rates of working capital down a global supply chain. While we are just beginning to understand the potential of this technology, it will be implemented in supply chains sooner than you think. There is work to be done, but blockchain will undoubtedly underpin the next leap forward in the future of trade.
Casey Lawlor is a recent graduate of Washington University in St. Louis and Co-founder of Fluent. After contributing to various technology and blockchain startups, Casey and his three co-founders started Fluent to apply a new technological solution to age-old problems in trade finance.