Ironing out the kinks: how DeFi can help close the $2tn trade finance gap
Small and medium-sized enterprises (SMEs) are often held up as the backbone of any economy.
Voy Finance CEO Lee Tarone
Their relative size and role within an economy means they often support innovation and creativity, not to mention the livelihoods of millions.
But funding for SMEs remains a perennial issue. The global trade finance gap currently stands at around £2 trillion, “and there is no end in sight for this massive lack of funding stopping valuable SMEs and businesses from growing and contributing to international trade”, says Lee Tarone, CEO of Voy Finance.
Voy Finance is a blockchain ecosystem built to bridge the trade finance gap. Speaking to FinTech Futures, Tarone says: “Businesses that value ethical and sustainable practices deserve the ability to bring their trade to international markets but cannot due to stringent requirements for financing, creating a lack of capital.”
Voy leverages decentralised finance (DeFi) to create liquidity pools and tokenised documents to streamline the lending process for these businesses. Using blockchain, the firm creates “transparent and secure” ways of lending toward real-world assets with a vision of conscious financing.
The potential of blockchain technology
Blockchain is a crucial component of Voy’s ecosystem. “It allows us to create a secure, transparent and traceable method of securing financing for SMEs,” Tarone explains.
The smart contracts built into the platform ensure that only businesses that successfully navigate the firm’s vetting process and receive appropriate scoring can access Voy’s liquidity pools.
Additionally, this process creates a verifiable way of tracking the supply chain of these businesses, meaning that all parties can share real-time information regarding the goods’ location and shipment status, minimising the correlated risks.
Additionally, blockchain technology can also help ensure the immutability and transparency of ESG metrics and ESG scoring records to make sure companies are meeting the required standard when it comes to carbon emissions.
ESG standards are essential for assessing a company’s sustainability and ethical impact, guiding investments and promoting responsible corporate behaviour.
“Although the views on ESG standards are currently divided, we cannot ignore the fact that given the current climate crisis, it is essential for our planet’s longevity and our economies to adopt a certain standard of ensuring sustainability,” Tarone says.
ESG scoring can give institutions and businesses a robust way of measuring their impact on the planet. “However, we recognise that incorporating the UN’s sustainable development goals (SDG) framework and collaborating with regulators can further improve ESG scoring by setting a global standard,” Tarone adds.
Voy’s aim is to work with industry leaders and regulators to create a comprehensive and reliable approach that eliminates significant obstacles to ESG scoring. This will enable businesses to accurately measure and report their impact on the environment and society, and ultimately promote sustainable practices.
Mind the gap
The trade finance gap has grown rapidly over the past two years due to diverse macroeconomic factors, including the Covid-19 pandemic and geopolitical issues such as Russian sanctions. The resulting economic instability has led to rising risk aversion and inflation, which in turn have eroded lending limits.
The trade finance gap has grown rapidly over the past two years
Tarone says SMEs face stringent credit requirements, high transaction costs and limited access to information, which makes it difficult for them to obtain financing, “leaving them behind as larger companies grow”.
Despite the existence of smaller businesses that follow sustainable practices, they are often overlooked by banks and other financiers due to their infancy in the trade space.
Tarone believes addressing this issue involves simplifying regulations, leveraging technology and developing alternative financing solutions. “Blockchain provides an effective solution to this,” he says.
The technology allows Voy to effectively assess and track business practices and then provide a transparent means of financing them. “At Voy, we also use data points from satellite imagery to provide better ESG scoring standards to our ecosystem.”
The technology has “significant potential” to change the way we look at supply chain management by providing increased transparency, traceability and efficiency.
Some key applications include end-to-end traceability to ensure authenticity and promote responsible sourcing, smart contracts to automate various aspects of the supply chain and enhanced collaboration through secure data sharing among stakeholders.
“We could track everything, from where the first raw material for a good is sourced, to every step it takes to reach the end consumer, all through an immutable and automated network,” Tarone says.
With smart contracts to assign funding or letters of credit within this system, the entire process could require much less time and effort, ensuring secure and smooth international trade.
Ironing out the kinks
While DeFi has historically had a bad reputation with “rug pulls, impractical annual percentage yield (APY) or entire ecosystems collapsing”, Tarone says, behind all the chaos, this is a sector of Web3 that can change how we interact with money, businesses and economies.
DeFi has the potential to smooth out the kinks in global trade finance
DeFi, when harnessed correctly, can create financial inclusion for unbanked and underbanked populations, faster and more efficient cross-border transactions, reduced transaction fees, enhanced transparency and improved liquidity.
It can assist with automating financial services through smart contracts, enable firms to offer customisable financial products tailored to individual needs and provide enhanced privacy and security compared to centralised systems.
Amid all the political and economic unrest the world is facing, these technologies could enhance transparency in international trade, facilitate currency diversification and streamline cross-border transactions, promoting global trade and stability.
Moreover, blockchain technology allows for the tracking and verification of sustainable and ethical practices in supply chains, promoting responsible trade and upholding international standards.
“Although not a complete solution, these technologies can create a more transparent, efficient and inclusive global trading system, enabling countries to adapt to changing geopolitical dynamics and maintain a stable, cooperative international trading environment,” Tarone concludes.
