The evolution of trade finance

Trade finance goes back way farther than you might think. Try 5,000 years in ancient Mesopotamia. Babylonian clay tablets dating back to that time give us the very earliest known examples of promissory notes and letters of credit. Otherwise, our trade finance system has little in common with ancient Babylon.

Today trade finance spans the globe, enabling trade around the world and spurring economic development in places where businesses would otherwise struggle to find an open door to the global system of finance and trade. The Babylonians may have traded with the Indus Valley and other civilizations as far away as Egypt and Anatolia, but their primitive concepts of trade certainly didn’t constitute the trading behemoth we see today.

So, what happened to trade finance over the years and where is the industry headed?

Well, various forms of regional trade finance persisted in the ancient world, though it took a dive along with the rest of civilization after the fall of the Roman Empire. For over a thousand years there were no institutionalized or officially sanctioned trade finance practices, though we can assume it persisted on smaller scales between individuals in specific cases.

Fifteenth Century banks led the revival of basic trade finance practices by overseeing the exchange of promissory notes between trading parties. The cat was out of the bag and it was only a matter of time before a growing, increasingly complex system would evolve. Soon letters of credit were common, guaranteeing the payment of funds if and when trade terms were met by both parties.

Letter of credit led in turn to greater volumes of trade. Merchants who previously lacked the capital needed to conduct a trade or were consistently limited by the risk involved suddenly had access to the financing they needed. In its basic form, this system has persisted into the modern day, exploding of course with globalization, bringing finance to areas of the world eager to join the global market.

But globalization has been a double-edged sword for trade finance. A truly global system of trade finance requires that financing be quick, but this traditional mode of trade finance is anything but. It’s slow, labor-intensive and it’s not transparent enough to effectively track where funds go and why. Trade finance also hasn’t kept up with the times technologically, and remain weighed down by papers and filing cabinets.

Envoy wants to hail in a new era for the ancient tradition of trade finance. By introducing blockchain technology to trade finance, Envoy aims to do away with the bulky paper trail left behind by old practices, bring unshakable transparency to the industry and create new opportunities for more businesses. Trade finance has come a long way in 5,000 years, but it’s blockchain that will finally drag it into the 21st Century.

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