“Widely Beneficial” Supply Chain Finance with Blockchain
Small and medium-sized enterprises (SMEs) have made a great contribution to China’s economic development. The number of SMEs accounts for 99% of the number of registered enterprises in China. SMEs’ output value accounts for 60% of the Gross Domestic Product (GDP) and provides 75% of urban employment. However, compared with large enterprises, SMEs still face various difficulties in production and operation due to the imperfect management system, financial system, and the lack of collateral. Among all these problems, difficult financing is a prominent one.
Therefore, the Supply Chain Finance，which relies on the credit of core enterprise to solve the financing problem for SMEs, came into being. In recent years, China’s Supply Chain Finance Market has developed steadily.
The Size and growth rate of China’s Supply Chain Finance Market from 2017 to 2020
Source: CHNCI, Huobi Research
However, due to various problems in the development of Supply Chain Finance in China, there are still many SMEs have unmet financing needs, mainly including the following aspects:
(1) Serious information isolation in the supply chain.
(2) Difficulties in passing credit of core enterprises across the level.
(3) Traditional bills have limited usage scenarios and difficulty in circulation.
(4) Difficult to authenticate fraudulent trade.
(5) Contracts have limited restraint but high-performance risk.
The rapid development of the Internet in the past decade has promoted the emergence of the “Internet Supply Chain Finance” business. This is mainly through the application of the Internet, big data, the Internet of Things, and other emerging technologies to the Supply Chain Finance, and through the transfer of Four-Circulations (material circulation, commercial circulation, information circulation, and capital circulation) to online platforms for collaborative management.
However, due to a large number of participants involved in the Supply Chain Finance and its complex operation, this business still faces various problems in the actual operation process, which are derived from trust issues. Blockchain, with its distributed ledger technology and cryptographic foundation, has several characteristics, such as non-tampering, traceability, and high transparency. With all these characteristics, it can solve trust problems in Supply Chain Finance. Also, by establishing an efficient and transparent trust mechanism, it can reduce costs and improve efficiency for the operation of the Supply Chain Finance.
(1) Establish a trust mechanism and break information isolation
(2) Realize the multi-level transfer of core enterprises’ credit
(3) Apply the smart contract to realize the integration of Four-Circulations and reduce the risk of performance
(4) Build an enterprise credit system based on blockchain
However, there are challenges when we apply blockchain technology to supply chain finance. The blockchain technology is still in the early stage of development and there are barriers to be resolved in terms of performance and operability. To sum up, there are several problems below:
(1) Difficult to eliminate data source falsification
(2) Imperfect of supply chain informatization construction
(3) Contradictions in privacy protection and transparency of commercial information
(4) Immature of the blockchain privacy protection technology
(5) Confliction of the new business model with existing legislations
(6) Poor operability of between platforms
Therefore, there is still a long way to improve the financing efficiency of SMEs as well as solve their financing problems with blockchain technology.
So far, there are mainly 4 types of supply chain finance applications, which could be classified by the initiators.
(1) Core enterprises that have abundant industrial experiences and funds, could initiate a blockchain platform to help the further development of SMEs, facilitate the optimization and transformation of the supply chain, and enhance its overall competitiveness.
(2) Finance institutions could optimize their supply chain finance platforms with the blockchain technology to reduce operating costs, improve risk control ability, and conduct effective customer acquisition strategies.
(3) Technical service providers could establish a Blockchain supply chain financial ecology that could be maintained by multiple participates.
(4)The government could optimize the public service platform applying the blockchain technology, affect the market from top to bottom through the state-backed enterprises, central enterprises, and industrial parks operation, help the sustainable development of the Supply Chain Finance Market, help SMEs with financing problems, and unleash the potential of the real economy.
Blockchain supply chain finance market participants (partially)
In the short term, we consider that the technology service provider may be the main initiator among the four types of initiators.
With the continuous development of blockchain technology, the Supply Chain Finance Market, and legislations, “Blockchain Supply Chain Finance is expected to transit from 1.0 to 2.0. Furthermore, the Blockchain Supply Chain Finance will also develop into an open community and integrate with Supply Chain Finance to create more innovation.
About Huobi Research
Huobi Research was established in April 2016 and has been committed to comprehensively expanding research and exploration in various fields of blockchain since March 2018.
Huobi Research takes the pan-regional blockchain field as the main research object, aiming at accelerating the research and development of blockchain technology, as well as promoting the application of the blockchain industry and promoting the ecological optimization of the blockchain industry. It mainly studies industry trends, technology path, application innovation, and model exploration in the blockchain field. Huobi Research will carry out extensive and in-depth cooperation with governments, enterprises, universities, and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain following the principles of public welfare, rigorousness, and innovation, to provide industry professionals with a solid theoretical basis and trend judgment to promote the healthy and sustainable development of the entire blockchain industry.
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