The Role of Stablecoins in Making Trade Financing More Responsive

22 Aug, 2023

By Effie Dimitropoulos, Executive General Manager

Research by IBM found that 54% of banks expect transformational technologies like blockchain, online and digital systems to revolutionise trade finance. Blockchain enables documentation and recording of transactions that ensure transparency in trade finance, with stablecoins a suitable medium for blockchain-based trade financing due to their stability.

AUDD on Stellar to provide a stable option in trade financing

Blockchain, as an enabler of trade financing, is fast becoming a reality. Blockchain optimises financing processes, makes transactions traceable, and enables verifications of originations. It means that if you are a trade finance merchant, you can track the trade financing process from transaction origination and documentation to approvals and disbursements via a public ledger in real time. But as you know, blockchain needs native currencies to operate seamlessly. Stablecoins fulfill that role.

AUDD is a stablecoin available on Stellar and the XRP Ledger, enabling transactions and being the medium of trade finance via the blockchain. Stellar dubs as the network for storing and moving money. The network is integrated with APIs and SDKs that build currency connections between different entities. AUDD on Stellar allows this to happen as it provides a stable option since it is 1:1 backed to the Australian dollar.

An example in practice: Assume John wants to finance an account receivable from entity X. He has to do this via blockchain. He chooses the Stellar ecosystem to expedite the process and ensure a permanent record via the public ledger. John has the option to receive financing through fiat or Stellar (XLM) If crypto is John’s preferred currency, he will receive XLM. But since XLM isn’t a stablecoin, its value can change depending on the forces of demand and supply. To reduce the risk in trade financing, John can choose the AUDD option available on the network.

Trade finance using AUDD to speed up processes

Novatti launched AUDD as a digital currency as a secure and convenient solution to bridge the gap between traditional fiat and the digital economy. If you are conducting trade finance within the traditional framework, you have to perform many manual processes and provide a lot of documentation. This process is time-consuming and makes trade financing a costly undertaking. As a digital asset running on a public ledger, you do not need to undergo such a lengthy process as everything is expedited via blockchain.

The Stellar Ecosystem Protocols (SEPs) facilitate the secure collection and storage of KYC information on the blockchain, meaning you won’t have to provide information whenever you seek trade financing via the ecosystem and AUDD. With the barrier removed, trade financing is conducted faster, allowing room for cost savings.

AUDD to unlock value in trade financing through ‘asset bootstrapping’

AUDD integrates SEP-24, a standardised on-and off-ramp API. SEP-24 connects businesses, merchants, and asset financiers at a low cost without the need for expensive investments in technology. One way this standard unlocks value is through “asset bootstrapping.” How?

If your business integrates SEP-24 into payments, you can use more SEPs to link AUDD to other assets through bootstrapping. Your business won’t need to create an AUDD market. Instead, you can channel liquidity into a single and existing AUDD market. That means an almost instant market for conducting asset finance deals.

In the future, the aim is to make AUDD available to more platforms to unlock greater value. Following Stellar’s application, AUDD liquidity can be unlocked via the XRP Ledger and Ethereum, with more blockchains to come.

Stellar anchors to simplify trade finance with AUDD onboard

Trade finance involves several parties, who must agree before a transaction is executed in the value chain. Stellar brings together these parties for a frictionless pathway of trade finance. The parties are designated as anchors responsible for moving value through the Stellar ecosystem. Here is how it works.

A service provider issues an invoice payable to anchor 1. Customers will pay anchor 1 using their local currency but can also choose AUDD. In doing so, anchor 1 will move value to anchor 2 through the Stellar network. The process is completed when the service provider’s bank receives the payment.

The above process is a simple illustration of how Stellar anchors can facilitate trade finance without needing an intermediary. Using AUDD as an alternative currency for the value transfer, investors can be assured that they are not exposed to exchange fluctuations that face fiat should they choose the stablecoin route.

Compliant trade financing to occur with AUDD

When financing an invoice, or paying a supplier, or conducting other payments via blockchain, you could be exposed to regulatory issues. That’s because regulation around the world varies and has not caught up within the operations of blockchain and digital assets landscape. u. Novatti had this in mind when the company designed AUDD with the SEP-12 protocol.

Under SEP-12, trade finance merchants will encounter Counter-Terrorism Financing and Anti-Money Laundering requirements through the information they provide. SEP-12 enables wallet owners and transaction initiators to include encrypted on-chain Know Your Business (KYB) and Know Your Customer (KYC) information. The information is sent along with the AUDD payment to the receiving party. Including such information builds on the compliance case for AUDD, making it an ideal stablecoin for trade finance. That comes alongside the compliant layer provided by Novatti, as the company is regulated by Australian market laws.

AUDD to supercharge trade finance through Stellar

In a nutshell, the addition of AUDD to the Stellar network can change how trade finance occurs. The stablecoin can act as a medium of exchange, unlocking value and speeding up the process. With the SEP protocols, AUDD enables compliant transactions, building on existing controls by counterparties. With the blockchain features of Stellar, including the ability to create permanent records on a public ledger, AUDD will supercharge trade finance generating win-win situations for all the parties involved.

The information in this blog is

  • provided for informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness, or fitness for any particular purpose;
  • not intended to be and does not constitute financial advice, investment advice, trading advice, or any other advice; and
  • general in nature and is not specific to you or anyone else.

You should not make any decision, financial, investment, trading or otherwise, based on any of the information presented in this blog without undertaking independent due diligence and consultation with a professional broker or financial advisory and you understand that you are using any and all information available in this blog at your own risk.

RISK STATEMENT – the trading of cryptocurrencies/cryptoassets has potential rewards, and it also has potential risks involved. Trading may not be suitable for all people. Anyone wishing to invest should seek his or her own independent financial or professional advice