Global supply chains use a fundamentally broken system that locks up many hundreds of billions of dollars within a complex milieu of intermediaries and financiers. However, blockchains change value transactions that have come to exploit the need for trust.

We are talking about an $18tn (£12.6tn, €16.5tn) market dominated by antiquated, paper-based methods such as letter of credit and factoring; two approaches that between them account for about $5tn of annual trade today. Letters of credit have been around for hundreds of years and have not really changed. They work by couriering hard copies of documents around the world, while banks employ hundreds of people to review those documents.

Mountain View-based Skuchain sees the potential to make the existing system faster and cheaper, while making financing available to small and medium-sized businesses in locations where it wasn't previously accessible. It has development projects under way with multiple international banks and has just announced funding from Digital Currency Group, Amino Capital and Fenbushi Capital, the first China-based VC that exclusively invests in blockchain companies.

Travis Giggy, head of international business at Skuchain, told IBTimes UK: "Letter of credit [LC] is an expensive process and it's a real pain in the ass, which is simply not available to businesses in emerging economies."

He said traders are starting to move away from LC but like everything in supply chains, it's a slow process. Open account systems are prevalent ($15tn) but require a high degree of reputation. "90% of trade is financed and if you are not an established player, you can't get the open account terms and you can't get a letter of credit from your bank and get a loan for the cash in advance transactions." He added the potential savings would be in the hundreds of billions and rising.

"Fundamentally, a blockchain is good for helping parties that don't trust each other to share data very securely. In a supply chain, you have got these companies that are doing business with each other but aren't related and don't really trust each other, that have to exchange goods and money."

Collaborative commerce

Giggy uses the term "collaborative commerce" to describe the future of global trade based on a new type of trust. A blockchain model could connect together new realms of commerce rarely seen in today's world outside of fully integrated companies such as Apple or Xiaomi, the mobile phone company in China.

Rather than being incentivised to lower their own costs and charge as much as possible for goods, vendors will work collaboratively up the supply chain, incentivised to produce the highest quality goods while sharing in less costly, more efficient and more egalitarian trade.

The trust of the blockchain will allow financiers in places like America to chain loans down into the supply chain - Travis Giggy

A look inside global supply chains reveals it's almost always a first world country such as the US or Britain trading with an emerging economy like India or Brazil.

Financing is largely available in first world countries; in less wealthy ones, financing can be expensive and hard to get. Even established companies with good credit in major manufacturing centres are at the mercy of their economies. And companies that are not established have to rely on a rich uncle, or a loan shark, and that can cost 5% or more per month.

"The trust of the blockchain will allow financiers in places like America to chain loans down into the supply chain," said Giggy. "This helps the buyer in America with cheaper cost of goods because they don't have to buy them from a vendor that's getting charged very expensive money.

"It will result in a better relationship with their vendors, better visibility into their supply chain, and it will even help marketing departments and their customers who will have provenance into the origin the goods that they purchase and consume. This can all be verified, validated because it leans on blockchain which is very secure and very transparent."

The blockchain/supply chain space

Blockchains and supply chains are already becoming a busy crossover, with startups such as Provenance focusing on tracking the authenticity and social and environmental credentials of goods from source. Skuchain is aiming its blockchain technology at the intersection of payments (letter of credit or wire transfer), finance (operating loans or short term trade loans), and visibility (SAP or an ERP system).

So there are clear winners. But which players in this equation will see their global trade revenues decimated by blockchains? Giggy said: "In today's world the banks make money of the letter of credit, but even the banks that we talked to – and we are talking to many banks – they don't like the letter of credit that much because it puts risk on the bank.

"And even though it costs from 1% to 3% to the consumer to buy a letter of credit, the banks don't make that much money from it because there is so much couriering of documents and physical verification of docs and lots of manual work involved. But they like it because it gives them visibility into the trades that are happening and the ability to finance those trades which is where they make the money."

Giggy pointed out people were moving away from LC to open account but this was problematic for banks because it's a system with zero visibility into what's going on. He said: "It [open account] is just two people that are doing business with each other and all they know is that a wire transfer happened out of their account into some other account. We are now working with banks to create new forms of electronic versions of letters of credit that can rest on top of our blockchain and give that visibility back."

'This money is outrageously expensive'

Giggy said Skuchain potentially disintermediates people such as factors, that offer very expensive kind of street money. Say a seller in China sends his goods off to Walmart in the US, the invoice for those goods can be taken to a factor that will pay 95% of it in advance of Walmart paying it; they know Walmart is good for the money but sometimes take a little longer to pay.

"So they take 5%, in fact usually more than that – 8%, 10% of this trade just in exchange for paying the seller off right away instead of waiting for the money over time," he said. "This money is outrageously expensive and it makes even people like Walmart, who can push down their supply chain, pay more for their cogs than they need to do. The factoring market by itself accounts for over $2tn per year."

Giggy said Skuchain's blockchain technology is designed to be ledger agnostic. He said the system currently comprises a combination of multi-sig addresses and OP_RETURN hashes on the Bitcoin blockchain, and Skuchain's own asset chain technology. It operates a federated system where every member on the chain is trusted and KYC'd.

Skuchain will also soon release Blockice. Giggy explained: "Blockice is our upcoming initiative for commerce, which will give banks, corporates, logistics providers, governments, and any player in the supply chain, the ability to collaborate on the future of blockchains for conducting commerce. We will focus on blockchain enablement of notarisation, title transfer, and chain of possession."