This post is written in collaboration with Monerium.
On Tuesday, December 10th 2019, the world’s first cross-border Euro transaction took place on the permissionless blockchain Ethereum. A day later the second Euro transaction went through via a domestic transfer.
Both transfers were initiated and settled automatically using ‘smart contract’ technology in three steps.
A standard Tradeshift workflow was executed (issuing a purchase order and receiving an invoice), which led to an accepted invoice.
An integration layer (new part developed by Tradeshift Frontiers) captured and turned the accepted invoice into ‘FlowTokens’. One FlowToken can represent one dollar or it can represent the entire invoice, which was the case in this pilot.
The FlowTokens were swapped with e-money on blockchain via a smart contract. We call this a ‘smart invoice’
This flow is illustrated in the diagram below.
Three steps to smart invoice settlement
Our pilot is groundbreaking for three reasons.
First, Europe is the first major market to digitize money on blockchain. Real Euro, recognised as such by regulators, change hands in cross-border B2B transactions via smart contracts on a permissionless blockchain. Instead of volatile cryptocurrency or complex stablecoins, the parties use a proven form of digital cash licensed under the European e-money directive. Europe thus is the first major market where an authorized form of digital money can be used on blockchain.
Second, money stays on the blockchain in a micro supply chain and the smart contract settlement costs are kept low. In this case, the two Euro transactions between the three entities had a flat fee on-chain settlement cost of $0.17 and $0.16 for settling first €1024 and then €512 respectively. For reference, using Automated Clearing House (ACH) in the United States typically costs somewhere between $0.20 and $1.50 in fixed fee or 0.5% to 1.5% in variable fee.
Third, smart contract settlement of tokenized invoices opens up new business models. Tradeshift Frontiers and Monerium identify three interesting opportunity areas:
Embedded and automatic global payments. Companies are paying over $400bn in payment transaction fees today and cross-border transactions are 5X more expensive than local ones. Settling payments through smart contracts can significantly reduce fees and process complexity.
Instant VAT and customs settlement. Every year, fraudsters rob Europe’s citizens of 50 billion euros of tax money. With smart contracts, we can tie up parts of the payment commitment from buyers into a tax VAT smart contract and settle VAT instantly. This, we believe, can help make it hard to conduct VAT fraud.
Deep Tier Finance. Deep tier finance takes the first tier supplier financing options and makes them available to tier two, three and four sellers.
Tradeshift Frontiers and Monerium are demonstrating how smart contracts can be used for something as common as settling invoices. In turn, this can lead to new business models and increased efficiencies of supply-chain ecosystems as outlined.
In 2020, we will continue to explore opportunities and maturing solutions with customers, partners and regulators. If you would like to take part in that either as a beta user, partner or regulator, please let us know here.
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