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. Twenty-four hours later a second Euro transaction went through via a domestic transfer.
Both transfers were initiated and settled automatically using smart contract technology. In this post we describe the informational business workflow executed on Tradeshift and the corresponding financial settlement workflow executed on the blockchain Ethereum.
If you haven’t already, we recommend reading our first post before diving in.
Connecting the informational business workflow with financial settlement workflow through smart contracts
The illustration below details the end-to-end workflow of our most recent pilot. It includes the issuance and redemption of e-money on and off Ethereum. Actors in the pilot’s mini-supply chain are Tradeshift Frontiers, Shop Icelandic and Nordic Store.
The following explains the flow in detail. First we go over the full information workflow on Tradeshift. Then the financial workflow on blockchain.
Diagram one: information and monetary flow in our most recent pilot
Informational business workflow on Tradeshift
Winter is here and for that, you need sweaters and scarves. Tradeshift Frontiers, therefore, made a purchase order of one Icelandic sweater and 10 scarves to Shop Icelandic, the subsidiary of Icelandic retailer Nordic Store.
The informational flow of trade in transaction 1, between Tradeshift Frontiers and Shop Icleandic, went as follows:
Initially, product lead in Frontiers, Magnus Nielsen, entered Tradeshift Frontiers account to make a Purchase Request (PR). General manager and co-founder of Tradeshift, Gert Sylvest, approved the PR. This generated the purchase order (PO1) illustrated above.
The PO1 was received in the Shop Icelandic account and accepted by Shop Icelandic financial department and then “flipped” into an invoice (inv.1) which was then sent back to Tradeshift. This is standard procedure on Tradeshift.
On the Tradeshift Frontiers account, the invoice was automatically accepted, because it was simply matched against the PO, which already had manager approval. This in turn ‘minted’ FlowToken1 consisting of €1024 payment commitment with a due date on December 10th. Since the invoice acceptance and FlowTokens1 minting happened automatically, we can proudly say that the settlement workflow on blockchain was initiated automatically.
The informational flow of trade in transaction 2, between Shop Icelandic and Nordic Store, was similar but without a PR:
The purchase order (PO2) was sent from Shop Icelandic to Nordic Store. This was done in a single step as no PR- and approval flow has been set up by Shop Icelandic.
Then, the PO2 was flipped to an invoice (inv.2) just like in transaction 1.
Last, the invoice was accepted manually. Shop Icelandic does not have an automated AP-workflow set up, so even though the invoice was matched against PO the settlement workflow was not initiated automatically.
Financial settlement workflow on Ethereum
The informational business workflow is matched by a corresponding financial settlement workflow on Ethereum.
The accepted invoices were used to generate and issue FlowTokens on Ethereum to Nordic Store and Shop Icelandic. This was done via an integration layer between the Tradeshift platform and Ethereum built by Frontiers.
Minted FlowTokens are, however, worthless until they have been committed to on-chain. This means that Gert and a representative of Shop Icelandic as buyers had to commit to paying. That allows the ‘smart invoice’ execute settlement on the due date on December 10th and 11th respectively.
Meanwhile, and separately from above, Euro licensed under the e-money directive was issued onto Ethereum via an integration layer built by Monerium. Here, after having successfully completed Monerium on-boarding process, Tradeshift sent €1040 to Monerium in an IBAN transaction that cost €5. Monerium subsequently issued €1035 into Tradeshift’s wallet, as that is what Monerium has a license to do. We here would like to emphasize: The €1035 issued to Tradeshift as ERC-20 tokens, which is a common Ethereum token standard, are not stablecoins, but Euro licensed as such under the European e-money directive.
Monerium is required to perform KYC and AML checks on all of its customers. e-money can not be issued until this check has been passed. Nordic Store, Shop Icelandic, and Tradeshift have thus all gone through Monerium’s KYC/AML check.
Next, magic happened and transactions settled. That meant:
On December 10th the Smart Invoice contract automatically swapped €1024 in the Tradeshift wallet for FlowToken1 in Shop Icelandic’s wallet. This cross-border settlement cost $0.17 (€0.15) in total to execute on-chain.
24 hours later, on December 11th the Smart Invoice contract automatically swapped €512 in the Shop Icelandic’s wallet for FlowToken2 in Nordic Store’s wallet. This domestic settlement cost $0.16 (€0.14) in total to execute on-chain.
With the above flow, we have thus demonstrated that:
Euro and other fiat currency transfers between European entities can be used to settle invoices at an on-chain cost in the range of $0.20 (€0.18)
After having gone through standard Tradeshift flows, the company “in the middle” didn’t have to do anything other than commit to paying its Invoice on-chain to automatically receive funds and have them flow “backwards” to its suppliers.
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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