Tokenized Invoices — A Sky High Concept?
Is this realistic? Or is it purely conceptual?
The new era-computing and efficient data-transmission networks led to the digitization of assets. But then, there are issues to this. Existing implementations of tools for asset management or trading are not sufficiently automated.
Furthermore, there is an issue of trust, reliability, and protection from fraud. Trust is an issue because even electronic records are prone to tampering and there isn’t a mechanism to verify the authenticity of an invoice transaction.
In fact, in a recent report, a large global bank reported $200M in losses due to fraud from one port in China. The fraudsters simply financed the same invoices for steel many times over. The cause of this expensive oversight? The lack of transparency between and within the banks and the finance providers who all believed they had THE invoice.
Such errors severely limit the potential of business operations, co-operation, and interoperability.
Here are some of the few limitations of legacy accounting and transaction processing systems:
- Poor audibility due to off-system processes
- Poor mechanism of access and control if work is to be outsourced, offshored
- Low level of interoperability with other platforms
- Inflexibility to adapt to new business requirements and regulatory changes
- Complicated rework, cancellation, and reconciliation processes
Some of the long-standing issues:
- Incompatible data formats
- lack of open APIs and integrations
- lack of fool-proof security and verification mechanisms for transaction integrity
- Single-source Database dependency for data-validation and data-integrity
The result is a less-than-efficient business operations system requiring manual intervention, and an accentuated need for system and process audits. One of the ways to remove these inefficiencies is to provide a way to guarantee trust; something that can be verified with consensus.
Tokenization to the Rescue
Tokenization is a radical step in the technological transition of accounting in the digital form. It is the process of subsuming sensitive document data within a unique identifier that retains all the essential information about the data without compromising its security.
From a technical standpoint, a blockchain implementation can provide a solution to the issues of trust, transparency, and provable uniqueness of the tokenized asset.
As a matter of fact, key features of immutability and transparent real-time data can extend to all business transactions precluding all auditing needs.
A blockchain-based ledger (Registry) is the primary source of transaction data and is inherently more secure than traditional database records. A tokenized invoice is hashed (computationally expensive — also called Proof of Work), timestamped, given a unique identifier that creates the transaction block. It can be easily distributed and verified.
A token can be viewed as a unit of recorded data in the registry. A registry of authenticity associates a specific asset with the asset-creator /owner and allows verifying its authenticity.
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The key difference at the level of recording transactions is that instead of creating and updating database records, every transaction uses a cryptographic mechanism to generate hash functions and includes a digital signature.
What are the Advantages of Invoice Tokenization?
- It is a way to provide owner/supplier with guaranteed trust in the invoicing processes
- It reduces the risk and impact of account-based fraud, fraud due to duplicate invoices.
- Invoice validity verification and faster invoice approval process
- Secured real-time payments.
- Reliable real-time audit of invoices by the owner or supplier increases business confidence and co-operation. It also helps achieve regulatory compliance.
- The liquidity of sale-able assets is increased as a result of reduced trading frictions.
- Easy reconciliation and subsequent reporting.
- It can prevent double-financing issues in invoice discounting and factoring.
- It facilitates invoice-factoring more easily.
- It could further enhance the automation of downstream processes requiring invoice data and facilitate a fully straight-through process (STP).
Reasons to use blockchain for the tokenization of invoice transactions:
- Audibility.
- Tamper-proof and immutable providing data integrity.
- Non-repudiation of parties concerned with the invoice transaction
- Trustless transparency and approval matrix– allow adding audit nodes who have permissions to see and validate the invoice transaction, but not make any changes
- Blockchain maintains a single source of truth’ while allowing users to read and work on only transaction blocks that are relevant to them. This provides more process control and data-security to the parties involved in the invoice transaction.
- Guaranteed provenance. Cryptography and blockchain help to provide trust in the history of transactions.
To Summarize
There isn’t an iota of doubt that tokenized invoices on the blockchain can lead to higher levels of trust, fast straight-through processing, and cheaper transaction costs. A highlight feature of tokenization is the ‘Trust’ mechanism ensuring data-integrity of the entire transaction history. As peripheral outcomes, it offers the much-desired data properties of availability, non-repudiation, robustness, and authenticity. However, there are critical challenges
- Tokenization requires that employees involved in the business process, manage activities in an application/system using cryptographic keys. The learning curve for the new system can be steep
- Complete digitization of processes is costly and takes time and effort. There just isn’t any offline mode possible.
Not all organizations can implement such sweeping changes in their accounts payable processes if they have already started their digital transformation initiative with systems upgrades, new applications, or intelligent invoice-data extraction systems.
Learn more about how Intelligent Document Extraction benefits your organization in a multitude of ways.
