Can Blockchain Revolutionize Trade?

Blockchain has gained increased attention recently because of the publicity surrounding Bitcoin. 
The use of this technology is relatively new but its potential is also starting to be explored in applications beyond digital currency. The World Bank Group has begun to explore the impact of blockchain technology on development. It is launching a blockchain lab and considering projects that can help with good governance and positive social outcomes in developing countries, including a pilot in South East Asia.
 
Blockchain may also have interesting implications for trade.  Increasingly consumers are becoming concerned about the origin of the products they buy (whether food, garments or consumables) either on ethical or quality grounds. The expectation is that, in increasingly complex supply chains, blockchain can provide product proof of integrity. SMEs or small producers can leverage this proof to find buyers for their products or gain a marketing advantage. The ability of blockchain to provide for ‘self-executing contracts’ (a transaction which is triggered automatically when all conditions are satisfied) is also believed to be an advantage for these small entrepreneurs as it would remove the risk of non-payment and reduce the legal and procedural costs of fulfilling a contract.
  Can blockchain also facilitate trade?
 
The time and cost of clearing goods for import or export add a significant financial burden on trade due to the copious layers of authorizations to import or export goods – such as permits, licenses, phytosanitary certificates, and others - that are required on the grounds of human, animal or plant health or safety. The final arbiter in a border transaction is Customs, whose role is to ensure that all such permits have been obtained and that they are valid and that the goods have been lawfully declared and all regulatory requirements have been met. 
 
The Holy Grail for Customs and other border agencies would be a set of trustworthy documents (invoices, bills of lading, packing lists, etc.) that accurately describe the nature of the goods, their conformity to the required standards, the inspections and authorizations that they have undergone, any transformations through processing, and any changes of hands along the entire supply chain for the purpose of conveyancing or re-packaging.
 
The reality at the moment is that not all the above information is available to authorities and what information there is often requires verification. Therefore, goods are often subjected to a high level of scrutiny including, potentially, physical inspections or laboratory tests.  This results in high costs for the traders, delays in clearing the goods, and a high degree of resourcing for the government authorities.
 
What if all the steps in the supply chain, from origin to destination, were captured in a blockchain? This could provide a degree of assurance that the information is correct as it originates at source and was not ‘manipulated’ along the way. If this blockchain was visible by Customs and the other agencies, goods could be cleared without further intervention.
 
Can blockchain help in providing accuracy, traceability and transparency, as well as reducing costs both for trade and government?

• Data integrity. Imagine a blockchain being started by a producer by recording the sale of goods to a distributor and then being augmented by every transformation or change of hands (e.g. storage in a warehouse, consolidation with other goods, inspected by Quarantine on export, packed into container, loaded on ship, cleared by Customs on export, etc.).  The distributed ledger concept would guarantee the integrity of the data stored in the blockchain as the blockchain is incremented and, therefore, when it is presented to the authorities of the importing countries they can rely on every piece of information having been generated by its originator.
• Simplification. Time and effort would be saved all along the supply chain by parties not having to reproduce the information and submit it manually to the authorities or trading partners.  Transactions would be made based on original data supplied at source.
• Increased security. Opportunities for corruption or collusion (a common problem in many countries which significantly adds to the cost of trade) would be reduced as the data cannot be retroactively tampered or altered along the way as the ledger represents the single source of truth.
• Multi-use big data. Over time, the blockchains would create a vast repository of ‘big data’ which can be used to analyze patterns and trends of trade to enable increasingly sophisticated risk profiling, which would enhance the border authorities’ risk management capacity.
• Guaranteed confidentiality. Confidentiality of the data would be guaranteed by an encrypted key being originated at the start of the chain and being passed down to the other parties in the supply chain including the border authorities.

However, blockchain also presents some major challenges.  Some of these challenges are of a technical nature and others go beyond technology.

• Aligning diverse suppliers and systems. For blockchain to fulfil the objectives above it would have to encompass all the participants in the supply chain from the original supplier of the goods to all the parties who have, in some way, played a part in getting those goods to their final destination as well as the regulatory authorities at the points of export or transit/trans-shipment.  In the case of some industries (e.g. garments, electronics) the goods may undergo various transformations and the final product may be assembled from materials or components coming from different suppliers in different counties each with its own supply chain.  For this to happen there must be an overwhelming incentive for everyone to participate and every node in the supply chain would need to have a modicum of IT capabilities as well as access to the Internet. Is there a way in which governments in different countries can come together and find some way of ‘incentivizing’ this process?   

• Fraud. Organized networks often operate through a complex system of false companies that create false descriptions of goods or false invoices. They could simply start a blockchain of false data. Blockchain does not replace the need for intelligence and risk management but the availability of ‘big data’ could conceivably improve the efficiency of targeting.  However, the capacity of Customs and other agencies in handling data would need to be enhanced and their practices, some of them deeply ingrained, would also need to be changed.
• Verifying Transactions. Blockchain may provide proof that a transaction has taken place but how can it guarantee that the terms of that transactions were fulfilled? For example, blockchain may record that goods were loaded into a container but how can one ascertain that the correct goods and the right quantity were actually loaded?  This has implications for ‘self-executing contracts’ as well. Unlike Bitcoins where the entirety of the transaction is self-contained, in a real-world supply chain, the validity of the contract depends on external factors such as the quantity or quality of the goods or whether a certain action (e.g. transport from A to B) has taken place.
• Data confidentiality. Even if a blockchain ledger’s access can be restricted to only the participants in that transaction, the confidentiality of the data must be protected even within that restricted membership.  For example, a supplier may consign goods destined for a certain buyer to a shipping line but the shipping line also provides a service to that supplier’s competitors.  This may present a challenge where the entire ledger relating to a transaction is distributed among the participants.
• Legality. There are a number of legal implications of blockchain that would have to be explored.  First and foremost, the issue of jurisdiction and ownership in terms of where the data is stored and where it is used as a declaration to the authorities.

The private sector has begun to explore the impact of blockchain on trade logistics. IBM has conducted two concrete pilots by using blockchain within the context of trade logistics. One pilot was conducted with Maersk to track shipments of flowers from Kenya to Rotterdam. A second pilot was conducted with the Singapore Customs Administration, which incorporates customs in the supply chain. This suggests a real potential for integrating customs and border authorities with the supply chain to achieve significant benefits in terms of facilitation.
 
So, is blockchain a game changer for global trade?
 
Blockchain could influence trade policy and regulation and offer a new paradigm in the way globalized trade is conducted. While it is evident that blockchain in the supply chain can be a useful tool, customer engagement is the bigger opportunity. It could reform the global trade environment into a more customer-friendly environment. However, key issues remain to be resolved which cannot be solved by technology alone. For example, reform and modernization of border management present many other challenges (e.g. institutional capacity, etc). More pilot work and research is required before the full potential and impact of blockchain on trade facilitation is realized.