Blockchain: The game-changer
Still in its nascent stage, the technology could radically change international trade if combined with robust regulatory framework
International trade could well look radically different in 10 to 15 year if the world succeeds in creating an ecosystem conducive to the new technology that is now popularly known as Blockchain. It could make international trade smarter, but smart trade requires smart standardisation, and smart standardisation can only happen through the cooperation of all the stakeholders. If the projects that are under development succeed, Blockchain could well become the future of trade infrastructure and the biggest disruptor to the shipping industry and to international trade since the invention of containers.
This is the conclusion of the latest WTO publication "Can Blockchain Revolutionise International Trade?" by Emmanuelle Ganne, which explores the implication of the new technology that has been greeted by many as the next game-changer. The paper says that it could affect cross-border trade in goods and services and intellectual property rights in a great way. It is currently used by many companies and could be potentially used in various areas covered by WTO rules. Reduction in trade costs and enhancing supply chain transparency is an advantage, as well as the opportunity it provides for small-scale producer companies.
It may be noted that the Blockchain is a distributed ledger technology which allows digital records and information to be shared in a secure, transparent, and immutable manner without relying on a single trusted third party. It offers interesting promises. It could empower individuals and companies around the globe to make transactions more efficiently, economically, and quickly, while retaining a high level of security. All the transactions are stored in a permanent and near inalterable way using cryptographic technologies.
That is why it is called by the Economist a 'trust machine'. It could have a significant impact on the way trade operations are conducted, from financial to physical cross-border trade transactions, reducing processing, verification, tracking, coordination and transport costs by streamlining and digitalising processes that involve multiple stakeholders.
These activities, by and large, have remained highly dependent on paper, even after the introduction of personal computers and cyber technology. Numerous cyber attacks and frauds have created new hurdles in the way of the fully digitalised world. However, the introduction of the new Blockchain technology has generated new hopes. The paper says that it could improve the administration of IP rights, enhance traceability and trust in value chains, and open new opportunities for small companies.
From finance, including trade finance, to customs and certification processes, transportation and logistics, insurance, distribution, intellectual property (IP) and government procurement, possible applications of Blockchain encompass a diverse set of areas related to WTO work.
Blockchain has the potential to impact transactions the way the internet influenced communication. That is why this new technology is sometimes referred to as 'Internet of transactions' or 'internet of value'. It is breaking the various silos that currently exist between the many parties involved in a cross-border trade transaction, and there is a strong probability that it could transcend trade globalisation to the next level.
This possible game-changer is seen to digitalise and automate trade finance processes, in particular letters of credit, and to ease supply chain finance. An array of banks working with financial technology (fintech) startups and information technology (IT) companies are investigating the potential of the technology. Pilot projects are encouraging.
The intrinsic characteristics of the technology also make it a potentially interesting tool to help implement the WTO Trade Facilitation Agreement (TFA) and to facilitate business-to-government (B2G) and government-to-government (G2G) processes at the national level. Blockchain and smart contracts could help administer border procedures and national single windows (a single point of entry through which trade stakeholders can submit documentation and other information to complete customs procedures) in a more efficient, transparent and secure manner, and improve the accuracy of trade data.
Nevertheless, there are also certain risks involved. Blockchain is neither suited to all situations nor it is a panacea for all the problems. The technology works best in circumstances where multiple parties are involved in transactions that require trust and transparency.
While pertinent in many situations, the use of Blockchain may create barriers if it is used for transactions that do not require high levels of reliability. In addition, setting up a Blockchain requires significant investment and coordination efforts, as well as substantial changes to existing systems and culture. Therefore, it is critical to weigh up the trade-offs carefully.
More importantly, the technology is still maturing, and many challenges, including technical, interoperability and legal issues need to be addressed before the technology can be used to its full potential. In particular, technical solutions need to be developed to address the "digital island problem" and ensure that Blockchains can speak to each other, and rules need to be drafted to clarify applicable laws and regulate responsibilities. Without this regulatory layer, Blockchain will likely be confined to proofs of concept and pilot projects.
Where the Blockchain adventure will ultimately lead us is difficult to project. Are we likely to witness a complete overhaul of our economies because of distributed ledgers in the near to medium future? Probably not. A hybrid approach, in which distributed ledgers complement existing systems, is more likely. The technology itself is still evolving and could look somewhat different in a few years. New "superior" distributed ledger technologies are already emerging that are quicker, more secure and less energy-intensive than the original Blockchain. Whether the future of distributed ledger technology is Blockchain, as originally developed, or another higher performing distributed ledger technology is worth investigating. If this technology is to be given the opportunity to realise its full potential, collective solutions are needed to address key existing challenges, while providing the flexibility necessary for the technology to thrive.
Given the potential of Blockchain, companies, civil society organisations, software developers, academics, governments and intergovernmental organisations should work hand-in-hand to assess the practical and legal implications of the technology and to develop collective solutions to existing challenges. This is particularly true when it comes to international trade.
(The views expressed are strictly personal)