15 Jun Trade and Blockchain
Emmanuelle Ganne, Senior Analyst in the Economic Research and Statistics division of the World Trade Organization (WTO), spoke with ON Research and shared her insights into the application of blockchain technologies in international trade.
Please explain with a few specific examples how blockchain is applied in international trade.
Let me start with a few words on what makes blockchain so interesting for international trade. I should note that I use the term blockchain in its generic sense to refer to distributed ledger technology. Blockchain possesses various characteristics that are transformative. It is a highly secure technology that ensures immediate transparency across the network or authorized nodes. What I see is what you see. Data added to the ledger is virtually immutable and is time stamped, making it possible to trace the sequence of transactions – for example, along the supply chain. The Economist called it the “Trust machine” because it allows participants with no particular trust in each other to collaborate without the need to rely on a trusted third party. This is very interesting in the case of international trade because trade operations involve dozens of actors who do not necessarily know or trust each other – yet need to work together to process transactions. Another critical feature of blockchain is the fact that it prevents double-spending. A key problem of digitalization is that, for example, you can create numerous copies of the same document. With blockchain you cannot, which is particularly important in the case of documents of titles such as bills of lading, which prove ownership of products and play a critical role in international trade. According to a survey of some 200 actors in the field that I conducted last year with Trade Finance Global, the top five key benefits of blockchain in the trade area are: greater transparency between all the parties, gains in speed and efficiency, real-time overview of transactions, cost reductions, and reduced counter-party risks (see Blockchain and DLT in Trade: A Reality Check, December 2019).
Broadly speaking, one can say that there are two main categories of blockchain applications in international trade. The first category are aimed at enhancing the transparency and visibility of how goods are processed. There are multiple projects that leverage blockchain to track products along the supply chain with various purposes: to build consumers’ trust about the origin of the product or its quality, to fight counterfeits, or to track tainted products.
If you buy a chicken in a supermarket, there is only very limited information provided on the packaging. Several big retailers are now using blockchain to track products from farm to shelf. For example, by scanning a QR code on the package, consumers can have access to the whole history of the product, from where the chicken was raised to which company processed it and when it arrived in the supermarket to be shelved. Depending on what is traced, you could also have information on the environmental and social impacts of each business process. You could check whether the fish you buy has been sustainably sourced and is slavery-free, whether the small farmer that grew the mango you see in the supermarket was paid a fair price, whether the pullover you like in the window of your favorite store is made of authentic alpaca fleece, whether the luxury bag you want to buy is not a counterfeit, or whether that precious ring with a diamond you want to offer to your fiancée has been sourced ethically and does not come from a conflict zone. Various luxury brands now embed small chips in their products to prove the authenticity of the goods and help fight counterfeit. This can also help customs officers to provide prima facie evidence of infringement. A brand owner using blockchain technology to record the history of its products could, for example, inform customs and enforcement agencies that its products include a crypto-embedded tag linked to the blockchain that proves its origin. The absence of a tag or an incorrect tag would then make it easy for enforcement officers to detect counterfeits.
Finally, following the various scandals that have shaken the food industry in recent years, most major food and retail companies have turned to blockchain to enhance the transparency of the food supply chain, but also to enable them to quickly track tainted products and help restore trust in the quality of the food we eat.
The second category of applications are projects aimed at digitalizing trade transactions. I already referred to bills of lading, which are critical documents in international trade. Because blockchain solves the double-spending problem, it makes digitalization of such documents truly feasible. There are numerous companies looking into blockchain for the digitalization of trade documents. Wave, Bolero, EssDocs, CargoX, eCom and Enigio are some of the companies active in this field. Beyond the digitalization of trade documents themselves, blockchain is also being used to digitalize transaction processes. Various projects aim at digitalizing trade finance processes, in particular letters of credit, which are very paper heavy.
In the study I mentioned above, we tried to map the various blockchain projects in the trade and trade finance space in a periodic table. If you look at it, you’ll see that there are quite a few projects out there. We also tried to assess the level of maturity of these different projects. While there have been thousands of proofs of concepts, live deployments have been relatively slow to come. We find that the average level of maturity is 2.3 on a scale of 5, which means that most projects are between the pilot phase and entering into production. So it’s still early stages. However, the situation is evolving rapidly. Since we published our periodic table in December last year, new projects have emerged and others have changed names. We’re now working on an update that should be published after the summer break. Stay tuned!
What are the biggest challenges we face to applying blockchain technologies in international trade?
The first thing to note is that blockchain is no panacea. It can’t and won’t solve all the problems we face in international trade, and what’s more, applying blockchain is not easy. Beyond the individual challenges that everyone wishing to use this technology faces (which distributed ledger technology to use, which governance system to put in place, etc.), there are several challenges that need to be addressed in a coordinated manner for the technology to have a truly transformative impact on international trade.
The first challenge is the so-called digital island problem. Many trade-related blockchain projects bring various actors together within consortia to improve the efficiency of trade processes. The creation of these consortia is a positive step forward, but the problem is that these projects operate in silo. Not only do they often use different technologies, creating a problem of interoperability at a technical level, but they also follow their own approaches in terms of processes, governance, etc. The problem is that an international shipment touches upon various ledgers, from provenance to logistics, trade finance, etc. If we want to truly remove frictions from international trade, some degree of standardization is needed to ensure interoperability between these different platforms at the technical level, but also at the application level, i.e. in terms of governance, data models and processes.
Another big challenge to be addressed relates to regulation. If national legislation does not recognize e-signatures and e-documents, for example, trade digitalization will never become a reality. Unfortunately, there is still a long way to go in that respect. The applicable liability framework may also need to be defined or redefined in certain cases. If a smart contract fails to work as expected, which party is liable? In the case of customs clearance, who would be considered the declarant if each participant in a blockchain can write to the blockchain? These issues need to be clarified to allow the technology to be deployed on a large scale. Finally, issues related to data privacy (compliance with GDPR) need to be considered.
Lastly, for blockchain to truly remove frictions from international trade, a global digital identity framework for businesses and governments needs to be put in place. The current system where everyone manages multiple digital identities is inefficient and costly.
Could this new and disruptive technology increase inequality between advanced and developing economies?
The rise of new technologies can be an opportunity for developing countries to leapfrog. The success of the mobile company M-Pesa in Kenya is a case in point. The same is true for blockchain. In fact, a number of projects have emerged in developing countries. However, like any digital technology, blockchain can only be used if the adequate IT infrastructure is in place and if electricity if available. Unfortunately, the digital divide remains a reality, not only in terms of access, but also in terms of bandwidth capacity and IT skills. If nothing is done to address these issues, inequality is likely to continue to grow. This means the deployment of technologies like blockchain could exacerbate disparities by de facto cutting out those that do not have the technical capacity to leverage these technologies and reap their benefits.
Due to COVID-19, the global economy is in recession and global trade and investment flows are significantly declining. How do you see the effects of the pandemic: is it pushing us towards quicker use of blockchain and other disruptive technologies?
The current crisis has clearly accelerated the move towards digitalization. With millions of people forced to stay at home, many businesses have gone digital, including banks involved in trade finance. A recent ICC study has shown that many banks have been taking their own measures to relax internal rules on original trade documentation to help combat the hurdles introduced by the pandemic, including lack of staff, inability to print and delays in or inability to deliver. They’ve expanded existing digital channels, the use of e-documents and e-signatures, and put in place new business processes and controls. Even though some of these measures are likely to be revisited once the pandemic is over, it has shown that we can go digital and is likely to accelerate the move to digitalization.
The COVID-19 pandemic has also shown the value of blockchain. Many blockchain projects have been developed to address challenges resulting from the crisis. The WHO, for example, identified blockchain as the technology of choice to build a platform (MiPasa) to enable early detection of COVID-19 carriers and infection hotspots. Blockchain is also being used to track and manage donations to China’s Red Cross, and for e-procurement for sourcing of necessary healthcare items.
When it comes to trade, the current pandemic has exposed inefficiencies in sourcing critical supplies such as ventilators and personal protective equipment, and has underscored the need for businesses and governments to improve the integrity and provenance of pharmaceutical products and medical supplies. Counterfeit scandals have highlighted the vulnerability of the medical device supply chain and the risk borne by patients. In March, US authorities seized more than 80 million counterfeit or faulty masks and 370,000 defective or fake disinfectants and other anti-coronavirus products.
What the current crisis has shown is that tracking is vital. And blockchain offers an interesting solution. Why? Because blockchain-based systems provide an open, tamper-proof record of transactions and allow for transparency across the entire supply chain. As noted earlier, blockchain allows anyone to easily identify the source of transgressions or to verify the authenticity of a product. So blockchain could help hospitals and healthcare organizations to trace products along supply chains and ensure that they are authentic and certified according to international standards. It could help detect signs of tampering or inadequate handling. Swiss hospitals, for example, have devised a blockchain system to track medical device routes. All transaction steps are stored in the blockchain.
I believe that the current crisis will accelerate the move towards digitalization and the more widespread use of blockchain. In fact, a recent survey by Trade Finance Global found that 89% of practitioners surveyed within the receivables and factoring industries see an increase in the usefulness of blockchain because of the COVID-19 outbreak. But almost a third of respondents also note that legal validity of documents and common standards are essential.
At the end of last year, the WTO published a report and hosted a two-day forum about the potential application of blockchain in global trade. Trade finance, insurance and supply chain digitalization are among the many areas where blockchain could revolutionize trade. Do you see it as a revolution? What were your main takeaways from the report and forum?
The report and the forum showed that blockchain holds enormous potential to transform international trade, but it is more an evolution that a revolution. In the study I co-authored last year, we found, as I noted above, that the average level of maturity of blockchain projects in trade and trade finance is 2.3 on a scale of 5. In other words, most projects have not yet entered into production or are only about to do so. We’re still far from wide scale adoption. Garter notes in a study I quoted in my 2018 publication ‘’Can Blockchain Revolutionize International Trade?’, that we are still in a phase of “irrational exuberance, few high-profile successes”. They predict that it is only towards the end of the current decade that the technology will generate “global, large-scale economic value”. Both the report I published at the end of last year, which was based on a survey of more than 200 actors in the field, and the Global Trade and Blockchain Forum we organized at the WTO, showed the importance of urgently addressing interoperability and legal issues to support the large scale deployment of blockchain. Discussions at the Global Trade and Blockchain Forum also highlighted the need for dialogue between the different stakeholders involved in international trade, and for active awareness raising and capacity building. I hope that this interview will contribute to raising awareness about the relevance of blockchain for international trade, and actions that should be taken to allow this technology to make trade more efficient and inclusive.
Interviewed by Suddha Chakravartti, Editor-in-Chief at ONResearch, on June 4th, 2020.