Furthering the Efficiency and Security of Trade Flows with the Blockchain
Since the entry of shipping containers in the 1950’s to transports goods passing different borders, international trade has not adopted any technological advances aiding the process shipments go through. Typically, there has been little change in the way goods are transferred from one location to the other. For example, the modes of transport used in this process such as sea or land remain the same.
A critical area that can benefit from technological advances to speed up the process of global trade is the administrative and regulative pressures experienced by cross-border trade. Blockchain technology has potential to improve the organizational process including the paperwork of credit to the quality of the product, and the masses of documents trade generates as well greater security. Along with the administrative challenges lies the aspirations to eradicate human trafficking, counterfeit goods, and illegal smuggling.
Blockchains and Borders
The vice-president of blockchain solutions at IBM, Ramesh Gopinath, is collaborating with Maersk and Walmart to explore digital ledger technologies applied to trade. Gopinath said, “International trade demands a faster, more secure and more efficient way to handle the document approval workflows needed to move goods across international borders.”
Gopinath also warned of the administrative errors of moving, verifying and securing documentation which carry the threat of virtually doubling the cost of moving a shipment:
“Traditionally, supply chains have relied on the physical movement of large volumes of paper documents, leaving the window open for fraud, human error, and inadvertent delays.”
Blockchain technology is a distributed ledger that proves to be a valuable tool for streamlining costs of administration and bureaucracy. It allows transparency to all the parties involved in a transaction, where records of transactions are contained and updated in sequential blocks with encrypted data instantly thus reducing the risk of fraud.
The head of supply chain and transport industries at the World Economic Forum, Wolfgang Lehmacher said:
“With roots in financial services, digital ledger technology is making inroads into goods transport through financial instruments, such as letters of credit, and through the digitization of traditional trade and shipping documents.”
In order to understand the process and the number of documents involved in a shipment, Maersk, a Danish shipment business, explored and tracked a shipment of flowers from the Kenyan port of Mombasa to Rotterdam and found the process generated approximately 200 communications.
This cumbersome administrative workload was collated from farmers, land-based transporters, governments, freight forwarders, customs brokers, carriers, and ports. The blockchain technology developed by IBM and Maersk simplify this process by creating a template-based workflow that puts all the documents in a single document, starting with the farmer’s submission of the packing list. Therefore during each segment of the process completed, documents are recorded and visible to participants to view submissions as of when they take place.
Blockchain technology offers an immutable platform that can only be changed through an agreement amongst a group of people on the network. Gopinath said, “No one party can modify, delete or even append any record without the consensus from others on the network.”
A growing number of firms are also exploring ways to use blockchain technology to digitize the trading process. For example, during August 2015, the Singaporean government along with a group of banks created a prototype using blockchain to letter a credit where banks guarantee buyers payments. Barclays used the blockchain and completed a trade finance transaction by monitoring reefer containers from Busan to Qingdao, including each stage from shipment booking to cargo delivery. Startups such as Everledger have experimented using the technology to monitor and protect the life cycle of valuable assets such as diamonds, to verify the authenticity at each stage of the supply chain. The blockchain’s advantages of tackling fraud have the potential to be adopted in numerous industries including pharmaceuticals and electronics.
The Challenge of Modernizing Cross-Border Trade
While the blockchain has reputable advantages of streamlining and improving the security of particular processes in various industries, it also has its unique challenges such as the applications created to move blockchain data for the use public may experience the threat of being hacked. For example, a number of exchanges used for bitcoin and ether have been compromised in the past.
Mr. Lehmacher clarified this vulnerability of blockchain applications:
“While blockchain technology itself is highly resilient, blockchain applications might be vulnerable. Technical capabilities to handle very large transaction volumes remains unproven, and the costs of maintaining the protocol are high.”
To use blockchain systems, the workforces in firms need to be willing for such changes to take place and be trained to use to software. Given a company has the technological capacity it will still face challenges while trying to take a blockchain prototype to widespread usage. However, the technical advances of blockchain technology undoubtedly prove to be of benefit for cross-border trade namely via automated workflows, smart contracts and the reduction (or elimination) of the incidence of bribes and illicit activity at the borders.