Part 2 of a 2-part series. Read Part 1.
Today, international trade includes a staggering amount of manual processing, including paper documents like bills of lading and letters of credit, spread across many disparate parties – buyers, suppliers, banks, freight forwarders, regulatory authorities, and so on. Due to the complexity of international trade, it is rare for participants to have real-time access to the relevant information. Even rarer is the ability to trust that information without question.
Ecosystem and constraints
Due to the inherent limitations of disparate processes between enterprises, there are significant opportunities for lost documents. Each link in the process is vulnerable to human error, fraud, and delay. I have seen estimates that the administrative cost of processing, securing, moving, and verifying this documentation can come close to doubling the shipment cost. Recent volatility in international trade is creating more pressures through new tariffs, financial regulations, and increased border patrols in an effort to stop human trafficking, counterfeit goods, and international terrorism. Every inspection of goods or stops along the supply chain cost time and increase prices for businesses and consumers.
Participants in international trade
Blockchain and international trade
All companies involved in international trade have been looking for new ways to streamline the trading process. Even though each of the participants in international trade has its own objectives, there is a significant overlap when it comes to simplified processing, time savings, security, and cost reduction. Blockchain offers a solution to secure the stream of information and goods in ways that we could not imagine until recently:
- Participants like buyers, suppliers, banks, freight-forwarders, and carriers as well as regulatory authorities become part of the same inter-enterprise collaboration network.
- A single source of the truth is maintained by each participant on a distributed network. There is no “master” source of the truth, and all participants have real-time access to the same information.
As an example, consider a transaction that begins with a sales order.
- The process starts, creating the first block in the chain, with date and time in its digital fingerprint and recorded on the distributed network.
- Next, the buyer requests a letter of credit from the bank, and this activity is appended as the next block with its own digital fingerprint.
- As the international trade proceeds, each step in the process creates another block in the chronological chain.
- The sequence of digital fingerprints ensures transparency and security for each step that is shared by all members.
- At the conclusion of the transaction, the end result is an immutable, single source of the truth owned by all participants.
Trust and verify
Blockchain is democratizing trust, as pointed out by Juergen Mueller, chief innovation officer at SAP: “Blockchain applies when several parties require a binding truth which cannot or should not be controlled by one authority.”
It was invented for parties who do not know or trust each other, but still require secure transactions – a role performed in the past by an intermediary. Blockchain is digitizing verified trust, eliminating the need for intermediaries along with unnecessary complexity, and reducing cost. The verified trust also supports the ever-increasing financial and regulatory requirements that are currently constraining global trade. Blockchain ensures that all participants have answers to their questions: Where are the goods? Who is transporting them? Who ordered their transport, and are the conditions of the purchasing contract adhered to?
The role of blockchain in inter-enterprise collaboration
Outlook and recommendations
Blockchain for international trade is still in its infancy; however, the reports of its use are increasing since Barclays Bank reported the first blockchain-based transaction in 2016:
- The International Chamber of Commerce (ICC) launched the Intelligent Tech & Trade Initiative (ITTI) during the WTO public forum in 2017.
- The Spanish bank BBVA successfully piloted a blockchain solution for paperless trade transactions between Europe and Latin America.
- According to Forbes, procurement networks will use blockchain to track shipments to ensure authenticity.
- In February 2018, two subcommittees of the U.S. House of Representatives held a joint hearing on the potential application of blockchain technology beyond cryptocurrency and financial technology.
To advance blockchain, several constraints have to be addressed, including local and international laws covering data protection. For instance, personal data protection laws may be in direct conflict with the tenets of blockchain. As these constraints are considered, organizations also need to address the following questions:
- What is the role of artificial intelligence (AI) in blockchain transactions? Can contracts be closed using AI?
- How will blockchain governance work, and how will disputes be resolved – for example, mismatched blockchain data between participants?
- How will blockchain output be consumed by participants? Who can leverage the information and for what purpose?
- Who is responsible for compliance with government and financial regulations: illicit trading, taxes, and requirements for individual responsibility for certain compliance risks?
- What role will regulatory agencies play in the process?
- What is the role of intermediaries like financial institutions?
The use of blockchain in international trade is rapidly increasing as companies seek to master the challenges of digitalization. All participants will experience significant changes in the way they interact with one another. They will become experts in inter-enterprise collaboration, transforming their supply chains, especially when combining the blockchain technology with artificial intelligence, driving unprecedented efficiency gains. The transformation to the intelligent enterprise will drive a new paradigm for partnership and trust based on complete transparency and a new ecosystem for commerce across all industries.
My recommendation is to start with the following next steps:
- Identify ecosystem partners with an appetite for digital transformation
- Decide what role you will play in the new ecosystem
- Employ new business models for inter-enterprise collaboration –an industry consortium or association, for example
- Engage a technology partner with industry expertise and a track record with blockchain
Read Part 1 of this series here.