One of the most tone-deaf suggestions in the Brexit proceedings so far came in August 2017, when the UK Brexit team released a long-awaited position paper setting out its proposal on how to manage its border with Ireland. It suggested that “technology-based solutions” – meaning blockchain, the technology behind cryptocurrencies such as Bitcoin – could be implemented to “make it easier to comply with customs procedures.”
The UK’s vague and misguided solution was quickly ridiculed by experts at home, as well as seasoned counterparts abroad. Although blockchain technology has now been around for ten years, it has not seen any meaningful implementation in global supply-chains, let alone within customs offices. Indeed, a “seamless and frictionless” border in compliance with fundamental customs procedures – itself a unicorn – cannot simply be coded into existence on its own. In reality, questions of capacity and time constraints mean that technological solutions are actually unworkable.
Although Brexit’s customs predicaments cannot simply be wished away via blockchain, the use of such a technology, in general, would reduce trade costs, increase transparency, safeguard against fraud, and overall expedite trade by reducing customs clearance times. While blockchain is not a technology that could replace a border, it could cut costs and streamline procedures of an already well-managed one, to the point of making them virtually “frictionless”.
However, while the financial industry and the tech industry have shown promise in their proposals for uses of blockchain, progress has been slow, and major success stories are yet to be seen. The technology comes with certain risks, and comprehensive implementation requires significant resources and expertise. Indeed, although the commitments of global tech giants are encouraging, the lacklustre regulatory response to the advent of blockchain is stifling its growth, and preventing firms and governments alike from reaping the associated benefits. Customs regimes around the globe have done little to promote the technology, and firms have consequently been slow to adopt it. This may strike some as strange, given all of its potential benefits and the ostensible ubiquity of the word.
First, What Exactly is Blockchain?
Although the technology involved in blockchain is complicated, in practice what it does is fairly simple. To visualize how it works, imagine you want to conduct a transaction with someone – exchange money for goods. When doing this in person, this is fairly easy: money and goods are exchanged physically, and a receipt is made to record the transaction. Long-distance transactions are more complicated: people transacting depend on and put their trust in an intermediary, such as a bank or a transaction system (like PayPal or Visa), to ensure that money has left one wallet and entered another. Ultimately, both participants in the transaction can record that interaction in their books, as does the intermediary through its ledger.
blockchain – otherwise known as distributed ledger technology – works differently: when two people want to transact, that transaction and its specifications are cryptographically logged into a “block” of data. Once the members of the distributed network have verified it, is added to the blockchain, creating a permanent record of the transaction. The network itself is both the medium of transaction and the means of recording it, as the actual blockchain ‘file’ belongs to all of its members, and each owns a copy of it. The result is a permanent record where each new transaction contains information about previous transactions so that it can be consulted at any time.
Additionally, its peer-to-peer system means that information can only be modified if a majority of the members of the network agree to do so, making it secure. Transactions recorded within blocks, are created, or “mined”, by dedicated individuals called “miners”, but the new information is not properly added to the blockchain until 51% of the network approves of it. In theory, this means that fraudulent changes to the blockchain would be noticed quickly, and rejected by the network. All elements of ‘trust’, which is difficult to create between parties that don’t know each other or are far apart, are thus removed from the equation. As the medium of exchange, blockchain is theoretically as secure a physically exchanging goods for currency, removing the need for settlement teams of any kind.
Furthermore, it is important to note that a blockchain can hold much more than just transaction information, and indeed can also be used to store and transact files, and be configured to execute certain tasks based on certain conditions. This is an important element of blockchain called “smart contracts”, which can be set to automatically execute tasks like transfer payments or send a document triggered by a certain date or the reception of a particular document.