Blockchain for Trade: the next gold standard or the fool’s gold?
By: Lucian Cernat
Subjects: Digital Economy WTO and Globalization
In the movie “Gold”, a small, struggling mining entrepreneur looking for gold goes from bankruptcy to a 6 billion dollar mining empire, and then bankruptcy again. Bear with me, there is a link between the story of the biggest corporate scandal in Canadian history and our story, beyond the fact that blockchain-based bitcoin requires lots of “miners” to keep the system up and running. The key detail connecting all these elements and bringing trade into the picture is fake laboratory certificates. The gold reserves underpinning that Canadian mining company valued at 6 billion dollars on the stock market existed only on paper, the wrong paper issued by a lab in a foreign country that did not detect that gold was added fraudulently to the mining samples (although ways that would have allowed fraud detection existed).
In reality, gold is also a great example to illustrate the complexity of global supply chains (GVCs) and the importance of trust between various players. Consider the journey that a gold nugget must take along its supply chain from the mine all the way to you, the end consumer, embedded deeply in your electronic products, for instance. Gold moves along several industries and countries, each having legal, regulatory, financial, manufacturing requirements and compliance standards. Unlike our movie, in the real world global supply chains require complex interactions between multiple players (private companies, government agencies, third party independent labs, etc.).
While invoices along GVCs are settled in euros or in dollars, the real underlying currency of a well-functioning global supply chain is trust. Therefore, the blockchain technology, whose middle name is “trust”, offers great potential for international trade. Each player in the system has already tried to put in place its own due diligence and control systems. However, individually, they are all vulnerable to hacking, fraud, errors and misinterpretations. Like in the movie, one geologist can tamper with the lab samples and mislead tens of thousands of investors and millions of consumers worldwide.
The hope is that with blockchain technology, there is no scope for such deceiving practices. Decentralisation, multiple authentication layers and the immutability of blockchain records, guarantee complete trust for each producer involved in a supply chain. Anyone along the distribution chain can see how, when and where a particular product has been brought to the market, check the underlying data guaranteeing the validity of conformity certificates, and see who was involved every step of the way. Enthused by this potential, numerous blockchain initiatives, mostly private, have emerged worldwide (e.g. the IBM-Maersk TradeLens, NTT-led TradeWaltz, or the we.trade platform, to name just a few). These initiatives are at various stages of development, testing the blockchain potential for various aspects of international trade facilitation.
However, for a blockchain solution to work in the area of international trade, it requires the buy-in and expertise of public agencies involved in trade policy making. Hence the need for public authorities to get involved in the design and testing of possible blockchain solutions. The European Commission, alongside other partners, has stepped in with great ambition in this area (e.g. the European Blockchain Forum). The latest addition to this portfolio of pilot projects is the #EUBlockchain4Trade, recently launched by DG TRADE in partnership with everis.
The estimated benefits from the adoption of blockchain technology are considerable. A 2018 WTO report concluded that the blockchain applications could significantly transform international trade in respect to a number of areas, such as trade finance, customs formalities, conformity assessment and certification processes, logistics, etc. For EU exporters, conformity assessment and technical barriers to trade (TBTs) is a particular area where costly procedural obstacles are most often cited: roughly 50% of all barriers encountered by EU exporters abroad were TBT-related. Many of these unnecessary barriers are not the regulatory requirements and standards themselves, but inefficient and burdensome procedures to prove compliance. The #EUBlockchain4Trade will not just be useful for the EU companies. According to the World Economic Forum, the reduction of trade costs thanks to blockchain solutions could result in more than 1 trillion dollars of new trade in the next decade.
The #EUBlockchain4Trade becomes even more important in the current context of the severe Covid-19 crisis and its double-digit, negative impact on EU trade. An EU-backed blockchain trade solution that would support all EU traders as well as their clients and suppliers worldwide would be a powerful element in the trade recovery package. Such a global public good would be most useful for the over 600 000 EU exporting SMEs, by promoting paperless trade and reducing the costs of participating in global supply chains, at a critical moment when a V-shaped recovery is needed more than ever.
Back to our movie now. Will a #EUBlockchain4Trade prevent a fake lab certificate or conformity assessment from becoming the next “black swan” with devastating implications for certain sectors or GVCs? Well, it depends. To deliver on its trade promises, blockchain technology must bring in the regulatory agencies and be combined with other emerging technologies and backed by due diligence practices in line with existing international standards. Blockchain trade solutions should be combined with other new technologies (IoT, sensors, artificial intelligence and machine learning) and be run in parallel with traditional risk assessments along all nodes of the supply chain. To paraphrase an old saying: in blockchain we trust, but let’s still verify the quality of the underlying data.
Disclaimer: The views expressed in this blog are personal and do not necessarily reflect an official position of the European Commission.
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