Technology can come in a variety of tools, applications, and processes to enhance our everyday lives. Throughout generations, advancements in technology have changed our daily lives, most for the time for the better. Technology can truly be transformational. In our next series of articles, we will explore how technology is impacting global trade, starting with blockchain.
Blockchain has been quite a buzzword over the past couple of years, combining data encryption, mathematics, and transparency to transactions globally. It is likely to change global trade for many generations to come. For a great summary of what blockchain is, see our previously posted article ‘Technology & the Changing Global Landscape: What is Blockchain?’. There is also a video on ‘How Does Blockchain Work by Simply Explained’.
As a breif refersher of Blockchain, it is a system that stores a series of information on an open ledger where transactions occur. When the movement of money happens, the account, to some degree, is visible to the world on the open ledger, and a record is created with the details of that transaction. Because the ledger is visible, it serves as a verifiable check and balance that the transaction has the money available to be finalized. The transaction is then linked or referenced to proceeding transactions and any transactions after it as a block of information. With each connecting block of information, the data is stored in a consecutive way that is highly encrypted and indefinitely linked to the previous and proceeding blocks of information. This is how blockchain gets its name; it is a series of blocks of information chained together in one system.
Here is an update on how blockchain has progressed since our last article and how it specifically impacts global trade. Reduced costs, increased transparency, and security are some of the primary benefits of using blockchain, says the World Trade Organization (WTO). Hosting entire conferences to raise awareness and adoption of digital technologies (including blockchain), the WTO believes that this technology can provide leaps forward in how transactions are handled globally (Organization, World Trade, 2018).
Information transfer, transaction costs, and customs verification/certification for the movement of goods are all eased with the transparency of blockchain technology. All of these benefits are expected to grow global trade by 31-34% over the next 15 years, says IBM (Sangha, Pureswaran, & Soman, For Global Trade to see Blockchain’s Benefits, Trusted Data Needs to be Shared Across Interconnected Networks in Digital Marketplaces., 2021). With that kind of expectation for the future, some serious changes are afoot with how transactions will evolve.
The emerging organizations utilizing blockchain can be split into three groups, according to Shangha, Pureswaran, and Soman. Co-created platform companies make up 51% of users which build networks and offer services to utilize blockchain technology. Co-created platforms use blockchain tech to incorporate additional information and details to accompany the blockchain transaction, such as tracing apps for a particular good for consumers. Companies seeking efficiency make up 31% of users. This category includes companies like Wal-Mart that see the cost-saving impacts and have shifted to using these networks. Companies that offer more than efficiency and add-on services have integrated blockchain, and other similar technologies make up 18% of users. These companies see long-term value in network integration for the entire global trading system from good creation, payment, movement, and arrival to the consumer.
One of the primary goals of blockchain is to reduce costs. Transactions costs are significantly decreased when using blockchain because traditional banks and payment systems are circumvented. There is less reliance on traditional banking as a form of legitimacy because blockchain technology allows for the open ledger as a verifiable way to purchase goods. In the future, we may even see that the traditional payment systems will need to reduce their costs to remain competitive. Mitigating risk for companies is also a benefit to blockchain users. With more transaction transparency, buyers and sellers can have better assurances of payment processing.
Blockchain has a strong potential to increase access to funds and create more efficiency for value chains, particularly for perishable products. FairFood says that “Blockchain can ease access to supply chain finance for smallholder farmers and other chain actors, can enable direct payments to actors in the supply chain and can reduce transaction costs of money transfer to LMICs” (Low and Middle-Income Countries) (Fair Food, 2019). Administrative costs and time in moving and validating paperwork for goods to be transferred can be reduced with a decentralized ledger. There will also be a clear chain of origin to ensure that moving goods through customs and across borders can go more smoothly, reducing time and effort on ensuring that documents are in order.
Blockchain, if integrated globally, could ease economic barriers to trade by improving visibility on tariffs and quotas from a government and data tracking standpoint. With these digital technologies, tariffs and quotas can be more easily tracked and traced throughout the entire process, and the reporting will become more transparent for all parties involved with one centralized data set.
Limitations for blockchain rest on scalability and adoption. Blockchain as a system will work best if embraced by the vast majority of trade parties to reduce friction across the board. If processing methods change throughout a trade deal, the benefits are lost from switching methods.
When considering financing outside of traditional banks, many small businesses can find blockchain attractive as assets are more transparent, and a relationship/history with the banking institution is not needed. Each exchange is verifiable on the decentralized ledger, which greatly reduces payment risks. Another limitation of blockchain is the volatility of crypto-currency (on which many blockchain transactions are based) which can scare off many new users and may inhibit initial larger-scale adoption (Liao, 2021).
Whole networks, not just individual companies, are needed to see a return on investments with blockchain technologies. The structure needs to work as a system of fully integrated steps chained together to create an information flow that allows for more trust. Doing business globally requires a vast amount of trust, which is how financial institutions have become an integral part of the trade process. (Sangha, Pureswaran, & Soman, Advancing Global Trade With Blockchain, 2020). Building trust has been difficult, but eventually, as blockchain gains adoption, the system itself will be the network of trust, with accountability and verifiability built-in with the transparent ledger. COVID-19 has slowed many processes globally, but the increased awareness of the need for integrated digital technologies in global trade is not one of them. The pandemic has amplified the need for such systems to keep records and maintain value-chains globally.
With interconnected trade, many barriers are being reduced, from cost, trust, and government by using blockchain technology, and it is anticipated by many in the trade industry to be transformational. Adoption and trust remain key factors to the success of blockchain technology. Time will continue to tell if these types of technological innovations will impact trade long-term.
Fair Food. (2019, May 29). Report: the potential of blockchain for agri-food. Retrieved from FairFood: https://fairfood.nl/en/resources/report-the-potential-of-blockchain-for-agri-food/?gclid=Cj0KCQjwub-HBhCyARIsAPctr7xm3le2_Ug4Sk4qbpjS02dMu7oLcVVtuVazWuq51vq0dfKe2Wl6vAMaAlzcEALw_wcB
Liao, R. (2021, July 19). How Decentralized Finance Will Transform Business Financial Services – Especially for SMEs. Retrieved from World Economic Forum: https://www.weforum.org/agenda/2021/07/decentralized-finance-transaction-banking-smes/
Organization, World Trade. (2018). World Trade Report 2018. Retrieved from World Trade Organization: https://iopscience.iop.org/article/10.1088/1755-1315/421/2/022051/pdf
Sangha, P., Pureswaran, V., & Soman, S. (2020, May). Advancing Global Trade With Blockchain. Retrieved from IBM: https://www.ibm.com/downloads/cas/WVDE0MXG
Sangha, P., Pureswaran, V., & Soman, S. (2021). For Global Trade to see Blockchain’s Benefits, Trusted Data Needs to be Shared Across Interconnected Networks in Digital Marketplaces. Retrieved from IBM: https://www.ibm.com/thought-leadership/institute-business-value/report/blockchain-global-trade