By: James R. Holbein, Of Counsel, Braumiller Law Group
Introduction: Blockchain is a transformative new technology, like artificial intelligence (AI), big data analytics, machine learning and Internet of Things (IoT) innovations. In the popular press there is a lot of turmoil concerning cryptocurrency, a type of blockchain-enabled investment. The volatility of cryptocurrency is well known. You can make a killing, you can lose your shirt, regulators fear it; the risk is real when investors speculate with cryptocurrency. I believe that the concerns surrounding speculation with cryptocurrency hinder the broader conversation about the base technology, blockchain. Blockchain technology has the potential to provide major efficiency and security gains for international supply chains.
Current Situation: There hasn’t been a significant technological change in international trade operations since email was introduced 30 years ago. Currently, all stakeholders in international transactions (manufacturers and producers, banks, buyers, sellers, shipping companies, customs brokers and freighter forwarders, truckers, customs administrations, and insurance providers) must have their own separate files and databases with all the documents related to a specific transaction. Typical documents filed multiple times by multiple players include the purchase order or contract, letter of credit, bill of lading, warehouse receipts, commercial invoices, payment documents, and proof of receipt. One calculation for an export of cut flowers from Africa required 200 separate communications involving 30 players such as farmers, freight forwarders, land-based transporters, customs brokers, governments, ports, and carriers to move a shipment to Europe. The systems for data tracking have no digital compatibility and use repetitive, manual, costly, inefficient, insecure, and time-consuming means. Today, mandatory requirements for digital filings for importation and exportation must be filed through “single window” electronic systems that vary by country. These many inefficiencies in the overall international supply chain process add up to increased costs for the businesses and consumers involved.
Blockchain as a Records System: The time is ripe for significant improvements in the systems used for managing supply chains. Blockchain technology is a transformative tool for managing records in a transparent and secure way. It offers every participant a complete record of every transaction with each player involved in the movement of goods from factory or farm to final delivery. Blockchain is a clear improvement over current processes because it uses end-to-end encryption to provide both security for the data and a permanent, immutable (uneditable), auditable record of every step in the movement of goods.
Trust and Identity: These blockchain features enable parties who have no trusted relationship to engage in reliable transactions without relying on intermediaries or a central authority (e.g., a government or bank). Each user on a blockchain has a secure identity and only parts of it can be viewed by other participants in the blockchain process. Not relying on a central intermediary not only reduces costs in international trade transactions, but it also opens up new avenues for collaboration among stakeholders and improves transaction efficiency by removing an extraneous step in the supply chain process.
Smart Contracts And IPR: “Smart contracts” are one of the key innovations of the Ethereum blockchain and can be used to program automated functionality into business processes built on the Ethereum blockchain. Smart contracts can automate the fulfillment of contractual obligations and prevent fraud (title to goods transfers only upon digitally verified fulfillment of conditions). Producers, manufacturers, shippers, distributors, retailers and customers rely upon the authenticity of products, trusting that a brand on the invoice is in fact that brand, not a cheaper counterfeit knock off. One of the unsung advantages of smart contracts on a blockchain is that it provides protection for intellectual property rights (IPR) by providing a complete record of the product’s documents and movements. With blockchain technology, products may be linked with non-fungible tokens at the moment of creation and those tokens serve as digital certificates of title. So, documents providing title to goods can be traced from the creation of the good until its ultimate consumption.
Marketing Benefits: Information hosted on a blockchain can provide numerous benefits to retailers and customers. Distribution of specific goods can be managed and tracked by smart contracts to provide companies with better control of IPR and distribution channels. Companies can use smart contracts to track ownership of the good, to provide better recall, warranty, and maintenance information to owners. Blockchain also enables customers to transparently see the digital record for a specific product from raw materials to final purchase.
Sensors and Blockchain: Many types of goods require special handling, such as, such as perishable agricultural commodities, chemicals, hazardous materials, etc. For shipping such materials, sensors can be embedded on shipping containers to record location, temperature, potentially other metrics. Data collected from the sensors wirelessly can be recorded on the blockchain. Buyers can confirm that the goods have received the handling required and can view in real time the status of their goods on the blockchain.
Customs Processing: Blockchain records can enable importers to provide explicit compliance information to customs authorities as to ownership, authenticity, handling, components sourcing, country of origin, and price of goods. Electronic filing allows officials to conduct risk assessments in advance and speed border clearance. Most databases now are compiled on a central hub that slows data access and increases the risks from hackers and cyber criminals. Blockchain-enabled software and services can increase speed and security of gathering and tracking relevant information.
Companies Building Blockchain for Trade: “With IBM, Maersk has created a platform poised to bring the entire trade ecosystem—liners, warehouses, freight forwarders, ports, customs, exporters, importers, and trade finance banks—to interoperate with each other on a data exchange platform running on blockchain. In this system, all players have a bird’s eye view of the entire trade transaction, access to all documents related to it, and share data and information; no entries can be changed, and all entries are updated on everyone’s screens in real time. The platform has already been piloted to ship flowers from Kenya, mandarins from California, and pineapples from Colombia to the port of Rotterdam. Each participant can also see the status of customs documents or view bills of lading and other data in real time. The data is secure, as no one party can modify, delete, or even append any one of the blocks without the consent of everyone else in the network.” (CSIS Harnessing Blockchain for American Business and Prosperity: 10 Use Cases, 10 Big Questions, 5 Solutions).
Blockchain Services Providers Emerging: Another company building blockchain processes is Covantis. Covantis is building a secure digital platform to minimize operating risks while increasing market efficiency for the entire commodities and trading and shipping industry. Covantis is currently working with a number of agricultural industry companies to manage the shipment and execution of bulk commodities such as corn and soybeans from Brazil to optimize the export trade execution process. Covantis has partnered with the market leading technology provider ConsenSys (Largest Ethereum based incubator of blockchain companies), Microsoft Azure, and Cognizant to leverage their solutions and services and deliver an innovative technology platform to transform global trade operations for agricultural commodities. Initial users of the platform include ADM, Bunge, Cargill, COFCO, Louis Dreyfus Company, and Viterra.
Summary: Blockchain technology innovates an industry that has remained technologically stagnant for over 30 years. Blockchain technology also reduces costs and improves efficiency in how international supply chains are currently operated. Not only does blockchain technology improve the existing operation of international supply chains, it also has the potential to innovate and reimagine how supply chains are operated and how stakeholders collaborate. I believe that the efficiency gains and cost reductions will lead to a significant competitive advantage for companies that adopt blockchain technology, and ultimately benefit the consumer at the end of supply chain.
Here are some resources for this topic:
Blockchain for Global Trade and Commerce – Consensys is the leading Ethereum based blockchain solutions company whose CEO, Joe Lubin, was one of the founding members of Ethereum. https://consensys.net/blockchain-use-cases/global-trade-and-commerce/. The linked article has resources on International Commodities trade, Global Trade Finance, Trade post settlement, distribution control, transparency, and verified ownership.
Harnessing Blockchain for American Business and Prosperity: 10 Use Cases, 10 Big Questions, 5 Solutions, by Principal Author Kati Suominen, with Andrew Chatzky, William Reinsch, and Jonathan Robison, November 2018. https://www.csis.org/analysis/harnessing-blockchain-american-business-and-prosperity.
Can Blockchain revolutionize international Trade? – 2018 WTO Research Paper
WTO 2021 Blockchain and Trade Forum
Blockchain & DLT in Trade: Where Do We Stand? This white paper was jointly produced by Deepesh Patel and Emmanuelle Ganne. November 2020. https://www.tradefinanceglobal.com/posts/tfg-partner-up-with-icc-and-wto-and-the-global-blockchain-forum/
Mr. Holbein gratefully acknowledges the contributions of Justin Holbein.
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