Ep. 113 – World Trade Organisation – Can blockchain revolutionise international trade?

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Emmanuelle Ganne is the Senior Analyst at the World Trade Organisations’ Economic Research Department. She is an international trade expert with over 15 years of experience in international trade, trade policy, global governance, and diplomacy. In this podcast we discuss whether or not blockchain can revolutionize international trade.

via GIPHY

Her blockchain adventure started at the WTO in 2017 and it was ‘love at first sight”. Because her direct colleagues at the WTO didn’t quite understand the technology and its transformational opportunities for international trade, she decided to author the book “Can blockchain revolutionise international trade?“. The book tried to build a bridge between the private sector and the IT community on the one hand and trade officials on the other.

Emmanuelle’s journey over the last two or three years has been to help people understand this unique technology and to create an enabling environment that allows it to be deployed on a large scale to make a difference for international trade.

 

What is blockchain?

 

Emmanuelle took the interesting approach of defining blockchain from the perspective of how she explained it to her teenage niece. At that time her niece’s school had a Pokémon craze going on. Every day, she would bring to school a big box of Pokémon cards that she would trade with her friends.

To explain blockchain Emmanuelle, asked her niece to try and imagine if she had an app on her mobile that would store digital twins of all of her Pokémon cards. Having such an app meant she wouldn’t need to bring her big box of Pokémon cards to school. She could digitally trade them as each card has its own unique digital twin like a fingerprint of that paper card.

Normally you can make copies of digital documents very easily but with blockchain you cannot. The mobile app can thus also allow her niece to trace the history of the card including which one of her friends previously owned that card.

Blockchain is like this mobile app. It’s like a giant repository of digital records stored in a specific order that ensures transparency and is highly secure as it also provides the guarantee that the information hasn’t been tampered with. This is achieved because everyone has a copy of the transactions. What you see is what everyone sees. These factors combined provides an environment of trust which means Emmanuelle’s niece can trade with not just her friends but with other individuals knowing that the digital twins of the cards aren’t fake and that all transactions are real and recorded.

Emmanuelle’s explanation of blockchain has some similarities to how Bettina Warburg explains what is blockchain to a 5 year old, a teen, a college student, a graduate student and an expert.

 

Can blockchain revolutionise international trade?

In November 2018, Emmanuelle published a comprehensive report entitled “Can Blockchain revolutionize international trade?” and then a year later in November 2019 she published the report “Blockchain & DLT in Trade – A Reality Check”. Whilst both of these reports are WTO publications, Emmanuelle clarifies that the opinions expressed in these publications are hers and are not meant to represent the opinions of the WTO and its members.

Blockchain is a technology that presents a unique set of features that make it truly interesting to facilitate trade in terms of:

  • Traceability of transactions
  • Removing the need for trusted third parties
  • Preventing double spending

Recorded data on the ledger is virtually immutable and its timestamps enhances the transparency of supply chain and traceability of transactions. For example supermarket shoppers can scan the QR code of fresh tuna to trace if it was sustainably sourced and slave labour free. It can be used to check if the small farmer that grew the cocoa beans of chocolate bars was paid a fair price or if the luxury bag being purchased wasn’t a counterfeit.

In addition to providing traceability of products, blockchain can also remove frictions from international trade by facilitating trade transactions. Blockchain allows participants who don’t necessarily trust each other to collaborate without the need to rely on a trusted third party, this is why The Economist, call it the trust machine. This is particularly important in international trade as it involves hundreds of actors who don’t necessarily know or trust each other but have to work together to process transactions.

Another important characteristic of blockchain is that it prevents double spending. As previously mentioned a problem of digitalisation is that it enables the creation of numerous copies of the same document. With blockchain that isn’t possible.

This is particularly important in the case of documents of titles that are used in international trade such as the bill of lading which proves ownership of products. This isn’t a document that  should be copied several times. Blockchain technology removes the risk of that double spending and when combined with the above other features it can make true digitalization of trade transactions possible.

Blockchain however is only a tool which for it to work to its full potential needs an enabling regulatory environment that recognises e-signatures and e-documents. It needs to address the interoperability issues to avoid the digital island problem of numerous platforms that don’t talk to each other.

 

Challenges in international trade – labour and paper intensive

“In 2014, Maersk followed a refrigerated container filled with roses and avocados from Kenya to the Netherlands. The company found that almost 30 people and organizations were involved in processing the box on its journey to Europe. The shipment took about 34 days to get from the farm to the retailers, including 10 days waiting for documents to be processed. One of the critical documents missing, only to be found later amid a pile of paper.” Source: Bloomberg – Kyunghee Park

International trade remains very labour and paper intensive. Four billion paper documents are generated each year as a result of international trade. The industry is trying to address that by looking at a number of technologies such as blockchain. There have been a number of PoCs (proofs of concepts) and some like Komgo which are already in production is digitising commodity trade finance.

 

Source: “Blockchain & DLT in Trade – A Reality Check”.

 

Most projects are still in their early stages. In her report “Blockchain & DLT in Trade – A Reality Check” co-authored with Trade Finance Global, she tried to map the different projects out there in trade and trade finance by producing a “Periodic Table of DLT Projects”. On a scale of 0 to 5, the average level of maturity was 2.3 showing that most projects are in between the pilot phase and entering production.

Interestingly the current COVID-19 pandemic has shown that it is possible to go digital with millions of people forced to work from home.

A recent ICC study has shown that many banks were taking their own measures to relax internal rules on original trade documentation to help combat the hurdles introduced by the pandemic. They have expanded the use of e-documents, e-signatures and they have put in place new business processes and controls. For Emmanuelle the pandemic has shown that players within international trade can go digital and it has in her view accelerated the move to digitalisation.

A recent Trade Finance Global survey demonstrated that 89% of practitioners surveyed within the receivables and factoring industries see an increase in the usefulness of blockchain because of the current outbreak.

Additionally, two thirds of them shared that the legal validity of documents and common standard are a must have.

 

Co-ordinating blockchain efforts amongst institutions

Insureblocks has had the pleasure of interviewing Nadia Hewett from the World Economic Forum and Peteris Zilgalvis from the European Commission. It is becoming increasingly clear that there is a certain amount of overlap between the work being done between the WEF, European Commission, WTO and the OECD.

Emmanuelle recognises that and whilst there are exchanges of ideas and work being done on joint projects there isn’t a goverance structure that brings them all together for inter-agency cooperation. There is a need for a multi stakeholder dialogue to address the current challenges and allow this technology to work to its full potential and to be deployed on a large scale.

The ICC has launched the ICC Digital Trade Standards Initiative (DSI) which will build on the work done by numerous other likeminded initiatives which aim to digitise trade, notably through the development of open trade and technology standards to promote interoperability.

 

Four process of international trade where blockchain can help

Source: “Can Blockchain revolutionize international trade?”

 

There are four processes in international trade where blockchain can help:

  • Commercial transactions
  • Trade financing
  • Transport
  • Official control measures

Trade finance, transport and official control measures are the key ones that impact the WTO. International trade transactions involves various roles:

  • Transportation logistics – physical flow of goods from point A to point B
  • Trade finance – financial flow of money from the buyer to the seller
  • Documents – flow of documents between parties to complete a transaction such as certificates of origin, phytosanitary certificate and bill of lading to name a few

In all of these process you have a large number of actors involved – importer, exporter, banks for trade finance, freight forwarder, ocean carriers, air transportation services, custom authorities and a number of other authorities for the issuance of certificates for example.

The reason blockchain is interesting is because it allows multiple players within and across different process to interact in near real time in a highly secure and trusted environment. It facilitates collaboration and the automation of processes. You can automate the transfer of documents and with the use of smart contracts you can automate payments under a trade finance transaction.

An example on how blockchain can be used is with the issuance and storage of import and export permits on the blockchain. This helps reduce the risk of fraud, avoid the permits being lost and with the use of smart contracts expired import and export permits can be automatically be rendered as invalid.

 

Letters of credit vs open accounts

Boston Consulting Group found that more than 20 players are part of a single trade finance transaction creating 5,000 data field interactions with only 1% of these creating real value. The rest of the data is either ignored or transmitted to the next party.

Letters of credit and open accounts are the two main tools for financing trade. A letter of credit, also known as a documentary credit or letter of undertaking is a payment mechanism that is very often used in international trade. It’s a letter from a bank, guaranteeing that a buyer’s payment to a seller would be received on time and for the correct amount if the buyer is unable to make payment on the purchase then the bank would be required to cover the full amount or remaining amount of the purchase price.

It’s often used in Asia but it’s a very paper and labour-intensive process with burdensome procedures. Blockchain can facilitate interaction between the different actors and reduce paperwork.

There have been an interesting number of pilots such as Contour, previously known as Voltron, which have tackled those issues with blockchain technology. What these pilots have demonstrated is that you can reduce the process related to letters of credit from typically five to ten days to less than 24 hours.

An open account transaction is a sale where the goods are shipped and delivered before payment is due. This transaction is advantageous for the importer in terms of cash flow and costs but it carries a high risk for the exporter. Blockchain can help to mitigate the risk that the exporter faces.

we-trade-introduction from we.trade on Vimeo.

There are a number of blockchain platforms that offer open accounts transactions such as We.Trade. We.trade uses smart contracts to provide a guarantee of payment and automatic settlement when the pre-determined conditions, agreed in a contract between the parties, are met. So here blockchain is used more in terms of mitigation of the risk involved in addition to facilitating the entire process.

Blockchain is also increasingly being used in supply chain finance. It’s a financing solution that is initiated by the ordering party, usually a large international party in order to help its suppliers to finance its receivables more easily and at a lower interest rate that they would normally be offered. Blockchain provides greater transparency into the supply chain because all transactions can be monitored for all parties on the chain.

 

Can blockchain play in a role in reducing the $1.5 trillion gap in trade finance?

The WTO estimates between 80% and 90% of global trade relies on trade finance, yet there is a $1.5 trillion gap between the market demand and supply for trade finance.  KYC and AML requirements remain the most cited barrier, with high transaction fees, and low credit ratings rounding out the top three. Small and Medium-sized Enterprises (SMEs) remain disproportionately affected by these and other barriers, experiencing a 45% rejection rate on proposals, much larger than the 17% seen by multinational organisations.

Emmanuelle reminds us that there are many reasons for this $1.5 trillion gap in trade finance. One of them is the difficulty for SMEs to get finance. Blockchain is interesting because it allows for companies to have an identity and to have an immutable evidence of time stamped transactions of how much business they’ve done. It allows for these digital records to be easily accessed and checked. From that respect it can facilitate trade finance.

Blockchain can ease some of the constraints faced by SMEs but it won’t be the panacea to address the $1.5 trillion gap in trade finance on its own. It is one element amongst many others.

 

The Periodic Table of DLT

Source – Trade Finance Global

 

As mentioned earlier on in this post Emmanuelle also produced, in November 2019, a report entitled “Blockchain & DLT in Trade – A Reality Check”, co-authored with Trade Finance Global, in this report she published a  “Periodic Table of DLT Projects” where on a scale of 0 to 5, the average level of maturity was 2.3 showing that most projects are in between the pilot phase and entering production.

She is hoping to update the periodic table in Q3 of 2020 and she believes that by then the average level of maturity will be above 2.3. We.trade was already mentioned as was Geneva based, Komgo, that was launched in December 2018 which focuses on international commodities trading like oil and gas.

DLT Ledgers which wasn’t actually mentioned in the period table is a Singapore start-up that has already processed $3.3 billion in trade finance.

Many other initiative such as Marco Polo and Contour have successfully launched numerous Proof of Concepts and are now entering production. You have many different speeds of developments of blockchain initiatives in trade finance. What explains this difference is that start-ups are more agile and can move faster than consortiums.

Contour for example was previously known as Voltron which was a consortium of banks which was run by committee that made decision making difficult and time consuming. In January 2020, Voltron was re-invented as a separate legal entity called Contour. It had a change in governance structure, a CEO and is now able to provide a full commercial service. This governance structure explains to a large extent the differences in maturity that you see with these different projects.

Emmanuelle believes that in the coming 6 – 12 months the landscape will change quite significantly.

 

Regulators & regulatory sandboxes

Emmanuelle recognises that it can be a long journey to fully comprehend what is blockchain and its potential. In her opinion there has been a big change over the last years and many more people now understand what is blockchain, what it can do and the challenges that come with it. More work still needs to be done to educate the regulators.

Regulatory sandboxes are regulatory tools that are used by policy makers to stimulate business innovation. They enable the creation of an intimate environment whereby businesses can draw on the expertise and advice of a regulator and to test their products under less stringent regulatory requirements resulting in lower compliance costs. This is very beneficial in the case of a technology like blockchain that is still very new and where there are no regulatory framework.

From the regulator standpoint the regulatory sandboxes allows the regulators to familiarise themselves with the technology and the various regulatory challenges that it raises or that may need to be addressed.

For Emmanuelle these regulatory sandboxes are a win win as they stimulate innovation, test in a way the adequacy of the regulatory regime, identify adjustments that need to be made, and they help regulators to familiarize themselves with the technology.

 

Could blockchain have helped to limit the economic impact of COVID-19

Emmanuelle points out that blockchain is not a magical wand. Trade plummeted because of the lockdown and many businesses had to stop their activities. Blockchain could not have changed this state of affairs.

However blockchain is an interesting tool to address some supply chain inefficiencies that the current pandemic has exposed. The current crisis has revealed structural inadequacies in our supply chains in the sourcing of some critical supplies such as ventilators and personal protective equipment. It has underscored the need for businesses and governments to improve the integrity and provenance of pharmaceutical products and for supply chains to be more agile.

There has been scandals around millions of counterfeit masks being imported. As Emmanuelle recently expressed in a presentation, the current pandemic has shown that tracking is vital and this is where blockchain can help.

Blockchain based systems provide an open tamper proof record of transactions that allow for transparency across the entire supply chain. It allows to easily identify the source of transgressions and to fight counterfeits. It could help hospitals and healthcare organisations to trace products along the supply chain and ensure that they are certified according to international standards.

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