Digitising world trade through blockchain
26 March 2024
Taken from the published LinkedIn pulse article.
Context
Despite the last century’s advancements in transport network infrastructure significantly reducing the time of physically moving goods across the globe, driving the value of world trade in goods to an estimated 24 trillion USD per year, the model of world trade remains dependent on an archaic, outdated system of paper documentation.
Across the supply chains and the range of stakeholders involved in getting goods from producers to consumers, the business of moving goods across borders currently produces and relies upon billions of paper documents each year. This remains an expensive, inefficient, and cumbersome process.
We explore the market and how moving away from manual paper documentation to ‘digitised trade’ will be the next step in revolutionising global trade.
Current Situation
The reliance of world trade upon paper documentation dates to the historic legal necessity for ‘transferable documents’ (which facilitate the request for delivery of goods and payments of money) to be in paper form. This legal obstacle has meant that despite some existing trade participants looking to digitise core processes and existing databases, these are minor tweaks to traditional processes that have not resolved the underlying objective of harmonising a clear, digital trade channel.
The current paper-based system is archaic, inefficient, and not fitting with the pace of change in the supply chain and global trade transport infrastructure over the last century. The United Nations Commission on International Trade Law has acknowledged the inefficiencies of the current system for a number of years, and moved to address these issues through the publication of the Model Law Electronic Transferable Records (MLETR) in 2017 – an adoptable model law to allow for electronic trade documents within a nations legal framework, and address the historical legal obstacle preventing the notion of possession in electronic documentation.
The MLETR was an important step in providing a legislative framework for countries to adopt and move towards digitised trade. Late last year, however, saw possibly the most significant step in making the move towards global digitised trade a reality through the passage of the Electronic Trade Documents Act 2023 in the UK, aligning English Law to the MLETR.
The passage of the ETDA on 20th July 2023 allows for the legal recognition of trade documents such as bills of lading and bills of exchange in electronic form under English Law, enabling a digital trade document to be recognised in the same way as its paper equivalent. This legislative change to English Law was significant, due to the precedence of English Law in governing international contracts and cross-border transactions globally, including in many cases where the parties have no connection to the UK. The International Chamber of Commerce (ICC) UK estimates that the ETDA theoretically enables 80% of bills of lading and 60% of global trade finance to transact digitally.
The business case for a shift from paper documentation to digitised trade is particularly enticing to the world trade industry. The ICC UK estimates that moving away from paper documentation to digitised equivalents could reap significant benefits for trade in goods, including a 15% increase in profitability, an 80% reduction in border wait times, a 30% reduction in operational costs, an 18% reduction in shipping costs, a 15-20% reduction in overall costs, and a 15% increase in on-time delivery rates.
Crucially, however, the ETDA is technologically agnostic and does not specify the technology to be used to facilitate digital trade documents. Of course, industry and institutions alike need to see the tangible benefits of using digital trade documents (as well as the reliability of the technology enabling it) before widespread adoption can be expected.
The Law Commission, a significant body in the UK for reviewing and recommending reform of UK legislation, recommends that the technology underpinning electronic trade documents should be considered capable of possession if they meet specific criteria aligned with the characteristics of paper documents. These include:
Exclusive control: “In order to prevent double spending, only one person (or persons acting jointly) must be able to exercise control of the document in electronic form at any one time.”
Complete transfer: “The transferor should no longer be able to exercise control of the document when it is transferred.”
Reliability: “The underlying system whereby the document meets the criteria must be reliable. We further recommend that the Bill should contain a list of factors which may be taken into account when assessing whether a system is reliable.”
Blockchain Benefits
In the context of these criteria, the distinct features of blockchain and digital ledger technology offer significant advantages for facilitating digital trade documents.
Addressing the benefits of blockchain technology aligned to these criteria, the use of blockchain:
Ensures exclusive control by employing cryptographic keys that grant document access solely to the rightful owner or authorised groups, preventing any unauthorised duplication.
Facilitates the complete transfer of ownership by recording transactions on an immutable ledger and irrevocably updates to reflect the new owner and revoke the original owner's access.
Enables reliability which is an intrinsic feature of its decentralised nature and consensus mechanism, distributing the validation process across multiple nodes to ensure accuracy, reduce the risk of failure, and make the system highly secure against tampering.
The acknowledgement of paper-based trade documentation's shortfalls by global institutions, including the United Nations, coupled with legislative advancements such as ETDA in the UK and similar laws in the US and Singapore, has set the stage for the potential digitalisation of approximately 80–90% of international trade transactions. However, simply surmounting the legal barriers to allow for digital trade documents, and proving the efficacy of blockchain technology in such a use case to governments and the trade industry alike are two very different things.
Appold Observations
At Appold, we recognise the opportunity blockchain presents in reshaping world trade practices for businesses and consumers alike. We are actively engaged with the government, suppliers and service providers around this industry, both in the UK and internationally. Our focus has been to advocate for and facilitate the adoption of blockchain in trade documentation as part of unlocking the full potential of digitised trade. As more blockchain products enter this space, with varying degrees of technology and use cases, we continue to monitor and assess their value.
Choosing the right technology partner is paramount and goes beyond just the technology itself. As with any type of blockchain implementation, it is crucial to assess and undertake operational due diligence on the technology providers’ governance, internal policies and procedures, track record and management team. The concern is ensuring that the chosen blockchain technology and team will still be around in years to come. After all, no government would want to implement technology from a specific provider on a mass scale to later discover that technology is redundant with no support or continuity. But this doesn’t have to be the case.
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