The phenomenal entry of Blockchain technology in international trade can best be described as a timely intervention. International trade as we mostly know it is an age-old industry that ‘dates back to ancient Egypt’ (Lynch, n.d.) . In its 2011 annual report, the World Trade Organization stated that “while the historical trend has been toward more openness and deeper rules in international trade agreements – and away from protectionist blocs – progress has not been in a straight line” (World Trade Report, 2011, p.48).
The old system of international trade involves a much more complicated system that entails a significant amount of personnel, unavoidable bottlenecks from customs and border accessibility, high risks, and a lack of transparency on both ends (ConsenSys, n.d.). The porosity of the global/cross-border trades has necessitated the use of blockchain for these transactions which usually cost more time and money to process. This report explores the transformation that Blockchain technology has brought to international trade with a view to analyzing its upsides and drawbacks.
Countries all over the world rely on international trade for sustenance. International trade is estimated to be a $19 trillion market (Sabanoglu, 2021) and ‘accounts for the exchange of capital, goods, and services across international borders or territories’ (ConsenSys, n.d.). Processes involved in international trade are unnecessarily long and strenuous, involving a significant amount of personnel, with one transaction spanning more than 3 months (ConsenSys, n.d.). The burdensome work that is involved in trade finance, has been testified to be ‘ripe for disruption’. (Eidel, 2016)
Blockchain transactions have been appraised for their decentralized nature, a quality that has endeared the technology to finance experts. Although the intention of the Blockchain inventors was to initiate the use of Bitcoin for transactions, ‘the underlying technology, however, can also help transform international trade: it can make cross-border transactions faster, more efficient, and more transparent.’ (Norberg, 2019)
The question remains to what extent Blockchain can influence global trade transactions as it pertains to cross-border trade among traders in developed versus underdeveloped countries, how much it includes traders especially those from least-developed and developing countries, small and medium enterprises with limited access to finance, and generally, traders who are usually inaccessible due to their levels of exposure, their location – which is a major factor given that most potential traders are in very remote areas, in addition to the obstacle that tariff regulations pose, etc.
This has been expatiated by Emmanuelle Ganne, the Blockchain lead at the World Trade Organization, who wrote extensively on the subject (Ganne E. , Can Blockchain Revolutionize International Trade?, 2018) with major emphasis on the above position as well as other issues including interoperability; the legal issues such as the “legal status of a Blockchain transaction, jurisdictional issues, and liability issues” (McKinlay, 2018) which, in the opinion of the author, are issues that can be resolved if all hands are placed on deck and if participating actors are willing to do away with old practices which have proven to be less progressive to the global trade industry. (Ganne E., The WTO, and Blockchain: Why the world’s premier trade organization is exploring blockchain technology, 2020).
The first attempt at using Blockchain in an international, interbank trade was carried out by The Commonwealth Bank of Australia and Wells Fargo in an experimental trade where cotton worth $35,000 was sent to China from Texas. This transaction was made with a smart contract which, unlike the name implies, is not a contract in the real sense, but a programme set to execute certain instructions at the fulfillment of certain conditions, and in this case, the payment goes through instantly as the cargo lands at the designated location, this went further to affirm that a ‘humanless’ transaction is possible. (Fingas, 2016)
Trade and Finance may have been on the way to technological reformation, but “the advancement of new technologies such as Blockchain and Distributed Ledger Technologies (DLT) have accelerated this.” (Ganne E. , 2020). The study that originated this claim was carried out by the WTO and Trade Finance Global which surveyed twelve companies using blockchain to rewire trade and trade finance including: Contour , Skuchain’s EC3 , eTradeConnect , India Trade Connect , komgo , The Marco Polo Network , Minehub , People’s Bank of China Blockchain Trade Finance Platform / Bay Area Trade Finance Blockchain Platform , TradeFinex , TradeWaltz , UAE Trade Connect , we.trade .
With the transparency and optimal efficiency that blockchain brings to the table, it is disappointing that this groundbreaking technology would come with crippling imperfections such as “immutability, scalability, interoperability” (Iredale, 2020) and so forth. Some of these problems are highlighted thus:
Blockchain is energy-intensive. As the world continues to seek ways to attain sustainable eco-friendly solutions, it is only counterproductive for Blockchain technology to do the opposite. It is imperative to point out that blockchain may be a lasting solution to paperless transactions, however, it is also an energy vampire as it requires excessive use of energy. To carry out Blockchain transactions successfully, one must depend on a network controlled by miners; this network gets overloaded when the number of users increases, leading the miners to expend more energy (Iredale, 2020).
This is why IOTA is currently the next big thing as it is evidently a harbinger for ecofriendly solutions without any repercussions on the environment, doing away with blocks, and promises optimal performance than blockchain as regards sustainability and interoperability. The IOTA places emphasis on zero use of blocks and, consequently, lack of use for miners. The IOTA overcomes the cost and scalability limitations of blockchain through a system where one transaction validates two other transactions. It is the “first distributed ledger built for the Internet of Everything” that features an easily adaptable process such as “an open-source; a feeless, scalable digital ledger; a protocol for IoT.” (IOTA, n.d.)
Although blockchain transactions are remotely secure, they are not 100% secure as they are vulnerable to 51% of external attacks and this “can result in control of the network.” (Iredale, 2020)
Nevertheless, it must be stated that the aforementioned issues – security, interoperability, and scalability –
have been tackled by recent development in blockchain tech, and further development of faster, and less energy emission projects like Proof of Stake network consensus which has the capacity to perform smart contract transactions with reduced energy consumption. It is already being made possible with the advent of Ethereum-based projects like Tezos, Cardano, Ripple, etc.
As nations continue to tread lightly around the blockchain trend, Canada is not left out of the picture. The Federal Government has begun to make gradual but effective strides towards implementing the use of blockchain technology in a majority of its sectors.
Canadian authorities put blockchain innovation at the core of the country’s values. In 2017 the Bank of Canada, the country’s central bank, teamed up with Payments Canada, central payments processor, and R3, a distributed database technology company, to conduct research called Project Jasper.
The research focused on how blockchain solutions can improve the clearing and settlement of high-value interbank payments. The research initiative consists of three phases. Phase 1 was conducted on the Ethereum platform, and Phase 2 was conducted on the custom-designed R3 Corda platform. The Bank of Canada published an extensive white paper with its findings after the initial two phases were completed. (Weinberg, 2019)
Project Jasper has been proclaimed a profound achievement is a first in the payments industry where a central bank is seen to collaborate on a venture of such nature with the private sector. (Payments Canada, n.d.)
Again, the country and more particularly, Quebec, has been appraised for its compatibility with the technology, given the “low energy cost, high internet speeds, and favorable regulations.” (Weinberg, 2019). This is good for SMEs, MSMEs, and large businesses that focus on international trade/finance.
With Canada’s recent announcement of its interest in the adoption of a “green” digital currency, it means the government might facilitate international and cross-border trade with digital currencies instead of blockchain-based projects. The Bank of Canada announced that it would embark on research related to a central bank digital currency (CBDC) as “part of its contingency planning to be ready to issue a CBDC in the future if the need were to arise”.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank, and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.
The group will assess CBDC use cases; economic, functional, and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI)
International trade will benefit from these CBDC projects, mostly when it comes to the aspect of quick concessions and withstanding the inherent lack of transparency. It is also conceivable that in the future, CBDCs are likely to, in addition to the above, “facilitate transactions, circumvent surveillance through SWIFT and thus help countries avoid economic sanctions will appeal to some states” (Paterson, 2020). The disturbing part of this, however, is that it can also lead to “a bifurcation of the global financial system along geopolitical lines, with a loss of the positive network externalities that a unified system brings. Such a move would likely have a retarding impact on trade” (Paterson, 2020)
Perhaps, the most enticing factor that CBDCs present is that the initiative would foster International Trade and “there will be less need to convert from local currencies into reserve currencies such as USD, GBP, EUR, and vice versa via a financial intermediary.” (Blurb Team, 2021)
With regards to the adoption of new regulations concerning “financial relationships and money transmission mechanisms, digital currencies offer Central banks an exciting opportunity to transform monetary policies” (Blurb Team, 2021) therefore, creating mutual growth opportunities for all.
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