Blockchain technology may be transforming the foundation for international trade in much the same way the TCP/IP standard paved the way for development of the distributed computer networking technology at the heart of the internet.
While Bitcoin and other cryptocurrencies have dominated the news about blockchain, the use of a secure distributed ledger for business has implications for everything from contracts and transactions to financing and record keeping.
Blockchain offers a digital solution for managing interactions between companies, organizations and even countries, observed Marco Iansiti and Karim Lakhani in the Harvard Business Review. “Blockchain is an open, distributed ledger that can record transactions between two parties efficiently, and in a verifiable and permanent way," they wrote.
The Basics of Blockchain
Companies large and small are developing blockchain solutions for business. “You only need to know skeletal parts of blockchain to realize what its benefits are for commercial transactions and trade," says Rebecca Liao, vice president of business development and strategy at Skuchain, a Mountain View, California startup that helps enterprise supply chains use blockchain. Those benefits include adding transparency, security and efficiency to the supply chain, as well as reducing capital costs for exporters.
—Rebecca Liao, vice president of business development and strategy, Skuchain
“Blockchain is a secure distributed ledger," explains Liao. “What that means is that instead of organizations transacting business with one another using point-to-point communications through secure databases, you have an immutable distributed ledger that sits on top of these different organizations. Once a transaction is validated through that ledger it cannot be taken off the ledger. It also is fully auditable, meaning that a secure record of all the validated transactions on that ledger remain forever."
There are two basic flavors of blockchain, public and private. Bitcoin is a public blockchain, which is validated based on a computer-driven algorithm. By contrast, commercial transactions use private blockchains in which the owner of the chain sets the policies for what is considered a valid transaction.
“The way transactions are validated using blockchain is a little different depending on whether it's a public or a private blockchain," Liao says. “But the idea is the same, which is that there is a distributed network with multiple parties validating a singular transaction. Once that transaction is validated by each party, it is placed into a block, and blocks then form a chain, hence the term blockchain."
Blockchain's International Potential
Early applications of blockchain for international transactions are focusing on digitizing trade documents, such as bills of lading, letters of credit and customs documentation. The idea is to put traditionally paper-based forms into “smart contracts" that are automated and tracked using a blockchain. “This is something that a lot of banks have piloted and trade organizations, such as the WTO, are looking at this very closely," says Liao. With blockchain, digital contracts can be stored in transparent, shared databases and protected from deletion, tampering and revision.
In addition to facilitating secure international trade transactions, blockchain also has the potential to be used for financing. “The second big bucket of what is being done in international trade is trade finance, where capital is involved," says Liao.
While the financial sector has initially focused on developing blockchain solutions for processing and validating transactions, another potential application is for securely tracking the title to goods anywhere within a supply chain. “The way that suppliers currently finance their supply chain operations is they take a receivable to a bank and ask for payment up front," explains Liao. “The bank will issue them that payment at a discount based on that seller's cost of capital. But with the blockchain, instead of financing off of receivables, we can finance off of inventory."
Blockchain could re-shape trade finance because it enables all parties in a transaction to know exactly where the goods are in the supply chain, and who owns them. “In addition, you have a payment guarantee from the buyer that is transparent for all the parties to see on a distributed ledger," Liao says.
Moreover, the combination of an iron-clad payment guarantee and the ability to precisely track a shipment means that financing can shift from the seller's cost of capital to the buyer's cost. As a result, financing fees can be reduced from what is sometimes double digit interest rates to under 1 percent. “This is how trade finance can be implemented as a capital opportunity," adds Liao, "not just as a way to save costs because we are reducing paperwork and processes."
The Need for Industry Standards
While blockchain has the potential to transform the structure of global commerce, it is still in its infancy. Liao says a lack of international standards is the most significant impediment to widespread adoption of this new technology.
“It's all well and good to know that the technology works," she says, “but until a data letter of credit is accepted as an official instrument, or a bank is willing to issue it as an official instrument, it really can't be used in a real-world context. Until an organization with authority in this area sets a standard, you're not going to see real implementations of this technology with live data and live money transactions."
The blockchain revolution has started, but it won't happen overnight.