Believing in Blockchain
According to a 2016 report by the World Economic Forum on the potential impact of 12.12 blockchain on financial services, the ‘value driver’ for blockchain adoption in trade finance would most likely be increased operational efficiency.[1152] If trade finance could be transformed from an expensive, slow, paper-intensive, anachronistic process to a simple, quick, modern, efficient process, then transaction costs in cross-border trade might be significantly reduced.
Blockchain can be understood as a form of group record-keeping, in which a group of indi- 12.13 viduals get together and agree to keep joint records, rather than delegating record-keeping responsibility to just one member of the group.
Each member of the group runs the same software simultaneously and each maintains separate copies of all transaction records. Ownership rights and the validity of transfers of ownership are determined by a group- consensus process. This distributed structure eliminates the need to ensure that the party maintaining the system-of-record version of a database is trustworthy, replacing a central authority with a combination of processes and group consensus.12.14 The ‘block’ to which blockchain refers is a data structure that corresponds to an entry in a paper ledger book. Each block has a time stamp and a hashed (ie, tamper-resistant) link to a previous block, thus creating a ‘chain’ of blocks. If someone tried to modify an older transaction, the chain connecting it to newer transactions will break, making it nearly impossible to hide any attempt at modifying a block.
12.15 In a conventional database system, one computer system within a network may be designated as the authoritative ‘system of record’ in the event that there is any inconsistency among the different copies of the data in the database.
In a blockchain system, the database of records is maintained by members of the group and, if there is ever any disagreement about what information belongs in the database, it is resolved by consensus among the network participants. New information is added onto existing blockchains; it does not overwrite or alter existing information. Once new information has been validated by consensus and added to the database, it should be nearly impossible for anyone to alter or remove it. For this reason, it is common to describe information stored in a blockchain as being ‘immutable’, or ‘permanent’, or ‘tamper-proof’.[1153]12.16 Bitcoin and most initial coin offerings are based on a ‘public’ or ‘permission-less’ blockchain design, while ‘private’ or ‘permissioned’ blockchain systems would be more likely to replace conventional trade-finance mechanisms, such as letters of credit. The bitcoin system is considered public or permission-less because there is no central authority deciding who may or may not participate. New bitcoins are created and added to the database by ‘miners’ who must solve a difficult computational challenge known as a ‘pro of-of-work’ problem. The first miner to solve one of these problems is rewarded with the value of the new bitcoin.
12.17 Many features of public blockchain systems make them ill-suited for use in conventional commerce. One major challenge is their appeal to people engaged in illegal or criminal activity because they offer something close to the anonymity of paying with cash. Another is blockchain’s poor performance compared to conventional transaction-processing technologies: because all nodes on a blockchain network participate in creating consensus every time a block is updated and because the kind of cryptographic calculations that must be performed to achieve consensus are very computationally intensive, transaction processing in public blockchain systems may grow slower as the number of participants increases.
The visibility of all the information in a public blockchain to anyone who chooses to investigate may be incompatible with the privacy or confidentiality requirements of many prospective users.12.18 Private or permissioned blockchains are designed to overcome these challenges while still preserving the decentralised consensus process and the immutability of transaction information associated with bitcoin. By restricting access to the system, those wishing to engage in unlawful conduct anonymously can be excluded from participating and the privacy or confidentiality requirements of individuals wishing to participate in the system
for legitimate purposes can be met. The computational load of processing transactions can be reduced by restricting the number of nodes on the network participating in the process, which in turn would increase the processing speed and scalability of the system. If blockchain does achieve widespread adoption in trade finance, it would most likely be in the form of a private blockchain, not a public one.[1154]
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In cross-border trade transactions, contracting parties usually cannot deal with each other face-to- face, and the need to move goods across borders instead of within a domestic market increases the time and expense required to complete transactions. Among the risks that may be amplified in cross-border trade compared to domestic trade are the risks of fraudulently duplicated paper documents or errors in the manual processing of paper documents. These sources of increased uncertainty and delay in turn increase the risk that one of the contracting parties will default. Intermediaries, such as commercial banks, have traditionally assisted parties engaged in cross-border trade to mitigate these risks in exchange for hefty fees.
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Replacing paper-based processes in trade finance with blockchain applications might permit data to be entered only once into a computer system before being accurately duplicated across the network.[1155] Delays caused by the need to collect many different paper documents, then manually review them, could be reduced or eliminated.
Delays caused when non-conforming documents are rejected, and then must be revised and resubmitted, might also be reduced. The total number of intermediaries involved in each transaction could be reduced in addition to reducing or eliminating manual document-review processes. Compliance burdens now borne by the trading parties and the commercial banks in processing the payments could be reduced as a result of the transparency and immutability of blockchain digital records.[1156] In other words, in the best case scenario following the adoption of blockchain in trade finance, the cost of trade finance might drop, while its effectiveness might be increased.12.21
In a 2019 report on global trade-management system software, Gartner listed the following examples of cross-border trade technologies being developed with blockchain: ‘Universal Trade Network' is developing interoperability standards for different financial blockchain networks; ‘Marco Polo Network' combines the R3 enterprise blockchain platform with ‘TradeIX' blockchain trade-finance solutions; ‘Voltron' offers a blockchain-based digital letter of credit service; the ‘Blockchain in Transport Alliance' (‘BiTA') is a standard-setting organisation developing standards for the use of blockchain in logistics, with more than 500 members in freight, transportation, logistics, and software industries; ‘TradeLens' is an open, neutral platform based on blockchain and developed by IBM and Maersk with more than 100 companies participating; and ‘Global Shipping Business Network' is an open, neutral platform based on blockchain and developed by ‘CargoSmart', together with nine ocean carriers and terminal operators, that competes with ‘TradeLens'.[1157] After noting that these efforts are still in an early stage of development, Gartner warned that ‘[d]espite the recent advancements, use caution when considering blockchain. Right now, it should be viewed as a potential complementary technology, not as a wholesale replacement’.[1158]
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