Introduction: Why Transforming Trade Finance is Hard

12.01 Ever since someone using the pseudonym, Satoshi Nakamoto, published a white paper entitled, ‘Bitcoin: A Peer-to-Peer Electronic Cash System' in 2008, there has been enor­mous interest in business and technology circles about the possibility of developing new commercial applications for cryptography.

12.02 While cryptocurrencies may be the most visible new commercial application for encryption technologies, they are by no means the only one. The term ‘blockchain' is used to describe tech­nologies that incorporate some design elements of cryptocurrencies, while avoiding others that generally make cryptocurrencies unsuitable for use in conventional commerce.³ The Economist magazine defined blockchain as ‘a database designed to be distributed among many users, to be immutable, to work without oversight from any central authority and to dispense with the need for its users to trust each other.⁴ The Gartner consulting firm has defined blockchain as ‘an expanding list of cryptographically signed, irrevocable transactional records shared by all parti­cipants in a network.⁵ In 2017, Gartner speculated that blockchain technologies might ‘generate an annual business value of over $175 billion by 2025 and rise to over $3 trillion by 2030.6

Trade finance looks to some observers like an ideal use case for blockchain because they be­lieve it could radically lower transaction costs and remove barriers to entry in trade-finance markets.^[1137] The administration of cross-border trade remains dominated by complex, old- fashioned, hybrid human-computer-paper systems long after disruptive innovations have transformed commerce in many other domains.^[1138] Interest in blockchain is driven by the desire to cut through the ‘Gordian knot' of complex, fragmented, anachronistic legacy trade-finance systems now in use.

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To other observers, however, blockchain looks more like a mass delusion similar to that generated by the fraudulent biotech company, Theranos.^[1139] This is because explanations of how blockchain can be used in commerce usually make the most sense when presented with the least detail. Once the effort to integrate blockchain into real-world transaction pro­cessing systems begins, it quickly becomes apparent that, far from making commerce sim­pler and easier to carry out, they make it more complex and difficult.^{New Roman",serif;color:black'>[1140]} The most positive thing sceptics can find to say about blockchain is that it has focused unprecedented levels of attention on the problems of legacy back-office computer systems, which in turn might mo­bilise enough resources to overcome some of the collective action problems that have made those legacy systems so resistant to change.^[1141]

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The process of sorting through all the conflicting claims being made about blockchain is complicated by the fact that most organisations have been very aggressive about announcing the beginning of blockchain projects, but almost no one has any incentive to admit publicly that their blockchain experiments have failed.^[1142] The lack of a universally accepted defin­ition for the term ‘blockchain’ further complicates matters. For example, after Facebook described ‘Libra’, the new cryptocurrency that it announced in 2019 it would launch, as a ‘blockchain technology', some critics noted that it incorporated neither the ‘blocks' nor the ‘chains' characteristic of blockchain.^[1143]

12.06 Just as there is no canonical definition of blockchain, there is no canonical definition of business process reengineering. The term ‘business process reengineering' is often used to refer to the process of setting organisational goals; describing an ‘as is' or current situation that will have to be changed; describing a ‘to be' or ‘happy' state that is the target; and devel­oping a process for moving from the ‘as is' state to the ‘to be' or ‘happy' state.

12.07 Most of the claims being made to justify investments in blockchain make more sense if understood as justifications for investing in business process reengineering.

Many banks are looking towards reducing costs and increasing efficiency by replacing the use of paper with technology. With Blockchain, the industry would have the ability to streamline trade finance progress.

12.08 The author appears unaware that organisations such as the International Chamber of Commerce in Paris, the global funds transfer network SWIFT, the World Customs Organisations, and the United Nations Conference on Trade and Development (‘UNCTAD') have been making steady progress for decades streamlining trade finance with legacy tech­nologies. Kaleem also appears unaware that this trend accelerated after the World Trade Organisation Trade Facilitation Agreement (‘WTO TFA') was concluded in 2013.

12.09 Migrating existing trade finance systems to newer technology architectures constitutes business process reengineering whether or not it involves blockchain. The idea of busi­ness process reengineering was originally popularised by the 1993 book with that title written by management consultants, Michael Hammer and James Champy.^[1145] Similar strategies for business process transformation have been popularised with other names, including total quality management, continuous improvement, lean, agile, Six Sigma, adaptive management, or even design thinking.^[1146] No matter who undertakes business process reengineering, or why, there is a broad, general consensus that the odds of the effort succeeding are low. Hammer and Champy estimated the failure rate for business process reengineering efforts to be from 50% to 70%, and later studies have repeatedly validated that estimate.^[1147]

The goal of reengineering trade finance is to create value for trade finance suppliers and 12.10 users.

Many of the claims being made for how blockchain can transform trade finance appear to 12.11 be fuelled by the same kind of magical thinking that sustained Theranos for many years.^[1149] Just as it eventually became obvious that Theranos simply could not do what its executives claimed it could do, at some point it is likely to become clear to everyone, except the most committed blockchain ideologues, that it simply cannot do what some have claimed it could do.^[1150] Although most blockchain investments may ultimately prove to be no more valuable than those made in Theranos, blockchain investors may be in a better position to hide their losses if they mischaracterise whatever technology they end up using as being blockchain, even though it is not—a practice known as ‘blockchain washing’.^[1151]

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