Since the publishing of Satoshi Nakamoto’s seminal paper on Blockchain technology in 2008, Blockchain has gone from mystery to mainstream. The concepts of Blockchain, Bitcoin and Smart Contracts have already been expounded on in easy-to-understand stories by experts and scholars in various industries, and thus, the decentralized ledger, and the technologies it spawned, are at least, in general terms, understood. This article focuses on the application of this emerging technology in international trade.
B. Effective Proof of Ownership for International Trade
Trade of goods is one of the most important forms of international trade. Generally, cross-border trade of goods can be divided into four categories:
-Business transaction: parties have reached agreement through business negotiation and signed a business contract.
-Transportation and insurance: according to the agreement between the buyer and the seller, the transportation contract is signed with the logistics provider, and the insurance is purchased for the goods.
-Trade finance: generally speaking, international trade is paid by telegraphic transfer or letter of credit. However, due to the large amounts of payment in international trade of goods, some enterprises may settle by way of trade financing.
-Official control measures: every country has a certain degree of supervision over the import and export process of commodities, including customs supervision on declaration of import and export goods, supervision of inspection and quarantine departments, issuance of specific certificates of origin, and import and export licensing system for specific products (e.g., import and export of drugs requires the approval of national drug regulatory departments).
In the above four categories, various stakeholders (including exporters, importers, logistics providers, insurers, financial institutions, banks and government regulators) may need to generate a large number of papers and written documents, endorsing trust and credit in every link of international trade, as well as proving information related to ownership and of the goods.
However, with the exponential growth of e-commerce, how to digitize and digitalise international trade is an unavoidable problem. Firstly, paper certification documents present various disadvantages, such as long circulation cycle, difficult preservation, and high operation cost. Meanwhile, paper documents cannot avoid risks of fraud, forgery and loss, resulting in legal disputes. The bill of lading (B/L), for example, as the most used and oldest document in international cargo shipment, it is not only the proof of ownership of goods, but also the proof of the transport contract. The shipping company can release goods with original B/L provided by consignee, but the disputes arising are very common, such as ‘delivery of goods without original B/L’, ‘anti-dated B/L’, etc.
This is where the advantages of Blockchain technology come in. Blockchain technology can make use of its unique data structure and encryption algorithm to provide proof of ownership of goods in international trade and store data more securely. Meanwhile, the underlying technology of Blockchain can distribute the relevant data generated at each stage of the transaction, establish the consensus mechanism between participants, and, ultimately, effectively improving the efficiency of international trade.
B. Establishing a Direct Consensus Mechanism
Complicated cross-border procedures for goods add costs to trade, which are eventually transferred to consumers and hinder the development of international trade. By contrast, further streamlining and facilitating the customs clearance of goods will accelerate the global flow of resources, which is particularly important in the context of the post-COVID-19 pandemic.
According to the United Nations Trade Facilitation and Electronic Commerce Center (UN/CEFACT), which has been committed to promote and facilitate international trade, the consensus mechanisms established in the international supply chain in the flow of goods, capital, and information, enable the normal operation of international trade.
Nevertheless, the cost of this consensus mechanism has been that international trade has become extremely cumbersome. Here again, the potential benefits of Blockchain stand out. As a decentralized, distributed point-to-point system, the core of Blockchain technology is that it can store and share data without the need for third-party intermediaries to provide a consensus mechanism between participants of transactions. If applied to international trade, Blockchain technology could further simplify the dizzying array of procedures and certifications that have been set up to resolve consensus, as well as strengthening the exchange of information between regulators and operators.
C. Secure and Efficient Way of Settlement and Payment
Banks play a very important role in the prevailing cross-border payment system. Since international settlement needs to complete the cross-border allocation of funds, it is necessary for banks in different countries to establish contacts and complete cross-border payments through correspondent banks or other means. For example, international collection and L/C settlements, which are popular in international payment, include the business of correspondent banks. Cross-border payment involves a large number of subjects, complicated regulatory rules (anti-money laundering, anti-terrorist financing, financial sanctions, etc.), and countries have different legal and regulatory systems with different technical and operational standards, resulting in high cost, long time and lack of transparency in the process of cross-border payment and international settlement.
In order to cope with the disadvantages of the existing international settlement and payment system dominated by third-party intermediaries, many enterprises are beginning to explore the possibility of applying Blockchain technology. In June 2018, the world’s first Blockchain remittance system completed the cross-border remittance from Hong Kong (China) to Philippines in just three seconds, saving an average of HK $500 in handling fees.
The development of Blockchain technology will profoundly affect the connotation of the Internet and information age, from the traditional Internet of simple information replication and transmission into the value transfer of the Internet era. Blockchain can effectively solve the credit crisis, guarantee the security of transactions, and thus provide a boost for the digital transformation of international trade.