COULD BLOCKCHAIN BE A GAME CHANGER FOR INTERNATIONAL FINANCE?


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  • Written by:

    Dan Mwangi

    dan@mtkenyatimes.co.ke

    Blockchain is a system that combines the use of advanced ledgers and in a sense cryptocurrency to completely digitize financial transactions. It is a type of a distributed ledger that uses independent computers referred to as nodes to record, share and synchronize transactions in their respective electronic ledgers instead of keeping data centralized as in a traditional ledger. Blockchain organizes data into blocks, which are chained together in an append only mode. Blockchain/ DLT are the building block of “internet of value,” and enable recording of interactions and transfer “value” peer-to-peer, without a need for a centrally coordinating entity. “Value” refers to any record of ownership of asset — for example, money, securities, land titles — and also ownership of specific information like identity, health information and other personal data.

    Blockchain has gained increased attention recently because of the publicity surrounding Bitcoin. The use of this technology is relatively new but its potential is also starting to be explored in applications beyond digital currency. The World Bank Group has begun to explore the impact of blockchain technology on development. Blockchain may also have interesting implications for trade.  Increasingly consumers are becoming concerned about the origin of the products they buy (whether food, garments or consumables) either on ethical or quality grounds. The expectation is that, in increasingly complex supply chains, blockchain can provide product proof of integrity. SMEs or small producers can leverage this proof to find buyers for their products or gain a marketing advantage. The ability of blockchain to provide for ‘self-executing contracts’ (a transaction which is triggered automatically when all conditions are satisfied) is also believed to be an advantage for these small entrepreneurs as it would remove the risk of non-payment and reduce the legal and procedural costs of fulfilling a contract.

    Blockchain can improve the state of trade and international finance. The time and cost of clearing goods for import or export add a significant financial burden on trade due to the copious layers of authorizations to import or export goods – such as permits, licenses, phytosanitary certificates, and others – that are required on the grounds of human, animal or plant health or safety. The final arbiter in a border transaction is Customs, whose role is to ensure that all such permits have been obtained and that they are valid and that the goods have been lawfully declared and all regulatory requirements have been met. All of these can be bypassed by the introduction of the Blockchain.

    The reality on the ground at the moment is that not all the above information is available to authorities and what information there is often requires verification. Therefore, goods are often subjected to a high level of scrutiny including, potentially, physical inspections or laboratory tests.  This results in high costs for the traders, delays in clearing the goods, and a high degree of resourcing for the government authorities.

    What if all the steps in the supply chain, from origin to destination, were captured in a blockchain? This could provide a degree of assurance that the information is correct as it originates at source and was not manipulated along the way. If this blockchain was visible by Customs and the other agencies, goods could be cleared without further intervention.

    Can blockchain help in providing accuracy, traceability and transparency, as well as reducing costs both for trade and government?

    Imagine a blockchain being started by a producer by recording the sale of goods to a distributor and then being augmented by every transformation or change of hands (e.g. storage in a warehouse, consolidation with other goods, inspected by Quarantine on export, packed into container, loaded on ship, cleared by Customs on export, etc.).  The distributed ledger concept would guarantee the integrity of the data stored in the blockchain as the blockchain is incremented and, therefore, when it is presented to the authorities of the importing countries they can rely on every piece of information having been generated by its originator.

    Secondly, Time and effort would be saved all along the supply chain by parties not having to reproduce the information and submit it manually to the authorities or trading partners.  Transactions would be made based on original data supplied at source. Thirdly, opportunities for corruption or collusion (a common problem in many countries which significantly adds to the cost of trade) would be reduced as the data cannot be retroactively tampered or altered along the way as the ledger represents the single source of truth.

    However, for blockchain to fulfill the objectives above it would have to encompass all the participants in the supply chain from the original supplier of the goods to all the parties who have, in some way, played a part in getting those goods to their final destination as well as the regulatory authorities at the points of export or transit/trans-shipment. In the case of some industries the goods may undergo various transformations and the final product may be assembled from materials or components coming from different suppliers in different counties each with its own supply chain. For this to happen there must be an overwhelming incentive for everyone to participate and every node in the supply chain would need to have a modicum of IT capabilities as well as access to the Internet. Is there a way in which governments in different countries can come together and find some way of ‘incentivizing’ this process?

    Another possible disadvantage is that organized networks often operate through a complex system of false companies that create false descriptions of goods or false invoices. They could simply start a blockchain of false data. Blockchain does not replace the need for intelligence and risk management but the availability of ‘big data’ could conceivably improve the efficiency of targeting. However, the capacity of Customs and other agencies in handling data would need to be enhanced and their practices, some of them deeply ingrained, would also need to be changed.

    So, could blockchain be a game changer for international finance?

    Blockchain could influence trade policy and regulation and offer a new paradigm in the way globalized trade is conducted. It could reform the global trade environment into a more customer-friendly environment. However, it is still necessary for different countries to digitize border points and welcome this idea…

    [armelse]

    Blockchain is a system that combines the use of advanced ledgers and in a sense cryptocurrency to completely digitize financial transactions. It is a type of a distributed ledger that uses independent computers referred to as nodes to record, share and synchronize transactions in their respective electronic ledgers instead of keeping data centralized as in a traditional ledger. Blockchain organizes data into blocks, which are chained together in an append only mode. Blockchain/ DLT are the building block of “internet of value,” and enable recording of interactions and transfer “value” peer-to-peer, without a need for a centrally coordinating entity. “Value” refers to any record of ownership of asset — for example, money, securities, land titles — and also ownership of specific information like identity, health information and other personal data.

    Blockchain has gained increased attention recently because of the publicity surrounding Bitcoin. The use of this technology is relatively new but its potential is also starting to be explored in applications beyond digital currency. The World Bank Group has begun to explore the impact of blockchain technology on development. Blockchain may also have interesting implications for…….Readmore>>>

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