OUR RESEARCH
There has been a lot of interest in and talk about blockchain technology and the promises of what it could offer businesses. Some people seem to be very clued up on what this technology is and how it will revolutionise the world, whereas others are struggling to understand what its all about. Without getting technical, this paper offers a basic description of the technology and how it could be applied to international trade and lists some challenges to its implementation.
Blockchain technologies have evolved from a cryptocurrency payment platform. In a nutshell blockchain was designed to permit two parties to conduct an online transaction without having to rely on a intermediary.[1] Despite its potential that have built up big expectations the technology has yet to be widely adopted. It is possible that blockchain could speed-up and simplify international supply chains and other trade processes. Can the technology be scaled up for large or complex applications, to what extent can various blockchain platforms work together in an integrated manner and how to resolve the legal and regulatory changes that would be needed before the technology could be widely accepted, are still open questions. Recently, blockchain's high energy usage has also been highlighted as an environmental concern.
What is a blockchain?
Blockchains also known as distributed or decentralised ledger technologies (DLTs), are tamper-proof, decentralized or distributed, ledgers that are permanent and verifiable. A ledger is an ongoing record (diary or spreadsheet) of transactions, often used for financial data. A ledger can store all kinds of data, not only financial records, for example it could store voting records or health information or the record of sales for an artwork ie provenance. But a blockchain is not just a database or spreadsheet.
Blockchain transactions are stored in a near inalterable way (using cryptographic techniques[2]). This is a ledger that can only be added to, and past entries can never be removed. If something about an earlier transaction needs to be changed, you don’t amend the earlier transaction, instead you add a new entry to reflect the alteration. All the transactions that happen over a set time are grouped into a bundle, or ‘block’. Every time a new block is created and properly verified[3] it gets added on top of the blocks that came before it. Hence blockchain.
Unlike traditional databases, administered by a central entity (or authority that grants access), blockchains rely on a peer-to-peer network that no single party can control. Because the ledger or database is shared and synchronized across multiple sites or institutions, it is more resistant and able to withstand a cyberattack better than a database maintained by a single site. However, a blockchain network can be controlled by an entity if he owns 50% or more of the nodes. So, it also has vulnerabilities.\
Verification in blockchain is a consensus-based process, meaning that every entry on the ledger must be verified by a majority of the nodes[4], before it is written into a block. In this way the ledger is resistant to modifications. This peer-to-peer consensus process of verification means that participants with no particular trust of each other can collaborate without having to rely on a trusted third party. Participants in a blockchain can access and check the ledger at any time. In summary, a blockchain is a trust network[5] without a central control authority that provides more security against cyberattacks than other record-keeping technologies.
Some of these concepts are not new, many have used aspects of this kind of process with the peer ratings system on ebay, for example. Paypal and Transferwise are also ways of moving money without directly using a bank, although the users bank accounts are an essential part of the process.
What can blockchains be used for?
Sparked by the growing interest and debate on blockchain the World Trade Organization (WTO) looked into the possibilities of applying this technology. The report lists many opportunities and points out some challenges. For example, blockchain and smart contracts could speed up border procedures and support existing customs procedures and improve the accuracy of trade data.
Blockchain’s strongest area of implementation seems to be in finance, where it offers a decentralized infrastructure for payment processing, financial markets transactions, accounting tasks and other data-driven functions, both personal and public. Its use in other areas has also been explored, for example, supply chain management, health records, transportation, voting, energy, taxation, land titles, tokenising welfare payments, provenance for artworks.[6]
Blockchain technologies offer the promise of enhancing the efficiency of processes and to reduce costs for industry, but are they better than what's currently available? Deloitte’s survey respondents in 2019 expressed generally positive sentiments toward blockchain, but over half of respondents (54%) said that blockchain is “overhyped,” growing from 43% in 2018.[7]
Could blockchain technologies be widely applied?
While presenting a very interesting emerging technology, blockchain technologies wide acceptance is still a way off. One barrier to blockchain adoption stems from the inherent nature of trade as inter-jurisdictional. Because intermediate and final products often move across borders several times, any technology that involves data sharing and cross-jurisdiction transactions will pose challenges, for example around privacy, security, governance, regulatory recognition and interoperability.
Trust
Following various scandals that have shaken the food industry in recent years, major food and retail companies are trialling Blockchain to track products and help restore trust in food quality.[8] The blockchain project by the French supermarket Carrefour is a good example. The blockchain is set up so that every actor in the supply chain (breeder, butcher, processor, etc) enters their own information independently on the blockchain. This is done by QR codes and smart phones. Carrefour cannot intervene in the flow of information. In a few seconds, with a smartphone a consumer can see whether a particular animal has received antibiotics and what it has been fed.[9] The effectiveness of this system still relies on establishing a credible link between offline and online events. Information added to the blockchain is only as good as the offline verification process that guarantees that the relevant requirements have been met offline. [10]
Scalability
Observers have pointed to the limited scalability of blockchains due to the predetermined size of blocks. One way around this would be to establish a consortium with a registration process[11]. Although safer than existing technologies, blockchains are not completely immune from traditional security challenges, after all any single entity owning 51% of the nodes can modify the data and thereby control the blockchain.[12]
Interoperability
Because numerous blockchains are being developed independently, they do not “talk to each other”,[13] and there is no standardization at the level of semantics (ie what information is communicated by the data element). This is critical in international trade. When I (as farmer and seller) say tomato and you (supermarket and buyer in another country) say tomato we must be talking about the same thing[14] or problems arise. In time this may be resolved as international organizations such as the International Chamber of Commerce (ICC), International Organization for Standardization (ISO), United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT) and the World Customs Organization (WCO), are working on interoperability standards. [15]
Legal issues
Individual countries would have to make changes to legal arrangements, for example recognising the legal validity of blockchain transactions, identifying the applicable law and liabilities, and having regulations for the way data can be accessed and used, before blockchain technologies can be widely used. There are different laws on data privacy standards, for example the General Data Protection Regulation (GDPR) places strict limitations on how personal data is stored and saved within the European Union. Similarly, in the United States, the Health Insurance Portability and Accountability Act limits how personal health information is handled. Some observers say that such privacy laws and blockchains pursue the same goal of giving individuals more control over their personal data, but through different mechanisms. [16] In 2017, the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Transferable Records, and various governments are working on legislation to recognize blockchain transactions, but much remains to be done. Issues related to applicable jurisdiction and liability, while problematic in the case of permissionless blockchains are more easily resolved for permissioned blockchains.[17]
Another issue, which relates to the inter‐jurisdictional and anonymous nature of the blockchain, is the identification of the applicable law and the allocation of liability in the event of a dispute or a fraud. This is especially relevant with permissionless blockchains. Uncertainties might occur, for instance, in cases data stored on the blockchain has a flaw, or its integrity is corrupted or hacked in transit between the parties, or an error in one party’s code caused a breach of contract.
Two developments that could act as enablers of blockchain technology are the codification of laws, which aim to making laws machine-readable in order to facilitate the transposition of contractual obligations into digital contract code (eg smart contracts), and the development of a single global legal identifier for companies.[18]
Regulation
Regulating an emerging technology is complicated. One option would be to have the same sort of regulation as the internet, through global governance networks based on a multi-stakeholder approach. But internet regulation approaches (and their effectiveness) vary hugely from country to country, there is no standardization. For some users this acceptable, and international trade occurs easily now between companies and individuals based in different legal and regulatory environments. The development of a comprehensive ecosystem modelled on the internet governance approach, that brings together companies, civil society organizations, software developers, academics, governments and inter-governmental organizations in various settings to look into standardization, legal and policy issues, would be an undertaking of unprecedented scale. [19]
Environmental issues
Blockchain technologies use a lot of power. For example, Bitcoin uses more electricity per transaction than any other method known to mankind, according to Bill Gates. It has been estimated that a single bitcoin transaction uses about 707.6 kilowatt-hours of electrical energy. The same as that consumed by an average US household over 24 days. [20] In a world where it seems many countries have gotten the message about man-made climate change and damage to the environment, this is a significant hurdle to overcome.
User access
Because blockchains are decentralized, there is no central authority. While offering a lot of freedom, this also leads to another potential problem. To access the assets or the information stored by the user in the blockchain, a user needs a private key. This is something like a unique identifier you already use for logging on to your bank account. It is generated during the set-up of your access to the blockchain, and its security is the responsibility of the user. So, if you as a user lose or forget your unique identifier (eg pin or private key) and are logged out, no one can get it back. This is a serious drawback particularly with permissionless blockchains since you cannot go to any central authority to reset your access. In a permissioned blockchain where there is a centralized authority, that would resolve such issues. However, it has been argued that a permissioned blockchain is contrary to the very nature of the technology and defeats the purpose of decentralization.
Conclusion
The potential of blockchain technology has captured the imagination and sparked ideas. Because blockchains are useful in overcoming a trust gap between transacting organizations, they could be useful in various contexts. A good case can be made for permissioned consortium-based blockchains[21] for certain applications in international trade. Many challenges to the application of permissionless blockchain technologies still exist because of the changes that would be required to existing legal, regulatory and procedural systems. Whether it’s an improvement over the status quo, however, is still an open question.[22]
Acknowledgment
I am grateful to Zvonimir Zavacki, President, Policy and Strategy Institute, London and Board Member at ICR Adriatica, for his review and comments on this paper.
Bibliography
Allen, D., et al., International policy coordination for blockchain supply chains. Asia & the Pacific Policy Studies 6, no. 3 (September 2019). p. 367–380.
Allison, I., PayPal Makes Its First-Ever Investment in a Blockchain Startup, https://www.coindesk.com/paypal-makes-its-first-ever-investment-in-a-blockchain-startup, Apr 2, 2019.
Beattie, A., https://www.investopedia.com/articl
es/07/roots_of_money.asp From Barter to Banknotes, Investopedia, Updated May 13, 2019.
Berkeley, J., The Economist, https://www.economist.com/leaders/
2015/10/31/the-trust-machine, 31st October 2015 edition.
Berkeley, J., https://www.economist.com/leaders/
2015/10/31/the-trust-machine, 31st October 2015, The Economist.
Computerworld, https://www.Computerworld.com/art
icle/3430225/real-world-uses-of-the-blockchain-today-from-supply-chain-to-equity.html Real-world uses of blockchain, including supply chain monitoring, equity management cross-border payments and election voting by Computerworld UK Staff, Computerworld | 4 September 2019.
Deloitte’s 2019 Global Blockchain Survey: Blockchain gets down to business, https://www2.deloitte.com/content/
dam/Deloitte/se/Documents/risk/DI_
2019-global-blockchain-survey.pdf
Epps, T., Carey, B., and Upperton, T., Revolutionizing Global Supply Chains One Block at a Time: Growing International Trade with Blockchain: Are International Rules Up to the Task? Global Trade and Customs Journal 14, no. 14 (2019). p. 136–145.
European Court of Auditors' Special Report No 26/2018, of 10.10.2018.
https://blocksdecoded.com/blockchain-applications-use-cases/
Finck, M. (2018). Blockchains: Regulating the Unknown. German Law Journal, 19(4), 665-692. doi:10.1017/S2071832200022847.
Gabinson, G. A., Policy Considerations for the Blockchain Public and Private Applications, 19 SMU Sci. & Tech. L. Rev. 327 (2016).
Ganne, E., https://www.wto.org/english/res_e/
booksp_e/blockchainrev18_e.pdf Can Blockchain revolutionize international trade? World Trade Organisation, published 2018, accessed March 25, 2020.
Irelade, G., Top Disadvantages of blockchain technology, 17 April 2020,https://101blockchains.com/
disadvantages-of-blockchain/
Lawton, G., https://searcherp.techtarget.com/
feature/10-blockchain-problems-supply-chains-need-to-look-out-for 10 blockchain problems supply chains need to look out for, Published: 15 Apr 2019.
Lipton, A., Treccani, A., Blockchain and Distributed Ledgers: Mathematics, Technology, And Economics, World Scientific Publishing, 2021.
Macaulay, T, https://www.computerworld.com/
article/3412304/how-governments-around-the-world-are-using-blockchain.html How governments around the world are using blockchain, Computerworld|19 September 2019.
Norberg, H., Unblocking the Bottlenecks and Making the Global Supply Chain Transparent; How Blockchain Technology Can Update Global Trade, April 2019. www.policyschool.ca
Oxford University, https://onlineprogrammes.sbs.ox.ac.
uk/presentations/lp/oxford-blockchain-strategy-programme and https://cdn.www.getsmarter.com/
uploads/course/info_pack/115/
oxford_blockchain_strategy_
programme_prospectus.pdf
Pendergast, D., Blockchain vs. PayPal: Understanding the Difference and Evolution, January 22, 2019.
https://www.coincentral.com/block
chain-vs-paypal/22 JANUARY 2019.
Sedlmeir, J., Buhl, H.U., Fridgen, G. et al. The Energy Consumption of Blockchain Technology: Beyond Myth. Bus Inf Syst Eng 62, 599–608 (2020). https://doi.org/10.1007/s12599-020-00656-x
Schneider, T., https://news.artnet.com/art-world/cryptocurrencies-explained-part-three-1248863 Cryptocurrencies, Explained: How Blockchain Technology Could Solve 3 Big Problems Plaguing the Art Industry, Artnet, March 22, 2018.
Tamblyn, N., The Common Ground of Law and Anarchism. Liverpool Law Review 40, 65–78 (2019). https://doi.org/10.1007/s10991-019-09223-1.
Vilner, Y., “5 blockchain product use cases to follow this year,” Forbes, June 27, 2018; Dan Price, “10 blockchain applications and use cases beyond cryptocurrency,” Blocks Decoded, October 15, 2018.
Werbach, K., “The Blockchain and the New Architecture of Trust” (MIT Press, 2018), as discussed in https://www.economist.com/open-future/2019/01/08/the-meaning-of-the-blockchain.
Notes:
[1] Gabinson 2016.
[2] Methods of protecting information and communications through the use of codes so that only those for whom the information is intended can read and process.
[3] Because it is a decentralized ledger with many nodes in the network, the transaction must be verified by all nodes.
[4] a piece of equipment, such as a computer or peripheral (eg a printer, keyboard), attached to a network.
[5] what is a trust network? A trust model is a collection of rules that informs an IT application on how to decide the legitimacy of an identity. There are different types of trust models, like public key infrastructure, which has been widely used in the banking industry. Zero trust security is an IT security model that requires identity verification for every person and device trying to access resources on a private network, regardless of whether they are sitting within or outside of the network perimeter. Blockchains are a model of trust through peer to peer and they require a shift from trust in people and institutions to trust in technology. This means trusting the cryptography, the software, the computers, the network, and the people who built the technology.
[6] https://www.economist.com/open-future/2019/01/08/the-meaning-of-the-blockchain, 8 January 2019 by Kenneth Cukier, The meaning of the blockchain The Economist, The Economist Group Limited.
[7] https://www2.deloitte.com/content
/dam/Deloitte/se/Documents/risk/DI_
2019-global-blockchain-survey.pdf
[8] https://www.wto.org/english/res_e/
publications_e/blockchainrev18_e.htm
[9] Norberg, 2019
[10] https://www.wto.org/english/res_e/
publications_e/blockchainrev18_e.htm
[11] It could be argued that this seems like going back to the very thing blockchains are against - a central authority/gatekeeper.
[12] https://www.wto.org/english/res_e/
publications_e/blockchainrev18_e.htm
[13] ibid
[14] the critical concept of fungibility applies here.
[15] https://www.wto.org/english/res_e/
publications_e/blockchainrev18_e.htm
[16] ibid
[17] ibid
[18] ibid
[19] ibid
[20] Bill Gates, https://www.nytimes.com/2021/03/
09/business/dealbook/bill-gates-bitcoin.html
[21] like the Carrefour supermarket example mentioned above.
[22] https://www.economist.com/open-future/2019/01/08/the-meaning-of-the-blockchain, 8 January 2019 by Kenneth Cukier, The meaning of the blockchain The Economist, The Economist Group Limited.
BLOCKCHAIN EXPLAINED