A potent instrument for global cooperation.
We explore blockchain technology as an emerging cooperative tool. While many remain sceptical of its merit, blockchain technology and its various applications hold a compelling argument towards harnessing healthy multilateralism amongst nations.
In 1976, Nobel Prize winner Friedrich Hayek postulated that the path to economic prosperity would be in absence of government intervention. In Hayek’s opinion, when a central currency issuer uses the money supply to accomplish a specific end, such as the manipulation of interest rates, it ultimately hurts the market system in the long term. We now see his claim play out in cryptocurrencies more than 40 years later. Although some banks and regulators still have some concerns, it can't be denied that these modern financial instruments even in their infancy, show great promise.
The removal of a central party requires each participant to maintain a level of trust amongst themselves. When it comes to facilitating transactions, this can take the form of a ledger that applies specific consensus mechanisms to regularly update and record finances and transactions. This distributed ledger technology is critical for the functioning of the blockchain mechanism. Providing an alternative to the traditional system requires a way to get around the issue of fraud detection through double-spending. Double spending refers to a false transaction which attempts to emulate an authentic transfer from a different user. Individuals participating in the digital system is responsible for keeping track of approved transactions in its particular sequence. In order for the system to be successful, a protocol must be in place to ensure the recorded transaction history of each participant is identical.
Bitcoin addresses these requirements by proposing a series of solutions. First, utilizing cryptographic hash functions, a mathematically dense puzzle is required to be formulated for a piece of information to be produced (Ganne, 2018). This is done so that it would require an infeasible amount of computational work to generate a fraudulent transaction. Additionally, the construction of the cryptographic hash function is so precise that any slight deviation from its original message will completely distort the composition of the hash function. This makes the series infeasible to compute in the reverse direction and to be deciphered (Ganne, 2018).
Secondly, a proof-of-work system involves examining hashed values that comply with predetermined patterns, which then broadcasts out to all participants in the network. The creation of broadcasted blocks will allow for all participants to keep track of the most ‘suitable’ transaction, ones with the longest chain or ones with the most computational work put into it. As the proof-of-work mathematical techniques cannot be altered without redoing the previous input, the peer-to-peer network utilizing network timestamp transactions through proof of work and mathematical techniques ensures non-temperance in outputs (Ganne, 2018).
World Applications: Inefficiencies and Lags
Despite leaps and bounds made by technology, international trade transactions continue to rely extensively on paper. A refrigerated container loaded with roses and avocados from Kenya to the Netherlands was followed by shipping company Maersk in 2014, to chart the network of physical processes and paperwork surrounding each shipment. They found that during the trip, about 30 intermediaries and more than 100 people were involved, with the number of interactions reaching 200. It took about 34 days for the shipment to go from the farm to the distributors, including 10 days waiting for documentation to be processed. Critical documentation was found to have gone missing, only to be recovered later amongst various paperwork (Park, 2018).
Discrepancies between payments and delivery of goods is an ongoing concern in international trade. The absence of trust between the entities causes uncertainty: importers will be unsure whether goods will be shipped after payment, and exporters are concerned about payment after shipment (Liu, Lu and Woo, 2019). Traditionally, there are three main ways for importers and exporters to conduct a transaction, cash-in-advance, open account or bank-intermediated trade finance in the form of letters of credit (LOC). According to the ICC Banking Commission (2016), over 40% of world trade was directly financed by bank-intermediated trade finance, this statistic was found to be much higher especially for developing economies.
Currently, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is responsible for the international proprietary communications platform, founded to create efficiencies by replacing telegram and telex for international payments. Serving 212 countries and over 10,000 banking organizations and corporate clients (Zachariadis and Scott V, 2014). The process is often slow, opaque and cost-inefficient due to numerous players, time zones, regulations and jurisdictions (Bank for International Settlements, 2020).
Efficiencies brought upon by existing models have prompted countless developments of proof of concepts to streamline and automate letters of credit processes, as well as implementing possible blockchain applications. On August 2016, HSBC bank, Infocomm Development Authority of Singapore (IDA) and Bank of America announced the construction of a blockchain application based on a Hyperledger Fabric to improve the LOC system. Its utilization of smart contracts - a computer program which would automatically execute actions based on terms of a contract or agreement, reduces administrative costs, regulate multinational insurance contracts and facilitate claims (Ganne, 2018). The system allowed for all parties to visualise data in real-time, extrapolate workflows and display it on designated ledgers, increasing transparency for certain information and retaining encryption on others (McDaniel and C. Norberg, 2020).
One of the key issues that may impede the process of digital adoption is interoperability and data exchange. The standardization of processes is crucial for participating entities to successfully trade in the global value chain. The unbalanced pace of adoption and varying technical interfaces will subject participants to the “digital island problem”. Consensus needs to be reached that will standardize the transfer of information and data to be understood by anyone (Ganne, 2018).
In this article, we explored the basics of blockchain systems. The system that provides a new and secure way to facilitate direct transfers between two consenting parties. The incorporation of cryptographic hash functions means that an infeasible amount of computational work would be required to generate fraudulent transactions. Inefficiencies brought upon by existing models in global trade causes lag time and discrepancies between payment and delivery of goods. Blockchain technology and its subsequent methods could bring forth a new age of selective data and documentation distribution.
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Ganne, E., 2018. Can Blockchain Revolutionize International Trade?. Switzerland: World Trade Organization.
Liu, T., Lu, D. and Woo, W., 2019. Trade, finance and international currency. Journal of Economic Behavior & Organization, 164, pp.374–413.
ICC Banking Commission, 2016. Rethinking trade and finance 2016: an ICC private sector development perspective.
Zachariadis, M. and Scott V, S., 2014. The Society For Worldwide Interbank Financial Telecommunication (SWIFT). New York: Routledge.
Bank for International Settlements, 2020. Central Bank Digital Currencies: Foundational Principles And Core Features. Bank for International Settlements.
McDaniel, C. and C. Norberg, H., 2020. Can Blockchain Technology Facilitate International Trade?. MERCATUS RESEARCH.
Park, K., 2020. Blockchain Is About To Revolutionize The Shipping Industry. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/articles/2018-04-18/drowning-in-a-sea-of-paper- world-s-biggest-ships-seek-a-way- out#:~:text=The%20container%20shipping%20lines%20are,catch%2Dup%20in%20technology.%E2 %80%9D&text=And%20the%20benefits%20wouldn’t,to%20the%20World%20Economic%20Forum.>