The UK and Europe

The implications of blockchain for trade and Brexit

Nicolas Botton / Jan 2018

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Last summer, the UK’s Brexit team suggested that “technology-based solutions” – meaning blockchain – could be used to deal with the complex predicament which Brexit has brought to the border between Northern Ireland and the Republic of Ireland, where a customs border would be necessary upon the UK’s exit from the Union. The UK’s suggestion was rightfully ridiculed by experts: questions of capacity and time constraints mean that technological solutions are actually unworkable altogether. Nevertheless, blockchain is a technology with real potential, especially in the field of trade.

Blockchain – or distributed ledger technology – refers to the common file which members of a network use to transact without the need for an intermediary, such as Visa or PayPal. Instead, it is the blockchain’s network which processes and verifies transactions, and creates secure and permanent records of transactions. These ‘blocks’ of data which contain this information can hold much more than just transaction information. They can be used to store and transact files, and be configured to execute certain tasks based on certain conditions, such as automatically execute tasks like transfer payments or send a document triggered by a certain date or the reception of a particular file.

Thanks to blockchain, the complex processes involved in trade – whether regulatory, logistical, or regarding chains of custody – could be made significantly more efficient. Used in a supply-chain, it would provide a firm with the infrastructure necessary to remove the need to secure each transaction through intermediaries via registration, tracking and certification. Information on any shipment – whether it be a proof of purchase, a clearance form, a bill of lading, insurance – can be made part of a block, and be accessible to suppliers, transporters, buyers, regulators and auditors. Having all this information in one location would not only lower transaction costs but auditing and accounting costs as well. Used in customs handling, exporters could upload all the documents onto a customs office blockchain and instantly prove their abidance with all import rules – for example, qualification for preferential rates through rules of origin, sanitary and phytosanitary (SPS) rules, or compliance with embargoes.

Although blockchain may sound like a dream come true for Brexiteers, in reality, the technology has seen only very narrow applications so far, as global players are hesitant to buy into it. This means that the kind of blockchain-powered infrastructure required to manage complex trade processes, such as a customs border, has not yet seen the light of day.

This can be blamed on four things. First, regulatory oversight on blockchain is currently quasi non-existent. The fact that blockchain lacks an authority or standard that firms can refer to, combined with the lack of research studies into the flaws of the technology, means that firms are reticent to start experimenting with a technology they correctly see as risky.

Second, blockchain is still in its infancy in many ways, meaning that many opportunities for fraud still remain that need to be ironed out before it can truly be called ‘secure’. This is especially significant in the field of customs handling, since all that would be required to allow fraudulent or illegal goods to cross the border would be one authentication from the right authority.

A third and more nuanced issue involves the unwanted transparency that blockchain may bring to supply-chains. Although firms have begun using blockchain to deal with specific problems that hurt profit margins, deeper integration may not be altogether attractive if it means that it is easier to verify contestable producer claims, such a country of origin, fair trade, or climate friendliness.

The fourth and most significant element preventing blockchain’s integration within trade concerns network issues. Not only is the talent associated with blockchain scarce and expensive, but the technology essentially requires a great number of entities to participate to be viable. Supply-chains making use of less tech-savvy producers will need a means of recording their associated data for transmission within a blockchain to make full use of its potential.

Taken all together, the current state of implementation of blockchain within global trade has clear implications for the UK's post-Brexit customs predicament. Not only does the technology not exist yet, there's a good chance that the UK will have had time to leave the EU, realize its mistake, and re-join it before blockchain sees any significant implementation within customs borders. It is simply not an option at this stage of the conversation, especially given the resources required for such a project, and Brexit’s time constraints.

But this won’t always be so. Eventually, regulators will realise how much can be achieved with blockchain, and finally provide the secure legal environment that it needs to thrive, and the support that businesses (and especially SMEs) need to be able to start experimenting with the technology. Although blockchain-powered trade can’t simply be wished into existence, when regulators commit globally to promoting blockchain, it will eventually be used for much more than just the Northern Irish border: customs offices all over the world will use it to monitor their borders effectively and to smooth out trade with partner nations. This is something worth striving for, and which demands the attention of policy makers.

Nicolas Botton

Nicolas Botton

January 2018

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