International Finance

Blockchain in the Irish border saga


Brexit has been a talking point since the UK parliament’s vote to leave the European Union, but who would have thought of its profound connection to blockchain technology. Three years ago, the country’s Brexit team had suggested that technology-based solutions could be used to address the complex nature of Brexit and the predicament it has brought to the border between Northern Ireland and the Republic of Ireland. It is at this border where customs would be necessary when the country leaves the European Union.  Besides the idea being a fascinating one, many experts have observed practical facts in the matter while some have even ridiculed it. But the more curious question is—what can blockchain do in trade finance for the Irish border? 

Foremost, it is important to understand that there are looming uncertainties in the UK’s trade relationship with the European Union in a post-Brexit world. The country is not only forced to see the implications of Brexit but combining the scenario with the coronavirus pandemic necessitates a strong digital infrastructure to cope with future complexities. It is a known fact that the European Union is the UK’s largest trading partner, but what might not be so obvious is that it accounts for around half of the latter’s trade, with the European Union membership reducing trade costs between the UK and other European Union countries, while making goods and services cheaper for consumers and enabling higher levels of export from the country. 

In line with this reality, Baker Mckenzie published a report which found that in case of a hard border scenario between the UK and the European Union, companies that traded freely across the European Union markets would have their goods marked against new costs each time they cross the channel. The report also reveals that these new costs will come in the form of tariffs and non-tariffs barriers—something that the UK government has never been in favour of—and it is anticipated to happen when Brexit is realised. 

Leaving the European Union in actuality would lower trade between both parties on the back of higher tariffs and non-tariffs. With that, the country might even obtain less benefits from future market integration within the European Union. According to Nida Khan, who is the co-founder of Nash, a fintech consulting and rating company based in Luxembourg, blockchain-based trade finance projects are majorly still in the proof of concept  stage. 

Blockchain has a new purpose 

The awe-inspiring advances in blockchain are scattered all over the world. “There are multiple areas where blockchain can provide a competitive  advantage in trade finance and I will mention two critical areas, namely the transaction  time and global trade finance gap, to accentuate the viability of blockchain in trade finance. In the Ornua (formerly Irish dairy board) case study, a letter of credit transaction was conducted using blockchain with a Seychelles trading company. The  transaction ensured the trade of $100,000 worth of butter and cheese in approximately less than four hours, from issuance to approval of the LOC, which in the conventional way would have taken between seven to ten days,” she told International Finance. 

For the uninitiated, blockchain has its own advantages in trade finance. To get a better handle on the blockchain in Brexit argument, Andrew Ridgway who is the business development director for Blockchain Company, told International Finance, that the highly resilient digital recording technology, blockchain, is valuable in trade finance in numerous ways. “Blockchain can provide increased security, transparency and efficiency in trade finance,” he explained. It has an inherent advantage in present-day processes for trade finance, especially during demanding scenarios such as delays, real-time updates, automated contract execution, reduced number of platforms and parties, transparent anti-money laundering reviews and proof of ownership, document version control and reduced duplication.”

Gauging whether or not to dwell on blockchain in trade finance has come down to understanding the nature of the technology in detail. According to the World Trade Organisation, the global gap in trade finance can potentially reach $2.5 billion by 2025. “This affects majorly developing countries, mid market firms and small and medium enterprises. According to the World Trade Organisation, around 60 percent of trade finance requests by small and medium enterprises were rejected by financial institutions in 2018, posing a very big obstacle to exporting as rejected requests imply that transactions do not take place,” Nida said

In an example, she explained that Singapore-based Triterras has embarked upon a trade finance blockchain platform which facilitates small and medium enterprises to request for trade finance from alternative lenders. “As per the  founder and chairman of Triterra, Mr. Srinivas Koneru, they were able to deploy $179 million in trade financing to small and medium enterprises within a month of launching.” 

Now the challenge for the UK is to establish a meaningful connection between blockchain and trade finance in a post-Brexit world. For that reason, Andrew discusses at great length how the technology can bring into balance its means and commitments in trade finance in two ways. First, he says, transactions can be completed directly between relevant parties through digitised information and without an intermediary. Once the agreement of the sale has been completed between the importer and exporter, the imported bank will review the agreement in real-time and submit the obligation to pay to the export bank. Second: When the export bank approves of the obligation of payment, a smart contract will be created on the blockchain to cover terms and conditions and lock in the obligations. Beyond this, the exporter and importer will confirm everything digitally from initiating the shipment to acknowledging the receipt of goods which then triggers the payment. The smart contract then automates the payment upon confirmation of this acknowledgment from the importer.

The next stage of understanding the technology’s role in Brexit trade finance is by assessing how it can help to provide provenance for goods in the supply chain. “When coupled with IoT, blockchain can offer an automated solution to track goods and shipments, while simultaneously recording all vital data in an immutable way, guaranteeing non-repudiated data,” Nida said. 

What it means for the Irish border trade 

The blockchain-Brexit formula is in fact a familiar concept to the UK. The HM Revenue and Customs had conducted a six-week proof of concept to test the use of blockchain for customs activity in the UK borders. The pilot project was focused on developing a single ‘permissioned’ blockchain that can essentially be used to inform the Authorised Economic Operator status of traders. By practice, the project will essentially enable the country to use blockchain to share the results of sensitive risk checks in a secure manner and improve the efficiency of customs processes. Financial Secretary to the Treasury Mel Stride, in response to a parliamentary question, had said that they are working on a cross-government Future Borders programme  and the technology can be considered as a possible solution to issues related to the Irish border. 

As Nida says, in the event of a customs border between the UK and the European Union, and the Republic of Ireland and Northern Ireland—an increase in the documentation for trade flows between the regions would be seen that would need verification, authentication and  compliance to laws, while paying extra tariffs. “Although reimposition of a hard border between Northern Ireland and the Republic of Ireland is a political decision, blockchain can definitely ease the issues that would arise post it. The technology can also serve as a tool to monitor the flow  of goods, dissolving the need for the existence of a hard border to serve as a manual  check,” she added.

“Blockchain will not only simplify the UK’s customs borders potentially preventing a hard border between Northern Ireland and the Republic of Ireland, but the transparency it feeds into the infrastructure will make tracking trade easier and more efficient,” Andrew explained with an example. He says, “goods received by a Northern Irish company from the UK will be taxed. There will be a tax refund if the goods stay in Northern Ireland, but if they are transported into the Republic of Ireland the company will not receive any refund. That said, the goods can be tracked entirely on the blockchain—meaning the tax process can be automated, digitally signed for and paid through a smart contact on the blockchain, with it being completely transparent.”

Besides reducing trade costs, blockchain can even assist with the difficulties faced in the border between Northern Ireland and the Republic of Ireland, further streamlining the border procedures. In Nida’s view, blockchain can be that solution by allowing  governments to deploy a blockchain network and have customs officials as one of the validating parties for the transactions, apart from different stakeholders involved in the supply chain serving as validators. “This immutable, distributed  database provided by the technology can give the complete picture of the entire suppliers’ network. Standards would need to exist in terms of data that is recorded  on the blockchain to ensure a universal comprehension,” she said. 

To second that, Andrew explained that “blockchain customs borders could see a huge increase of inflowing goods, but they would need to be processed under new trade agreements.” That said, there are multiple challenges while trying to achieve a seamless international trade. Other than the existing gap, trade finance also suffers from paper-based and manual processes which are a hindrance to an error-free and verified data. By theory, trade finance involves multiple parties which communicate with each other through different platforms for communication and document sharing—which increases the transaction time and imposes restrictions for easy to access trade finance solutions, thereby limiting the number of clients. An  increase in transaction cost also occurs because of the involvement of multiple parties through multiple, disconnected platforms and subsequently the risk associated with a transaction also increases as all parties do not have access to the same source of  information. 

“This is when blockchain comes as a panacea to address trade finance challenges where the decentralised distributed database can provide the needed data repository for all parties to strong and retrieve verified data from the same source,” Nida said, pointing to SWIFT, which is the world’s major platform for domestic and international payments that settles and records trade finance transactions. “As observed by Financial Times in 2018, it suffers from many inefficiencies, where payment transfers frequently ‘pass  through multiple banks before reaching their final destination, making them time consuming, costly and lacking transparency on how much money will arrive at the  other end’. Blockchain as a payment system can resolve these issues by facilitating  payments using cryptocurrencies in real-time and with complete transparency,  including knowledge of the amount of payment, that would be received by the other  party,” she added.

More transparency will decipher complexities in trade finance

Plug all these factors in the blockchain-Brexit formula, and there comes the answer: The technology is at the frontier of trade finance if properly used because it can  help to verify and authenticate documents associated with the trade of products and facilitate the additional processing fee based on the specific  transaction. “Blockchain provides a distributed database that records data in a  permanent manner,” Nida explained. “This ensures that all data available is free from manipulation  and an accurate picture can be seen at any stage of the supply chain. Automation, faster transaction time, reduction in the number of intermediaries and real-time  payments can make blockchain a technological solution to focus on to ease post-Brexit economic issues.” 

It is not often that a technology is given so much power when discussing the seriousness of Brexit and its real implications for customs borders. “The presence of customs borders between the European Union and the UK would result in the process taking more time, increased documentation, increase in personnel to  check at the customs and increase in overall price of the goods,” Nida said. “This can prove to be detrimental for economic progress and development for the economies involved. A  strategic approach should be adopted to find a technological solution to ease the  issues that would arise from Brexit.”

Testing and expertise will drum up blockchain-Brexit 

In Andrew’s view, these possibilities will change dramatically if there is an added effort from the UK government to understand blockchain on the back of its wide applications and its benefits in supply chain industries, because such an event would change the chances that were previously thought to be impossible for the UK. Two years ago, the British prime minister said that the country is cent percent committed to the development and adoption of new technologies, drawing a parallel to the government’s active interest in blockchain. Investments of more than  £10 million had been made through Innovate UK and the research councils have demonstrated huge support in blockchain projects. 

The upshot of blockchain is that it can decrease the negative impact of Brexit on trade finance, especially when it comes to efficiency and speed, which would otherwise be an extensive process for the country. For that to happen, the technology would need to see a lot of testing and expertise. But it would certainly take time for blockchain to be used as a solution for Brexit because of the regulatory issues and technological  impediments in the country. 

“Data privacy is another issue that needs to be solved when using  blockchain along with security if blockchain is being used as a payment system to  replace or support platforms like SWIFT,” Nida said. “The benefit of blockchain in making the UK  economy stronger after Brexit is undeniable from the envisaged benefits of the  technology but considerable time and effort would go into making blockchain, a feasible reality in trade finance, that has regulatory approval from all concerned  jurisdictions.”

Time and again, the main challenge for the UK is that the technology required for blockchain to be used in border control does not exist yet. But it will make total sense when the technology is introduced in the Brexit play because of the border’s historically sensitive nature. So any changes to trade, immigration checks, local economies and other matters following Brexit will have to be neatly tracked and assessed, at once giving the country the transformative strength it needs. “This technology will not solely fix Brexit or have a large enough impact, unless significant initial investment into the expertise required to implement the technology is put in place to really spearhead and drive blockchain projects and regulation in the UK, to have a positive impact on Brexit in the near future,” Andrew said. 

He added that the problem facing the Irish border and blockchain is that there is currently no tried and tested blockchain solution. “So it makes it difficult to implement a fool proof blockchain solution before the new rules are implemented in January 2021 and it would require a tremendous amount of expense and cooperation in a short time. Something which has been missing throughout the whole Brexit soap opera.” 

Political divides might influence smart contracts

Another contributing factor to blockchain in Brexit is that political divides and opposition will decide how some smart contracts would be constructed. But the underlying technology of blockchain can still be implemented to cut costs, improve efficiency and increase transparency in the long run. 

The concept is valid because the current situation in trade finance imposed by Brexit would be transformed if there are additional developments to the technology. “Even when looking into voting, real estate and immigration, blockchain can help the government streamline processes, cut costs and improve transparency and control. Developing and implementing new technology into society and with the benefits blockchain can bring, the economy will reflect the technological advances implemented,” Andrew said. “The clear advantages across numerous industries in which the government is active and rely on, can most certainly boost the economy regardless of whether the UK’s mission to leave Europe, succeeds or fails.” 

Last year, the government ruled out blockchain development at customs borders because it requires ‘significant work’. It is reported that the UK might not be able to use blockchain unilaterally because of the collaborative nature of distributed technologies, which means the idea of blockchain in the Irish border should be taken with a grain of salt. For now, the House of Lords European Union Committee remains skeptical of the popular belief that blockchain can solve customs borders issues, especially in the case of a no-Brexit deal.

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