12374113
jaakko@moni.com
Supervisor: Geraldo Vidigal
University of Amsterdam
Blockchain in international trade
facilitation, compliance and
sustainability
Masters Thesis, LL.M. International Trade & Investment Law
Jaakko Väyrynen
26.7.2019
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Abstract
Blockchain has been said to be the biggest innovation concerning international trade since the shipping container; what the shipping container did to the flow of goods, the blockchain will do to the flow of data and funds in supply chains. With its enormous potential to lower barriers to trade pursuant to the Trade Facilitation Agreement the technology will also allow more supply chain transparency and traceability that can be used in various ways, for example curbing trade in illicit or counterfeit goods, goods’ compliance with technical regulations and sanitary measures and states’ compliance with WTO agreements. This paper will concentrate on the aforementioned examples, the adequacy of the legal framework currently in place and how the legal framework should look like in order to gain full advantages of the technology. Due to blockchain’s inherent decentralised and cross-border nature, the acts of international organisations such as the WTO, WCO and ISO; multilateral cooperation on facilitating blockchain technology through these organisations is invaluable for the future of international trade.
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Table of Contents
Introduction ... 3
Part I: The Blockchain and international trade ... 5
1.1 EVE Framework ... 10
1.2 IBM & Maerks – Tradelens ... 12
Part II: Blockchain, supply chain and WTO Agreements ... 13
2.1 Businesses ... 13
2.2 States ... 15
2.3 World Trade Organisation ... 17
2.4 Preferential Trade Agreements ... 20
2.5 Outlook in the near future ... 20
Part III: Technological and legislative issues: the road ahead ... 22
3.1 Issues in implementation ... 23
3.2 Blockchain related issues ... 25
3.3 International Organisations and multilateral cooperation ... 28
Conclusion ... 31
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Blockchain in international trade facilitation,
compliance and sustainability
Introduction
Blockchain has been said to be the biggest innovation concerning international trade since the shipping container; what the shipping container did to the flow of goods, the blockchain will do to the flow of data and funds in supply chains1. The estimated contribution of the technology to the
world economy and international trade is by no means trivial; according to industry estimates, 10% of global GDP by 2027 will be generated by blockchain technology-based business2, of which international trade is a significant contributor with an increase of over $1 trillion in value within the next ten years3. Implementing the World Trade Organization (WTO) Trade Facilitation Agreement (TFA) with the help of technology would increase international trade volume by 14.3%4 by lowering barriers at borders; the Agreement’s objectives could be seen as a mandate for the WTO to further their blockchain initiative in achieving the said aims, namely making trade transactions flow smoothly over borders.
But how does the technology, most known for its role behind the infamous cryptocurrency Bitcoin, be capable of such reshaping of international trade as we know it? Are the technology and the legal framework ready for all the intended uses of blockchain in this area to realise its full potential? With its enormous potential to lower barriers to trade pursuant to the Trade Facilitation Agreement the technology will also allow more supply chain transparency and traceability that can be used in various ways, for example curbing trade in illicit or counterfeit goods, monitoring goods’ compliance with technical regulations and sanitary measures, and monitoring states’ compliance with WTO agreements. Therefore, the paper does not only discuss business (B2B) and business-to-government (B2G) information sharing in connection with transactions and compliance with border measures, but also on a less explored area; government (G2G) or government-to-international organisation (G2IO) data sharing on how measures are de facto applied at the border at
1 E. Ganne, Can blockchain revolutionize international trade?, WTO, Geneva, [2018] <https://doi.org/10.30875/7c7e7202-en>
accessed 24 May 2019, p. 44.
2 World Economic Forum Global Agenda Council on the Future of Software & Society, 'Deep Shift Technology Tipping Points and
Societal Impact' [2015] <http://www3.weforum.org/docs/WEF_GAC15_Technological_Tipping_Points_report_2015.pdf> accessed 24 May 2019, p. 24.
3 World Economic Forum, ‘Trade Tech – A New Age for Trade and Supply Chain Finance’ [2018] <
http://www3.weforum.org/docs/White_Paper_Trade_Tech_report_2018.pdf > accessed 24 May 2019 p. 4.
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any given time and how that data can be used to track WTO Agreement compliance. It is therefore not only trade volume that the blockchain can increase but also the sustainability, quality and safety of goods and the quality and complicity of domestic regulation by increasing accountability throughout various stages in the supply chains. It will be argued that the technology has the potential to help the World Trade Organization to achieve its objectives; growing world trade by lowering trade barriers, which blockchain can facilitate by lowering transaction and transportation costs, while maintaining Member States’ freedom to choose their desired level of protection, which blockchain can be used to monitor so that States adhere to international standards and other requirements laid out by the WTO Agreements.
As the European Union describes in its report on blockchain in trade: “TFA [is] a foundation for WTO members to explore further ways to ease trade, including through blockchain.”5 This is seconded by some authors such as Ganne, who in a WTO publication endorses blockchain as a solution for fully implementing TFA, as an objective of the agreement objective is to “[include] the use of electronic means to exchange data and documents related to cross-border trade transactions.”6
Under the Agreement, trade facilitation includes a vast range of information obligations on Member States that are often not fulfilled with existing arrangements. This paper shall take part in the discussion why blockchain would be a great solution in the implementation of the agreement. Although blockchain has great potential to advance the flow of funds in trade, such as with letter of credit trade finance or international payments, this paper will concentrate on the flow of information connected to physical goods through the aforementioned examples, the adequacy of the legal framework currently in place and how the legal framework should look like in order to take full advantage of the technology.
Part I of this paper will discuss blockchain as a technology in connection with international trade; first, the Part will describe what a blockchain actually is, how it can facilitate cross-border trade and why it can advance the quality of trade flows unlike the technologies currently in use. These claims are then looked at through actual use-cases that are connected to the main WTO Agreements; the GATT, TBT Agreement, SPS Agreement and TRIPS in Part II. Part III explores the problems that hinder the adoption of the technology; the problems are of various gravity and both technological and legal in nature, some which have not been resolved even regarding existing technology, such as standardisation of data semantics. Overcoming these technical and legal problems is essential in introducing the technology on a global scale. Part III also analyses the potential solutions to existing
5 EU Report on Blockchain: a forward-looking trade policy (2018/2085(INI)), para. 5. 6 supra n.1, p. 28.
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problems and due to blockchain’s inherently decentralised and cross-border nature, the role of international organisations such as the WTO, WCO and ISO should be stressed; multilateral cooperation on facilitating blockchain technology through these organisations is invaluable for the future of international trade to avoid some of the problems that persist with existing electronic systems, such as lack of standardisation resulting in regulatory divergence and interoperability issues. As will be seen, the technology is potentially changing international trade as it currently stands, however, the road ahead is long until a global implementation is possible as it requires wide legislative cooperation and political will which are the most worrisome aspects concerning the development of the technology according to logistics industry experts7.
Part I: The Blockchain and international trade
What, then, is this technology with the potential to remould international trade and the global economy? In its simplified form a blockchain is a modern (and slightly more complex) version of a split tally stick8, a way to store information in a decentralised way that is tamper-proof; ledgers of information are distributed on multiple servers (nodes) and the changes to these ledgers (transactions) are recorded in consecutive time-stamped and encrypted blocks of data, the latter containing a cryptographic hash of the former, thus making it impossible to alter the previous blocks without distorting the data on the latter9. The changes to the ledgers are decided by consensus: if data on one node is altered against the rules of the blockchain, the rest of the nodes will automatically reject those changes, thus making the blockchain a secure way to store information as there is no single point of attack that a malicious actor could exploit10. For example, in the cryptocurrency context, there is no trusted third party (e.g. a bank) maintaining a ledger to record transactions from a party to another, but the ledgers distributed on the nodes maintain information on transactions (from A to B for the amount of X) thus always upholding the right balance in each public key (cryptocurrency “account”) even if one or even half of the nodes are maliciously attacked or down11. The same would hold, for
example, land or other ownership registries; ownership documents could be digitised and put on the blockchain thus making all transfers of ownership transparent and immutable even across long custody chains. The blockchain, therefore, adds a layer for transfer of value on top of the information
7 Allen D and Berg C and Davidson S and Novak M, Potts J, ‘Blockchain TradeTech’ (May 2, 2018)
<https://dx.doi.org/10.2139/ssrn.3171988> accessed 10 June 2019.
8 see e.g. Wikipedia, ‘Tally stick’ <https://en.wikipedia.org/wiki/Tally_stick#Split_tally> accessed 25 May 2019.
9 Satoshi Nakamoto, 'Bitcoin: A Peer-to-Peer Electronic Cash System' (Bitcoin.org, 2009) <https://bitcoin.org/bitcoin.pdf> accessed
5 June 2019, p. 1.
10 ibid, p. 2-3.
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layer of the internet as we know it today as digital assets can be transferred without creating duplicates of those assets.
Figure 1: Traditional database systems vs. Blockchain database system12
How does this all fit into international trade when considering trade in physical goods? First, for example, a mobile phone’s safety certificate could be digitised when issued and uploaded on a blockchain, or cargo of crude oil could be tokenised on a blockchain. All documents that can be recorded in code can be digitised and uploaded13; that is almost all documents, although signatures
and stamps that are not in a text form would have to be also digitised14. Digital signatures usually
employ a public/private key pair that could be compared to a P.O. box; the location of the box is public, i.e. the address, but the key for the box is personal to the owner. The digitised documents could then be transferred on the blockchain from a party to another reducing transaction costs as the documents move fast and securely; IBM and Maersk reported that with current methods a test shipment of roses from Kenya to Rotterdam resulted in a 25 centimetre thick pile of documents that
12 Alejandro Reyes, 'The World of Blockchain' (Medium, 2017)
<https://medium.com/@reyesale/the-world-of-blockchain-f3b268e3d748> accessed 1 June 2019.
13 documents can also be uploaded on a blockchain in an unstructured pdf/image form. This, however, is not recommended on public
blockchains due to file size.
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passed through multiple parties in the supply chain, and one important document was lost in transit15, Although only a single shipment, the test shows that the documents change hands a vast number of times and the amount of documentation even in simple trade transactions piles up considerably, thus making paperless trade a welcome change for business parties and customs officials alike. Tokenisation of goods is similar to the digitisation of documents, and function much like shares in that they represent the underlying asset16; for example, a crude oil cargo of 500,000 barrels could be tokenised into 500,000 tokens, each representing a 0.000002% share of the bulk, which could then be used for commodities trading on the blockchain. Again, the fast and secure transfers on the chain would ensure cost-effectiveness, and as there are only as many tokens as barrels, the cargo cannot be double spent as with physical bills of lading that are subject to vast amounts of documentary fraud17. Connecting the physical goods to a blockchain, as with connecting goods to physical documents, always poses a problem on goods that are not unique; how can, for example, a smartphone be reliably connected to the documents that represent the individual good? Barcodes and ID-numbers on packaging have been traditional ways to connect goods to documents but there are more secure alternatives; QR codes, RFID chips, or ‘crypto anchors’. Crypto anchors are small chips that can be embedded to products in a tamper-resistant way, for example inside a smartphone. Also, the data on crypto anchors cannot be copied to another to create duplicates.
The transfers of these documents or tokens related to real-world goods are ensured to be legitimate and immutable by the hashing and consensus mechanisms inherent in the chained distributed ledger technology. Consensus mechanisms are various and they are the mechanisms that dictate the rules of blockchain ‘decision-making’, for example, the Bitcoin blockchain uses a Proof-of-work mechanism that requires nodes to compete on completing a cryptographic puzzle by using computing power in order to decide on the creation of a new block18. Solving the cryptographic puzzle creates a block of data consisting of the occurred transactions, and the proof is then validated by the other nodes so that the creation of the new block follows the rules, or the decision-making protocol that is the consensus mechanism, of the blockchain19.
15 Tom Groenfeldt, 'IBM And Maersk Apply Blockchain To Container Shipping' (Forbes, 2017)
<https://www.forbes.com/sites/tomgroenfeldt/2017/03/05/ibm-and-maersk-apply-blockchain-to-container-shipping/#5324cfda3f05> accessed 1 June 2019.
16 George Sazandrishvili, 'Asset Tokenization on Blockchain Explained in Plain English' (Medium, 19 May 2018)
<https://medium.com/coinmonks/asset-tokenization-on-blockchain-explained-in-plain-english-f4e4b5e26a6d> accessed 19 July 2019
17 DA Bury, 'Electronic Bills of Lading: A Never-Ending Story.' (2016) 41(1) Tul Mar LJ 197 18 supra n.5, p. 4.
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Figure 3: Hashing20
A cryptographic hash, a 64-digit concentrate generated from the data of the created block, is then included in the following block so that any unauthorised tampering of the data of any previous block would be detected as the hash of a tampered block would become inconsistent with the hashes contained in the following blocks (see figure 3). To overcome the detection of tampering and to override consensus mechanism, a hacker would have to attack at least 51% of the node network, which in theory is possible, however economically not viable when the number of points of attack rise to tens, hundreds or even thousands. Buterin, a co-founder of Ethereum, is in development with a concept that would require 99% of the nodes to be hacked to distort the consensus mechanism, thus increasing security in blockchains.21
Merkle Proof is a way to prove that data under a hash includes certain elements; if one wanted to prove that a block contains a certain transaction, the individual hash of the transaction can be contrasted with other hashes and the hashes together should make up the ‘root’ hash of the block discussed above.22
These features together make a blockchain a so-called ‘trustless’ mechanism23, as it does not require trust in any other party as the ledger is maintained on multiple nodes without the chance of being
20 supra n. 7.
21 Vitalik Buterin, 'A Guide to 99% Fault Tolerant Consensus' (Vitalikca, 2018)
<https://vitalik.ca/general/2018/08/07/99_fault_tolerant.html> accessed 12 June 2019
22 Evan Kozliner, ‘Merkle Tree introduction’ (Hackermoon.com, 2017) <
https://hackernoon.com/merkle-tree-introduction-4c44250e2da7> accessed 21 July 2019.
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tampered with, and fresh transactions only occur with consensus between the nodes according to the cryptographic rules of the blockchain.
A blockchain can be either permissionless or permissioned24; a permissionless blockchain such as the Bitcoin chain is open to all users willing to participate as a user or a node, and conversely permissioned blockchains such as Hyperledger require permission to use and act as a node. Permissionless public blockchains are the ‘ideal’ of decentralisation as they only function on predetermined rules and there is no entity that controls the access to the chain. However, the downside of these chains is privacy; although parties are pseudonymised, the transactions are visible to all users of the chain thus often raising concerns on business confidentiality. This privacy issue is solved in permissioned chains as users and creators of the chain may decide who may see what information; however permissioned chains bring a degree of centralisation as an entity or entities control access to the chain. There are some developments to solving some of the problems of these different types of chains which are considered in depth in Part III.
Smart contracts were introduced by Nick Szabo as early as 199725; these pieces of code act as
self-executing contracts where contractual obligations are automatically performed conditional to certain events (‘if X happens, execute Y’) which can be external (e.g. information input of delivery of a cargo) or internal (e.g. input of cryptocurrency in a smart contract). Smart contracts can be utilised in many ways, of which most relevant to international trade and for the purposes of this paper is supply chain automatisation. In the context of blockchains, these smart contracts are built on top of the blockchain infrastructure if the architecture so allows (see e.g. Ethereum).
The blockchain layer is built on top of the TCP/IP infrastructure that we call the internet (figure 2).
24 Also often divided between private and public chains, however, this distinction here is of less relevance. 25 Nick Szabo, 'Formalizing and Securing Relationships on Public Networks' (Nakamotoinstituteorg, 1997)
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Figure 226
1.1 EVE Framework
As can be seen above, blockchain is not just a single technological innovation but a combination of many; cryptography, distributed ledgers, hashing and smart contracts. How do these pieces make a puzzle that is supposed to be supreme to the technologies currently in use? The answer lies in trust and transparency created by the combination of the abovementioned factors. As Nikolakis, John and Krishnan express, these features create an Evidence, Verification and Enforcement (EVE) Framework for supply chains; the blockchain acts as evidence of the chain of custody, as all events are recorded on the chain, all events are easily verified upstream due to immutability and transparency of the transactions, and these combined allow for enforcement of obligations in the correct stages of a supply chain27.
26 by the author.
27 William Nikolakis, Lilo John, Harish Krishnan, 'How Blockchain Can Shape Sustainable Global Value Chains: An Evidence,
Verifiability, and Enforceability (EVE) Framework' (MDPI Sustainability, 2018) <https://doi.org/10.3390/su10113926> accessed 12 June 2019
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1.1.1 Evidence
The trust mechanism of a blockchain, including the cryptographic validation and consensus rules, makes the information, if initial input is correct28, tamperproof evidence of one’s assets on the chain, and of ownership at any given time due to timestamping of the asset blocks. Due to real-time updating of the distributed ledger, this avoids the double-spend problem that exists with e.g. off-chain cryptocurrencies or cash, physical bills of lading or certificates that can be duplicated. Some countries such as Brazil have already taken the legislative initiative to make blockchain evidence admissible in courts29.
Everledger could be used as an example of providing evidence on a blockchain; newly mined diamonds are given ‘digital passports’ that act as a document of ownership and proof of ethical sourcing30. The diamonds’ characteristics are recorded and a laser engraving is added for identification, and these features are then linked to a blockchain to create an unique identity for each diamond.
1.1.2 Verification
Verification is dependent on the validity of the previous evidence premise; all the data on the chain can be validated upstream, creating an audit trail with high data integrity. The transparency of the transactions on the chain makes it easy to track assets upstream fast and easy even when the number of intermediate transactions is measured in thousands. For example, Walmart has adopted a blockchain-based solution to track food; a process of tracking a single mango upstream to a particular grower used to take seven days which was cut to seven seconds with the new technology31. Upstream verification can be used in various types of monitoring, for example, compliance of certifying bodies up the chain.
28 see Part III on the ‘Garbage in, garbage out’ problem. 29 supra n.27.
30 Everledger (https://diamonds.everledger.io/).
31 Reshma Kamath, 'Food Traceability on Blockchain: Walmart’s Pork and Mango Pilots with IBM' (JBBA, 1(1), 2018)
<https://jbba.scholasticahq.com/article/3712-food-traceability-on-blockchain-walmart-s-pork-and-mango-pilots-with-ibm> accessed 12 June 2019.
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1.1.3 Enforcement
A blockchain based system can automate enforcement due to the abovementioned factors; contractual or customs enforcement can be automated based on the data on the blockchain that acts as trusted evidence that can be verified up the stream. Automated enforcement would require the use of smart contracts, for example in the case of customs enforcement the funds allocated for customs duties in the smart contract would be released, conditional to acceptance of the goods based on the supply chain data. Without automation enforcement measures would be made more cost-effective when the allocation of responsibilities would become easier and faster due to evidence and verifiability on the chain.
1.2 IBM & Maerks – Tradelens
The above factors creating a framework of evidence, verification and enforcement could be used for supply chain monitoring and management by all stakeholders in the chain from the producer, or even the provider of raw materials, to the consumer, and all the actors in between. IBM, one of the biggest innovators in the blockchain sector, and Maersk, the world’s biggest shipping company, have come together to create a platform to do just that; they created Tradelens that brings together all the actors on the supply chain32. Tradelens is a complete platform, i.e. not only the blockchain that underpins it, but also equipped with its own software and a user interface; it allows the input of data and documents through application programming interfaces (APIs), an app or a web browser, which makes it easy to use. The platform is based on a permissioned ledger that allows built-on distributed applications (smart contracts/’chaincode’ in used Hyperledger language) and is therefore in the control of IBM and Maerks for the acceptance of parties who may become members of the platform. Although thus far the most complete application of blockchain to supply chains it suffers from some of the same problems as tried-but-failed global e-document systems, such as BOLERO33; there is some degree of
centralisation and the platform is controlled by only a couple of entities, that for some are competitors, and, therefore, include security concerns. Also, as the platform requires the use of specific software that is not open source, the adoption for some businesses and states is not an option. This is due to security concerns with non-open source systems, as inspecting the code is not possible and the code might include backdoors for accessing secure information.34
32 Tradelens (https://www.tradelens.com/)
33 supra n. 17, failure of the system to become widely adopted was due to data security risks brought by centralisation (e.g. single
point of attack, trust in the administrating entity).
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Although an impressive system, Tradelens has yet to attract a wide-scale adoption for the abovementioned reasons. To overcome these issues, Part II will address the needs of supply chain stakeholders and what the system would have to bring to the table to gain wide-spread adoption; the part will take into account the international trade system as a whole including the perspectives of businesses, states, international organisations and non-governmental organisations.
Part II: Blockchain, supply chain and WTO Agreements
The various stakeholders in international trade have differing needs from a new system, however, they share some common aims of which probably the most important is the facilitation of trade. As mentioned above, only the full implementation of the TFA would bring the world’s trade volume up by 14.3%35 which would enrich the global economy by $1.3 trillion by the next decade, and maybe even more when costs in trade are reduced. But it is not only the volume of trade that would be affected by the adoption of blockchain technology and the resulting paperless trade; it will be argued that the resulting trust and transparency would enhance sustainability, quality and safety of goods and the quality and complicity of domestic regulation by increasing accountability throughout various stages in the supply chains. These themes, trade facilitation, better goods and better regulation, will underpin the below considerations of how international trade can be renewed by blockchain adoption by fitting the benefits brought by the technology in the EVE Framework. The end of this part will explore what the system might look like in the coming years.
Despite wide multilateral cooperation to promote free trade, international trade is still riddled with barriers of various sorts, be it tariffs or non-tariff barriers in the form of domestic regulations, inefficient border processes or costs. The ones that are suffering the most from these barriers are the small and medium-sized enterprises (SMEs) and the least developed countries (LDCs)36, and in the
worst case, these barriers act as total barriers to entry in certain markets. Arguably, when deployed in cooperation by states and relevant international organisations, blockchain could aid in removing or lowering some of these barriers, or at least in monitoring that tariffs and regulations are applied in a manner that is not arbitrary or a form of discrimination.
2.1 Businesses
The most significant benefit of a blockchain solution for businesses would be the reduction in transaction and information costs in trade; switching to trusted and transparent paperless trade would
35 supra n. 1, p. 29.
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cut inefficiencies and fraud in supply chains. Businesses would also benefit from higher customer satisfaction by providing consumers with the data of provenance of the goods.
For upstream businesses a blockchain would act as a repository of evidence for e.g. certificates of safety or origin; when a certificate is anchored to certain goods and directly uploaded on the chain by relevant authorised body it serves as the original as it cannot be duplicated and double-spent when goods and documents are moved down the supply chain. One important document for businesses is the Bill of Lading, that is an age-old document often still produced in physical form. The bill of lading is a multifaceted document as it acts as a document of title (holder of document has constructive possession of the goods), proof of carriage contract, receipt for loading of the goods, and an undertaking by the carrier to ship the cargo to the destination and to release the cargo only to the holder of the bill of lading. It is evident that a document of such importance needs to be trustworthy; however, this is often not so as the document is often the target of documentary fraud37 by, for example, tampering or duplication. It is, therefore, in the interest of multiple business stakeholders (e.g. buyer, seller, carrier, insurer, trade financer) in the supply chain to ensure that the bill of lading is the original, unmodified document, which could be ensured by issuing the original directly on the blockchain where it can be moved only by the authorised party holding it, which also leaves an auditable trail of the chain of custody. As currently the document is transferred from party to another by mail or a courier, this causes significant delays at the end of the supply chain as often the cargo arrives before the bill of lading itself. To the industry the inefficiencies and fraud pose and enormous cost and problem38, which could be significantly reduced by the adaptation of a blockchain based system. There have been attempts for creating an electronic bill of lading system, however, all of these have failed due to, for example, the security risks of a centralised database39, that blockchain would avoid.
Downstream businesses would be able to verify events down the supply chain for various purposes; e.g. to ensure that goods conform to the company’s or the local standards, and as mentioned above, to track the provenance of goods, for example, to avoid another horsemeat scandal40 or to track origins of a potential disease outbreak in agricultural supply chains. Businesses could also use the traceability of goods in the pursuance of their sustainability or corporate responsibility goals and to further customer satisfaction by bringing this information available to consumers. Verification of the chain
37 supra n. 17.
38 ibid, p.198. 39 ibid, p.212.
40 Kim willsher, 'Horse meat scandal: Paris fraud trial' (The Guardian, 2019)
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of custody and origin is also often important for businesses to comply with domestic or international rules on ethical sourcing of raw materials, such as endangered species (see e.g. Gibson wood example41) or minerals from warzones, as non-compliance could result in hefty fines.
With current systems, interoperability and siloed information imposes a problem; the transfer of information between parties is often inefficient as often legacy systems between stakeholders differ and do not work together. As there are a plethora of different legacy systems, even only using blockchain as a shared database manner would solve a part of the interoperability problem (only need interoperability between each legacy system and the chain, not between all different legacy systems). The blockchain coupled with smart contracts could avoid some problems in enforcement of contracts, not least due to divergence in contract law and often costly processes of international contract litigation. As smart contracts are self-enforcing when certain conditions are met (e.g. signature on delivery), enforcement of these obligations would be automated without delay, bringing certainty especially to cash-strapped SMEs, e.g. whose goods would be automatically paid on delivery; the uncertainty in international contract litigation and receiving the payment is often a barrier to trade internationally to some SMEs as the transaction costs may become prohibitive.
2.2 States
States would benefit from a blockchain based system especially in pursuance of implementing the Trade Facilitation Agreement, as its aim is to “expedite the movement, release and clearance of goods”42. The blockchain would aid in this by automating some of the border processes and removing
the inefficiencies of paper-based handling. But the expedited border processes are not the only area where States can utilise blockchain; for example, the system could aid in monitoring goods’ regulatory compliance coming into and going out of the country, enforcing regulations and collecting the correct tariffs based on the information on the blockchain. Blockchain also has the potential to battle crime and fraud in supply chains through the trust and transparency mechanisms in areas such as tax fraud, money laundering, terrorism financing and counterfeiting. It would not only advance information exchange between businesses and regulators, but also on intra- and inter-governmental levels as well which would make the enforcement of international agreements and domestic laws and regulations more efficient by providing evidence of the goods’ origins and chain of custody that can be cross-referenced to international sanctions lists and other lists of identified malicious actors.
41 supra n. 27, p. 1.
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Information shared between governments could, therefore, become faster and more reliable as the documents would be available directly from government to government without intermediaries. Fitting the utilisation of blockchain to the Evidence, Verification and Enforcement framework, States could use blockchain data as evidence of tariff classifications and regulatory requirements expressed in code; the data of the application of the classifications and requirements can then be presented in a ‘human-readable’ form to show that the State adheres to the tariffs that it has committed to and international standards its regulations are based on. This can be achieved by the way of comparison of the supply chain data and the data obtained from the border process; if the data in the blockchain is consistent with international standards, and the goods are admitted to the country arbitrarily or discriminately, this would call for more information to be presented for doing so.
All government-issued or documents provided by authorised certifying bodies could be directly uploaded on the blockchain so that their authenticity would be always backed by the blockchain protocol and digital signature of the issuing authority; these could include certificates of origin, sanitary certificates and product safety certificates.
Verification of the supply chain and the origin of goods serves multiple purposes; States could use the data to monitor compliance with rules of origin in their preferential trade agreements (PTAs) as it would be possible to verify the source of the goods, including the materials used, and where they have been processed. Verifying the origin of the goods could also be important for safety reasons; for example, counterfeit medicines are a serious health risk and a problem even in rich countries43. By embedding crypto anchors to slips of medicine the authenticity of the medicines would be easily verified by reading the tag and auditing the trail back to the producer; this method would reveal counterfeits immediately, as the crypto anchor would not link the medicines to the correct chain of custody, and there would be no authentic digital signature of the pharma company included in the information.
By the same method, agricultural products could be screened for safety purposes; for example, if there is a fresh outbreak of BSE in cattle in some areas, the affected products, be it fresh or processed, could be easily flagged by the information on the chain, and temporary measures could be applied to such goods. With current methods, this might go undetected due to human error or missing documents, and even if detected, a paper-based trail would require extensive manual work to eliminate all such products from the market44. Also, the credibility of certifying bodies in other states
43 Tim K. Mackey, Gaurvika Nayyar, ‘A review of existing and emerging digital technologies to combat the global trade in fake
medicines, Expert Opinion on Drug Safety’, [2017] 16:5, 587-60 <https://doi.org/10.1080/14740338.2017.1313227>
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may be monitored; if, for example, it is found that agricultural products show traces of chemical pesticides even if the products were certified as organic, this can be brought to the attention of the accrediting body in the exporting state.
Automation in the enforcement of, for example, tariffs, quarantine measures and confiscation measures could be done by, in case of tariffs by the automated levying of duties by the way of a smart contract upon admission,45 or for quarantine or confiscation measures cross-referencing the blockchain data to international watch lists. In cases such as money laundering attempts by the sale of artwork without a legitimate audit trail, this could provide important information for local regulators or intergovernmental agencies on global developments while effectively removing illegal assets from circulation.46
2.3 World Trade Organisation
By review of blockchain literature on international trade and supply chains, the benefits of blockchain for WTO and other international organisations seem to be the least explored area, however, an important area in the development of international trade. The reason for the existence of World Trade Organisation is to lower barriers to trade, however, it is imperative to the Member States that they remain free to regulate, or, if not totally free, to set their desired level of protection.47 This is reflected in the General Agreement on Tariffs on Trade (GATT) by the way of allowing tariffs as a way to control access to domestic markets, however, any discrimination is prohibited under the Most Favoured Nation and National Treatment principles. The Technical Barriers to Trade Agreement (TBT Agreement) and Sanitary and Phytosanitary Agreement (SPS Agreement) take harmonisation slightly further; domestic regulation should be based on international standards, or there must be a scientific basis for setting a higher level of protection (SPS Agreement Art. 5) to avoid unnecessary regulatory barriers to trade, which are the most burdensome to SMEs48.
As transparency is “one of the fundamental norms of international trade”49, blockchain could act as an important tool in real-time trade monitoring and bolster the transparency mechanism in the WTO; the data from border processes could be collected to keep track of tariffs, and if states adhere to their
45 Yotaro Okazaki, ‘Unveiling the Potential of Blockchain for Customs’ (WCOOMD.org, 2018) <
http://www.wcoomd.org/-
/media/wco/public/global/pdf/topics/research/research-paper-series/45_yotaro_okazaki_unveiling_the_potential_of_blockchain_for_customs.pdf?la=en> accessed 21 July 2019.
46 Derek Fincham, ' Can Blockchain Technology Disrupt the Trade in Illicit Antiquities' (2018) 14(2) SciTech Lawyer 4 47Agreement Establishing The World Trade Organization, Preamble 1.
48 The Invisible Barriers to Trade – How Businesses Experience Non-Tariff Measures
<http://www.intracen.org/publication/The-Invisible-Barriers-to-Trade---How-Businesses-Experience-Non-Tariff-Measures/> accessed 10 June 2019 - 50% SMEs affected by non-tariff barriers.
49Mark Halle, Robert Wolfe, ‘A new approach to transparency and accountability in the WTO’ (Entwined, 2010)
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committed tariffs, and non-tariff measures such as requirements of standard certification to satisfy domestic regulations. Data analytics could also reveal de facto discriminatory measures; seemingly non-discriminatory measures could affect trade flows drastically from certain countries (not against MFN/NT rules per se) which could attract the attention of WTO Committees, Trade Policy Reviewers or states who might have interest to litigate, especially developing countries that may not have the tools or resources for monitoring other states’ Agreement compliance themselves, and the data could be used as evidence before the Panel or Appellate Body.
The General Agreement on Tariffs on Trade (GATT) requires the Member States to adhere to the tariffs in their Schedules of Concession on a Most Favoured Nation (MFN) basis on like products (Article II); when tariff classifications are codified and data of collected tariffs are gathered in real-time automatically during border processes, it gives Member States the incentive to adhere to their committed tariffs to avoid being brought before the WTO Panel for litigation.
Even if domestic regulations are considered to be ‘behind the border’ measures, they often amount to a barrier to entry at the border if labels, documents and certificates are not conforming to the regulations. “Domestic standards and regulations – notably those related to product safety and animal health – are difficult to observe.”50 This statement remains true with blockchain, however, the technology gives some tools to monitor these through data gathering and analytics; seemingly similar regulations and standards may be applied very differently and maybe even discriminately. If a state has not set higher standards than those set by international bodies, goods with all required documents and certificates should be allowed to enter the market, and discrepancies between states adhering to the same standards could be made visible to all Member States. “The behavioural assumption is that providing information can influence policy”51, thus affecting the quality and complicity of ensuing regulation if non-compliance with obligations can be easily reviewed by other Members.
The effect of information is not only in transparency between WTO Members; it could be argued that trust in upstream information in the supply chain could result in less trade restrictive measures in pursuance of legitimate policy objectives. As an example, cases US-Tuna I52 and US-Tuna II53 could
be discussed; in Tuna I the United States imposed a measure to protect dolphins from being bycaught in tuna fishing by imposing a ban on imported tuna that has been caught by using purse-seine nets, limiting the import ban to a certain area where dolphin bycatch had been a problem, unless the
50 ibid, p. 3.
51 ibid, p. 5
52 United States - Restrictions on Import of Tuna (No 1), Mexico v United States, GATT Panel Report, DS21/R, BISD/39S/155,
(1991)
53 United States – Measures Concerning The Importation, Marketing And Sale Of Tuna And Tuna Products (No 2), GATT Panel
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importer could prove that no dolphins were caught. As Mexico did not agree with the documentary proof procedure, the US imposed a ban on Mexican tuna. In Tuna II the issue was on a product label for tuna products that were caught in a ‘dolphin-safe’ manner; again a certain area faced more onerous requirements (an observer on each boat catching tuna with purse-seine nets) for monitoring of dolphin bycatch, which hindered the market access for tuna caught in that area. After US’ measures were found to be in breach of WTO law in both cases, US decided to comply with the ruling of the Appellate Body by imposing the higher standard to all imports and domestic tuna, and therefore ended up with a more trade restrictive measure following the ruling.54 It could be argued that with more trust in the supply chain information provided from the source, evidenced by digital signatures and certificates provided for the vessels adhering to dolphin-safe fishing, could have avoided setting this higher standard that hinders trade more than the lower standard, as the lower standard could have had a similar or even identical impact on dolphin protection especially as it would have decreased illegal, unreported and unregulated catch from the supply chains. World Wildlife Foundation has launched a blockchain initiative to protect marine life which tracks seafood products “from the vessel to the supermarket”55, that could serve as an example how transparent and trustworthy supply chain
information could single out malicious actors and steer the industry without blanket import bans or highly onerous requirements for using a label, thus advancing international trade.
The Agreement on Trade-Related Aspects of Intellectual Property56 differs from the abovementioned Agreements in that it takes a further step towards global positive harmonisation; it sets a minimum standard for the protection of intellectual property coming in from the other Member States57. It is therefore not a trade liberalising agreement but designed to protect the rights of the owners of intellectual property rights, as it ensures that the level of protection has to conform to the standards set by the major international treaties on intellectual property58. Blockchain could be utilised in the context of copyrights and patents as it “may host public copyright [and patent] registries, which record—in a transparent manner—the ownership, distribution, use and remuneration of works.”59 Therefore, for the creator, it would act as time-stamped evidence of ownership, and first uses when entry to the market is recorded on the chain. The owner of works could, therefore, be easily verifiable
54 Meredith Crowley, Robert Lloyd Howse, ‘Tuna–Dolphin II: a legal and economic analysis of the Appellate Body Report’ (2014)
World Trade Review 13(02), p. 321.
55 WWF, ‘New Blockchain Project has potential to revolutionise seafood industry’
(https://www.wwf.org.nz/what_we_do/marine/blockchain_tuna_project/)
56 TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing
the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994).
57 TRIPS Agreement, Preamble 3. 58 TRIPS Agreement, e.g. Art. 10bis.
59 Balázs Bodó, Daniel Gervais, João Pedro Quintais, Blockchain and smart contracts: the missing link in copyright licensing?,
International Journal of Law and Information Technology 26(4) [2018] <https://doi.org/10.1093/ijlit/eay014> accessed 2 June 2019, p. 312.
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even down a long chain of custody, which can be used to find the owner of orphan works. Another area where evidence and verification are important are protected designation of origin, protected geographical indication, and traditional specialities guaranteed marks; there are various examples of cheap produce being sold under one of these marks that do not conform to the standards required. For example, cheap mixed olive oil was sold as Italian extra virgin olive oil around the world in 2014 causing economic damage and reputational damage to honest carriers of such marks60. With a blockchained supply chain, the upstream certification process would become more transparent and inspections downstream can easily detect where faulty produce originates and if it is from a legitimate producer, and for example parallel imports could be minimised. Enforcement of IP remuneration could be deployed by using smart contracts that would give access to digital works if a payment is made to the smart contract; this would make cross-border trade in digital goods more reliable for rights holders as their remuneration would be automated.
2.4 Preferential Trade Agreements
Modern trade agreements are becoming more extensive in their scope, especially considering environmental and social policies61. Here, blockchain could provide a tool for monitoring that the goods adhere to set standards on sustainability, and with blockchain, this could be taken even further by imposing a requirement to make the supply chain data available to consumers. For example, Carrefour, an international supermarket chain, makes this data available to consumers voluntarily so that consumers can make an informed choice on products on sale62. Rules of origin could also become
conditional on the carbon footprint of a product; if the raw materials, that carry an excessive carbon footprint according to the supply chain data, are then processed in the exporting state, the FTA rule of origin would not apply, and tariffs would be charged on an MFN basis. This would make sustainable sourcing amongst trading partners a way to reach common goals, e.g. towards the climate milestones of the Paris Agreement, and to ensure a level playing field even with ambitious climate objectives.
2.5 Outlook in the near future
60 Nick squires, 'Italian companies investigated for passing off ordinary olive oil as extra virgin' (Telegraphcouk, 2014)
<https://www.telegraph.co.uk/news/worldnews/europe/italy/11988947/Italian-companies-investigated-for-passing-off-ordinary-olive-oil-as-extra-virgin.html> accessed 1 June 2019.
61 See e.g. CETA, EU-Turkey CU
62 ‘Carrefour launches Europe’s first food blockchain’ (Carrefour, 2018) <
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The above shows what blockchain can do for international trade and trade law; it can facilitate border processes to increase trade volume, ensure that goods originate from legitimate sources and are aptly certified, advance sustainability, bring transparency to trade agreement monitoring, and so forth. It adds a layer of transparency and trust on top of the internet that we know today, and those factors, trust and transparency, are fundamental to a functioning international trade system. All of these are valuable to the stakeholders in global supply chains, but the next question is when and how will it be implemented to reap the benefits?
The number of stakeholders in the international trade system is very high, even with blockchains’ ability to cut some intermediaries; starting from the very beginning of the supply chain with providers of raw materials and ending to the end-buyer. Especially as a very new technology, the adoption curve for businesses will be steeper than for governments, although various states and for example, the European Union have started exploring the benefits blockchain may bring63. The legislative and technological issues aside64, adoption of common technological system requires enormous political
will to come together with parties with diverging interests. Implementation of blockchain based systems has started in the private sector as shown by Tradelens, however, it is highly unlikely that one platform would eventually cover all international trade. UN/CEFACT predicts that there will be multiple platforms and blockchains for different needs; such as trade finance platforms, shipping platforms, intergovernmental platforms and so forth65. As seen in Figure 366 below, these will create a complicated web of interactive systems, and therefore interoperability and standardisation will play an important role in the adoption of the technology on a wider scale. Probably the most challenging area is to adopt an extensive intergovernmental network for trade, as states have been inclined to use their own systems and agencies are often not allowed to share information due to domestic legislation67. That is where the role of WTO as a forum of multilateral cooperation will bring consensus amongst governments; TFA brings information obligations to Member States68 but that only solves a part of the problem with information sharing if systems are not interoperable. Legislative and technical issues in adoption of inter-governmental information sharing systems are discussed in the following part that will explore issues that exist also with the current technology,
63 see e.g. EU Report on Blockchain: a forward-looking trade policy (2018/2085(INI)). 64 See part III.
65 UN/CEFACT White Paper on technical application of Blockchain to United Nations Centre for Trade Facilitation and Electronic
Business (UN/CEFACT) deliverables ECE/TRADE/C/CEFACT/2018/INF.1.
66 ibid.
67 supra n. 1, p. 39. 68 supra n. , Art. 1.
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followed by blockchain specific issues and the role of international organisations in overcoming these problems.
FIGURE 369
Part III: Technological and legislative issues: the road ahead
As demonstrated above, the possibilities of reducing trade barriers whilst upholding product safety and quality by the use of blockchain technology are numerous when widely implemented. This part will discuss the problems that have hindered technological advances in the past, and what issues have to be overcome to make the potential of blockchain a reality. The part will end with exploring the roles of international organisations in overcoming these issues and facilitating a whole new system for international trade facilitation.
69 supra n. 65.
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3.1 Issues in implementation
3.1.1 Problems with existing technology and legal framework
As briefly mentioned earlier, electronic systems in some areas of international trade have not gained popularity for various reasons; the most notable reasons are the lack of trust and standardisation. 3.1.1.1 Standards on data semantics/definitions
Data can be uploaded on a blockchain in various forms; even a scanned document can be uploaded. However, this is very inefficient as the file size would be thousands of times higher compared to the same document expressed in a raw data form, and also this takes away most of the automation potential as the documents would then have to be read visually. Transfer of data between parties and systems become irrelevant if the data cannot be received in a (machine) understandable form, therefore, it becomes an issue of interoperability between data systems. “The semantic data model is a method of structuring data in order to represent it in a specific logical way. It is a conceptual data model that includes semantic information that adds a basic meaning to the data and the relationships that lie between them.”70 To create systems for a high level of automation and fast readability for a high number of supply chain participants, the data should be able to be read and understood by all parties even on different operating systems. This will also help to reduce the size of data entries on the blockchain, thus affecting scalability. This is not a blockchain specific problem but also an interoperability problem for existing technologies as well, and this is one of the reasons that wide data sharing, especially G2G, has not gained popularity.
International Organization for Standardization is developing 11 different sets of standards for blockchain technology71, however currently only titles of the standards are available, and it is left unclear if a semantic data model will be a part of the standards.
3.1.1.2 ‘Garbage in, garbage out’
One of the biggest problems in trade is linking documents, be it physical or digital, to the actual goods; the data on the original document is as only as good as the initial data input. If a malicious actor at the beginning of a supply chain creates a fraudulent entry on a blockchain it will be as untrue
70 https://www.techopedia.com/definition/30489/semantic-data-model
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at the end of the chain, and this is even a bigger problem with a blockchain where the initial input cannot be modified in case of an error.
The data input problem occurs upstream, especially where paper forms, filled in by hand, are used to collect data entries. This problem persists especially in those areas where technology adoption and internet usage are low72. The only way to overcome the problem with bad data input is to make data entries more reliable and less dependent on human error; although high tech innovations, such as submitting product intrinsic attributes such as DNA data on the blockchain73, exist, their adoption in poor rural areas is unlikely to happen in the near future. Therefore, supervision and governance of certifying bodies and other parties responsible for data input should be monitored strictly, also down the supply chain; transparency in blockchains helps to single out repeat offenders.
3.1.1.3 Security
The electronic systems that have been tried, but have eventually failed, were mostly riddled with security concerns; centralised databases provided a single point of failure for hackers and outages, and control of especially foreign entities was not seen as a trustworthy solution74. Data transfers have also raised concerns for businesses due to poor encryption mechanisms75.
Although one might have read on the news about blockchain related security breaches, such as hacks to cryptocurrency exchanges76 or the hack to the Decentralised Autonomous Organisation based on
Ethereum Smart Contracts77, it is to be noted that these hacks did not attack the blockchain itself, but
in the case of the exchanges, regular databases and in the case of DAO, the application layer on top of the blockchain. Although a blockchain might be immutable and highly resistant to tampering, the applications built on top of them and storage of user credentials are still prone to human error and phishing.
The possible security flaw in the consensus mechanisms of most blockchains is the ‘51% attack’, meaning that if a hacker takes control of at least 51% of the nodes in the network, it can take control the consensus of the blockchain and the assets on the chain. However, there are attempts to tackle this
72 Blockchain's Garbage In, Garbage Out Challenge - Supply Chain MIT,
<https://supplychainmit.com/2017/10/19/blockchains-garbage-in-garbage-out-challenge/> accessed 10 June 2019.
73 ibid. 74 supra n. 21. 75 supra n.1, p. 35.
76 see e.g. Wired, ‘Hack Brief: Hackers Stole $40 Million From Binance Cryptocurrency Exchange’ (2019)
<https://www.wired.com/story/hack-binance-cryptocurrency-exchange/> accessed 10 June 2019.
77 Falcon S, 'The Story of the DAO — Its History and Consequences' (Article 2017)
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problem and Vitalik Buterin, the founder of Ethereum, has come up with a solution where only 1% of the nodes have to be honest to ensure the security of the chain78.
In conclusion, due to decentralisation, cryptography, hashing and consensus mechanisms, a blockchain based system is more secure than traditional systems, requiring that some vulnerabilities that exist with legacy systems persist, and some that are specific to blockchains which shall be considered below.
3.2 Blockchain related issues
3.2.1 Privacy
The privacy issue in blockchain implementation is two-fold; there are data protection issues concerning private persons and matters that are under business confidentiality.
Data protection legislation, such as the European Union’s General Data Protection Regulation, may affect the utilisation of blockchains concerning data of consumers due to the clash between immutability of blockchains and the right to be forgotten79. EU has taken the initiative to explore how the regulation will affect blockchain implementation80. Even though the data is secure, pseudonymised and encrypted, the data still exists in the previous blocks and it cannot be deleted if a user wished to exercise their right. GDPR also prohibits the transfer of data out of the EU except in certain circumstances81 which imposes a problem for blockchains as nodes may be dispersed around the world. Although not trade-related per se, privacy legislation relates to all personal data thus potentially affecting some documents that can be uploaded on a blockchain.
The other aspect of privacy in blockchains is the use of public ledgers in business transactions. As explained in part I, public ledgers are permissionless so that anyone can have access to the pseudonymised transaction data on those chains, e.g. anyone can see the transaction history on the Bitcoin blockchain in the form of which public key has transferred bitcoins to another public key. Although transparency is one of the best features of the technology, in some cases it does not fulfil the requirements for business confidentiality. The easiest answer for this is the use of permissioned chains where the visibility of transactions can be limited to a need-to-know basis, or the use of hashing
78 supra n. 18, p. 2.
79 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons
with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ 2016 L 119/1, Article 17.
80 supra n. 51.
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and Merkle Proof82 to store confidential information off-chain or on a permissioned blockchain and only providing proof of existence and timestamping on the public blockchain. Merkle Proof can be used for selective disclosure of only parts of documents stored off-chain, for example by proving one’s age by providing proof that there is an authentic document that shows a certain date of birth (requires JSON or other structured data format documentation83).
The abovementioned method of using a permissionless and permissioned (or public and private) chains create a hybrid blockchain that can be utilised by businesses and governments alike, for example to provide fully transparent supply chain event data on the public chain and to keep sales contracts and other confidential documents that are linked to the supply chain events on the private chain that can be set to disclose information on a need to know basis. Creating a hybrid chain would, of course, require seamless cross-chain interoperability, but as these are often created together, this should not be an issue. As seen below, with standardisation cross-chain interoperability could rise to the level of full interoperability between chains, which could make the blockchain ecosystem wide-spread and easy to operate like the internet as we know it today.
3.2.2 Standardisation
To avoid regulatory divergence and technological island problems, such as inoperability of systems relying on different data semantics or cross-chain functionality (could be contrasted with a ‘common language,’ if none exists, information cannot flow), international standardisation requires immediate attention but with a sensitive approach. Although the technology is still in its infancy, the lack of standardisation may hinder its advancement in an efficient manner; if states decide to adopt varying regulatory frameworks, especially interoperability may become an issue. Standardising the technology should take a holistic rather than a piece-meal approach as leaving outside parts of the blockchain protocol; this can be achieved with the help of “international cooperation in standard-setting processes (a ‘bottom-down’ approach)”84 that involves the process of cooperation and input
from the private and public sectors alike. This first phase could include regulatory sandboxes (i.e. pre-regulatory environments for testing innovations in the supervision of competent regulators) for innovations to flourish and to map potential issues in adoption and use before tightening the reins on regulation.
82 Rob Hitchens, ‘Super-Simple Zero-Knowledge Proofs in Solidity for Ethereum’ (Medium, 2018)
<https://medium.com/robhitchens/selective-disclosure-with-proof-f6a1ac7be978> accessed 10 June 2019.
83 ibid. JSON is a structured data format that can express the data in a visual document in code.
84 Tracey Epps, Blake Carey, Tess Upperton, 'Revolutionizing Global Supply Chains One Block at a Time: Growing International
27
Although interoperability is often dubbed a problem in the wide-scale adoption of blockchains85, technology has advanced to the level where cross-chain readability and operation is possible; alongside using Merkle Proof for cross-chain readability86, solutions for cross-chain data transfers are numerous87. As an example, relay chains are “systems inside of one blockchain that can validate and read events and/or state in other blockchains [and vice versa]”88, thus making cross-chain data inputs possible. Standardising these solutions in a consistent manner would avoid different types of blockchains becoming technical islands.
3.2.3 Scalability
Scalability is another issue that is often brought up as a barrier to wider blockchain adoption, especially on a global scale89. However, this is not true for all blockchains as scalability is highly dependent on the underlying protocol and its consensus mechanism, whether it is permissioned/permissionless, number of nodes and the size of data and blocks. The bitcoin blockchain is an example of a blockchain that is not built for very high transaction numbers and large data size; the consensus mechanism (proof of work) of the permissionless chain makes it energy-intensive and the 1MB data limit90 in each block hinders its capability to handle a large number of transactions at once. However, the scalability problem can be largely avoided by using permissioned or hybrid blockchains, hashing (e.g. Merkle Proof) and more efficient consensus mechanisms such as proof of stake91. Even with energy-intensive proof of work mechanism hybrid chains could benefit from the
advantages of both, a permissioned and a permissionless, chains as not all data need be uploaded on the permissionless chain reducing the need for transaction numbers and size, and the data that is uploaded on the permissionless chain can be verified from the permissioned one that upholds confidentiality.
As can be seen above, the adoption of blockchain based systems that are interoperable on a global scale still requires a vast amount of work from standard-setting bodies, legislators, regulators and business innovators. However, taking a sensible approach in facilitating blockchain adoption can
85 see e.g. Ganne (n. 1).
86 supra n. 68.
87 Vitalik Buterin, ‘Chain interoperability’ (2016) <
https://static1.squarespace.com/static/55f73743e4b051cfcc0b02cf/t/5886800ecd0f68de303349b1/1485209617040/Chain+Interoperab ility.pdf> accessed 10 June 2019.
88 ibid. p. 2.
89 see e.g. Ganne (n.1). 90 supra n. 7. p. 2. 91 supra n. 17.
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further regulatory certainty, thus making more efficient and compliant world trade a step closer to becoming reality.
3.3 International Organisations and multilateral cooperation
If a blockchain based ecosystem for international trade is to be developed, this requires a high level of cooperation on multiple levels; national, transnational, inter-organisational and multilateral. This part will look at the roles of international organisations, especially the WTO, in this context; how would multilateral cooperation through these organisations further the aim of blockchain based ecosystem advanced in this paper?
As noted earlier, the trade ecosystem will most probably consist of multiple chains for different purposes, and in fulfilling its role the WTO has two functions in this area: creating rules that advance free trade and monitoring states’ compliance with those trade rules. TBT and SPS Agreements have incorporated international standard-setting bodies in the harmonisation process as the Member States have to base their domestic regulation on those international standards92; therefore, the role of organisations, such as ISO and UN/CEFACT, have to be considered as well.
3.3.1 Creating trade rules concerning blockchain
In introducing a new technology and to guarantee interoperability of systems, positive harmonisation is needed to take full advantage of the technology and advance international trade. Positive harmonisation of technical standards is an ambitious goal, however, valuable in reaching the trade facilitation goals of the TFA.
3.3.1.1 Standardisation
Due to vast numbers of different documentation required in international trade, multiorganizational cooperation in standardising those documents and representing them in code is imperative to digitise world trade. This requires codifying the form of different documents and the contents in the documents so that data is fully readable, transferable and verifiable between parties, systems and documents.
The form of documents that are already standardised, such as INCOTERMS93 or dangerous goods
forms, can be translated to machine-readable form and can be incorporated into smart contracts
92 TBT Art. 2.4 and SPS Art. 3.1.
