Supply chain tracing and trade facilitation with blockchain
The immutability and real-time features of blockchain make it ideally suited for tracing the origin and journey of goods through a supply chain. It is certainly better than current certification and labeling systems, which can be manipulated (Gannes, 2018). Blockchain-based systems engender transparency and make counterfeiting hard to do. Unsurprisingly, firms in the global food industry, which have been beleaguered by numerous scandals owing to supply chain mishaps, are increasingly turning to blockchain technology. “At each point of the journey, data on the product, supplier, location, as well as on the environmental and social impact of each business, are collected and added to the blockchain, creating a digital history of the product that is accessible to all, from the farm to the consumers (Gannes, 2018).”
Ethiopia is partnering with blockchain firm IOHK to track its coffee supply chain using the Cardano blockchain.Similarly, the United Nations World Food Programme (WFP) has deployed blockchain for the management of its food aid supply chain between the Djibouti port and its main operations hub in Ethiopia. With the blockchain-based system, it is able to track in real-time when it receives food shipments in Djibouti all the way to its base in Ethiopia and onward as it distributes the food aid. Also, the Rwandan government is working with UK startup Circular to use blockchain to track its precious metal tantalum supply chain to provide comfort to buyers that they are sourced ethically.
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Most of the processes of international trade are paper-based. And even as blockchain technology is palpably suited towards trustworthy paperless solutions, adoption has been slow. With Covid-19 restrictions and lockdowns hampering physical contact, blockchain-based solutions have become attractive. Unsurprisingly, there are numerous ongoing global blockchain-based trade digitization initiatives at the moment.
Information for cargo due at sea ports is generally lagged by at least 24 hours, weighing on lead times for clearing goods. But this is for the ideally efficient sea port. In African ports, clearance of goods takes weeks. Quicker clearance at customs would be engendered if there was a way to reduce or eliminate the time lag. The real-time feature of blockchain achieves this and more. There are time and cost efficiencies from having each step of the shipping process recorded and accessible on the blockchain in real-time.
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Potential trade gains of more than US$1 trillion could be realised over the next decade owing to removal of current constraints in trade processes, according to the World Economic Forum (Ganne, 2018). For Blockchain-facilitated trade to be effective, however, whether in Africa or elsewhere, a conducive regulatory environment is crucial. African countries, which stand to benefit more from blockchain efficiencies, would need to accommodate legally binding electronic formats for signatures and documentation, on the one hand, but specifically with respect to blockchain transactions on the other (Ganne, 2018).
A demonstration of the paper-based international shipping process from a typical African country is germane at this point. We use an actual Kenyan example.Shipping a refrigerated container of roses and avocados from Kenya to the Netherlands requires more than 100 people, 200 interactions, and takes about 34 days from the farmgate to shop shelves (Ganne, 2018). The myriad shipping documentation required can be overwhelming. The process costs money and time.
For instance, a Boston Consulting Group (BCG) research paper finds that there are more than 20 players involved in a single trade finance transaction, with 10 to 20 documents emanating from the process (Gannes, 2018). Frustratingly, only 1 per cent of the about “5,000 data field interactions” is value-creating, with about 85 to 90 per cent of the interactions tantamount to paper-pushing (Gannes, 2018). The automation imperative is writ large.
Unsurprisingly, firms and governments are increasingly open to the potential efficiencies of blockchain-based digitalization (Gannes, 2018). A blockchain system would engender more secure trade finance transactions and ease Know-Your- Customer (KYC) and Anti-Money Laundering (AML) processes. A more trustworthy blockchain system would also allow for more trade transactions to occur on open account terms, where payment is made after shipping and delivery of goods (Gannes, 2018). Currently, most international trade transactions require prepayments.
African examples showing how blockchain has been used to demonstrate this potential are apt at this point. UK bank Barclays and fintech startup Wave conducted a self-acclaimed first live blockchain-based trade finance deal in September 2016 (Gannes, 2018). The letter of credit (LC) for the export of US$100,000 worth of cheese and butter to The Seychelles from Ireland by agri-food cooperative Ornua took less than 4 hours, from 7 to 10 days via the paper-heavy process hitherto (Gannes, 2018).
In 2019, the Eastern and Southern African Trade and Development Bank (TDB) and Singapore’s dltledgers facilitated the importation of US$22 million worth of white cane sugar to Ethiopia from India, with all trade finance activities conducted exclusively via blockchain.And more recently, to overcome cross-border trade and supply chains disruptions owing to Covid-19, TDB used blockchain technology to facilitate a US$150 million intra-African trade finance transaction between Morocco’s OCP and Ethiopia.
An edited version of this article was first published by Nanyang Business School’s NTU-SBF Centre for African Studies, Singapore. References, figures and tables are in the original article. See link viz.https://www.ntu.edu.sg/cas/news-events/news/details/can-blockchain-and-cryptocurrencies-facilitate-african-trade
