Articles

Backing blockchain with strong policy

[This article was published at Policy Forum]


Blockchain technology offers several benefits for the world’s industries and supply chains, but as investment grows, there must be a simultaneous increase in robust international policy coordination, Darcy Allen writes.

Blockchain technology will bring the next wave of globalisation by radically upgrading the world’s trade infrastructure.

We are now seeing intense competition to replace laborious centralised processes of tracking goods with more decentralised supply chain platforms powered by blockchains.

Discovering what policy changes are necessary to facilitate this new economic infrastructure, however, will require significant policy entrepreneurship through a new dedicated international policy coordination body.

The new body would facilitate experimental trials of regulatory recognition, coordinate new free trade agreements, and encourage the emergence of technical and information standards.

Blockchain technology also offers a new way of governing information along the supply chain – especially amongst those that lack a degree of trust.

While most modern records are maintained and updated by centralised third parties – such as banks or governments – information stored in blockchains are managed through tamper-resistant and decentralised processes.

Some information currently entrusted with third parties will shift to decentralised blockchain governance. Recent surges in interest and investment in the technology attempt to gauge where the technology will be useful and how organisational boundaries will shift.

The modern global economy is ultimately made of supply chains. These supply chains link together the mining of raw materials – through their transformation and production – and the final retail process. All of this must be tracked, often across several countries and between parties where strong business relations are yet to be forged.

Understandably, governments, consumers, and producers demand a wide variety of information about goods. Questions may range from whether a product falls under fair trade standards to how fresh its ingredients are.

But accurate answers are sometimes difficult to come by because of the logistical difficulties involved in recording individual bits of information. Tracking the millions of parts in a modern aeroplane or the production conditions of a sub-component in an old building, for example, may prove challenging.

Today, we attempt to answer these questions by passing information between hundreds of supply chain participants. Those communications are often paper-based bills of lading, certificates of origin, and ship manifests. This results in fraud, errors, and information loss. Indeed, global food fraud is estimated to cost over $50 billion each year.

A lack of visibility down supply chains also risks safety. One memorable example is when Australia’s strawberries were found to be contaminated with needles just last year and frantic efforts to recall them followed.

There have been some welcome efforts to digitise supply chain information. But without blockchain, the integrity of this information remains reliant on third party maintenance and provision of databases.

Blockchain can act as a new infrastructure for modern supply chains. Accurate measurements of temperature, quality conditions, and locations are all examples of data that can be captured using sensors. Once updated to a decentralised blockchain, it is extremely difficult to change.

What can we do with this more detailed, cheaper, and trusted supply chain data?

Better supply chain data won’t just make it easier for goods to cross borders. The world can expect more niche product offerings with premium prices, shifts in the capture of value, and a movement away from storing information in closed companies towards platform-based decentralised storage. It will also see a greater use of artificial intelligence to optimise supply chain coordination.

What, then, is the role of government? To be sure, blockchain supply chains are being privately built by companies such as IBM and Maersk, as well as Australian companies such as AgriDigital, BeefLedger, and UCOT.

But supply chains must interact with regulation. Governments demand information about goods as they cross borders, including their labour conditions and biosecurity risks. This raises many questions around blockchain supply chain policy.

Will governments recognise blockchain-based information as proof of the quality and origins of a good? How will smart contracting technology interact with preferential trade deals? What are the implications for competition policy? These are only a few of the issues that policymakers and industry members must discuss together.

We can’t know the precise answers to these policy questions given the nascent nature of the technology. But we do know that regulatory environments that enable testing and experimentation will see inflows of investment, and that discovering this must occur at an international level, in a dedicated international policy coordination body.

This article is based on the author’s paper with Chris Berg, Sinclair Davidson, Mikayla Novak, and Jason Potts published in the Asia & the Pacific Policy Studies (APPS) journal. You can read the full paper, ‘International policy coordination for blockchain supply chains’, here.

This article is published in partnership with DevPolicy Blog.

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Articles

Blockchain and the manufacturing industry

[Together with Chris Berg and Jason Potts this article was published in the Australian Technology Manufacturing Magazine]


Bitcoin was invented in 2008 by Satoshi Nakamoto as a censorship-resistant cryptocurrency built for the internet. With regular fiat money centralised bodies such as banks and governments control the records of who owns what. For bitcoin those records are held in a decentralised blockchain. Blockchains are updated and maintained by a decentralised network. To ensure the transactions and records are correct, economic incentives to continually drive the blockchain network towards consensus.

Applications of blockchain extends beyond records of money. We rely on trusted third parties to maintain our registries, enforce our contracts, and maintain our records. Entrepreneurs are now discovering which roles carried out by third parties such as governments and firms will be shifted towards blockchain-based decentralised networks.

Blockchain is now being applied to trace goods along supply chains, to give control of medical records to patients, and to create decentralized identities that help people move across borders.

What does blockchain mean for Australia’s manufacturing industry?

At first glance manufacturers produce physical products and then transport those goods to consumers. More deeply, the manufacturing process is heavily reliant on databases of information in multiple directions along their supply chains. This is especially true for advanced manufacturing. When goods and inputs move, information about them must move too. This includes information about the provenance of sub-components and intermediate parts, information about the integrity of rare products prone to counterfeit, and information about ethical standards in production.

It’s harder to produce this supply chain information than you think. The information must be coordinated between hundreds of parties in the supply chain. Most of those parties don’t know or trust each other. And this information is still often paper-based or siloed within organisational hierarchies. The result is a trail of information about manufactured goods that is prone to error, fraud and loss. And these problems only get worse as supply chains get longer in a globalised world, and manufactured goods become more complex.

Blockchain technology presents a different way to govern supply chain data that centres on the movement of the good itself. Rather than passing pieces of paper between supply chain participants to track goods, information can be recorded in a decentralised blockchain. In practice goods are given a digital representation. Then as the goods move, information about them is timestamped in an immutable blockchain. Importantly this information is stored outside of organisational boundaries, making blockchain an alternative mechanism to solving the age-old problems of provenance and quality. What information is stored in a blockchain could be the historical location of a good, who produced it, how it has been stored, and who has finance on the goods.

Supply chain information extends beyond a single supply chain. To produce a complex product involves first mining raw materials, transforming those into intermediate parts, before manufacturing of the final good. Blockchains are critical here because they can track goods and components across multiple supply chains, giving more visibility and traceability deeper into complex manufactured goods.

Blockchain supply chains will leverage other frontier technologies such as the Internet of Things (IoT). Containers and products will contain sensors to record information such as GPS location and temperature. This information won’t be sent to a centralised party, but recorded cryptographically into a blockchain. This information can help consumers in verifying genuine products, assist producers in creating analytics of consumer demand and ensuring their inputs are legitimate, and governments in ensuring compliance with domestic rules and regulations.

The first and most obvious application of blockchain in supply chains has been in agricultural products such as wine, meat and seafood. The common characteristic of these goods is that they are information-rich. Information about their provenance and stewardship is often hard to verify by observing the final goods, but radically affects the price that consumers will pay.

This means the next wave of applications is likely to be other high-value information-high goods. Goods that are highly-customised, such as 3D printed medical devices, aeroplane parts and pharmaceuticals, are perfectly poised to apply blockchain technology.

Blockchain in advanced manufacturing is more than just tracking goods once they’ve been produced. We can use blockchains to coordinate the highly valuable digital files that sit behind many of these products. How can you ensure that the CAD file being 3D printed was the one originally intended? Similarly, blockchains are being used for intellectual property rights, helping to ensure compliance in an increasingly digital world.

In the physical manufacturing process itself blockchain can be used to record information about the lifecycle of manufacturing equipment. We can now have more cost-efficient and credible auditable ledgers that extend beyond organisational hierarchies.

What we have proposed here is a general movement away from intermediaries being trusted to maintain information about goods and their production, towards information governance through decentralised blockchain platforms. To be sure, many of these applications are in the trial and experimental phase. But they represent an early fundamental shift in how we organise information across the entire manufacturing supply chain.

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Journal Articles

International policy coordination for blockchain supply chains

Published in Asia & the Pacific Policy Studies

Abstract: From the adoption of the shipping container to coordinated trade liberalization, reductions in trade costs have propelled modern globalization. In this paper, we analyse the application of blockchain to reduce the trade costs of producing and coordinating trusted information along supply chains. Consumers, producers, and governments increasingly demand information about the quality, characteristics, and provenance of traded goods. Partially due to the risks of error and fraud, this information is costly to produce and to maintain between dispersed parties. Recent efforts have sought to overcome these costs—such as paperless trade agendas—through the application of new technologies. Our focus is on how blockchain technology can form a new decentralized economic infrastructure for supply chains by governing decentralized dynamic ledgers of information about goods as they move. We outline the potential economic consequences of blockchain supply chains before examining policy. Effective adoption faces a range of policy challenges including regulatory recognition and interoperability across jurisdictions. We propose a high‐level policy forum in the Asia‐Pacific region to coordinate issues such as open standards and regulatory compatibility.

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Articles

Predictions for trade in a blockchain world

[Together with Alastair Berg and Brendan Markey-Towler this article was published at Machine Lawyering]


As goods move from producers to consumers, information about those goods must travel with them. Where did a product come from? Is this wine fake? How fresh is this lobster? Modern supply chains, however, are remarkably long and complex. This complexity makes it costly to produce trusted information about goods. Blockchain and other distributed ledger technologies are poised to help lower information costs, potentially expanding and reshaping global trade.

At first it isn’t clear why we should care about trade costs. Reducing trade costs might make our goods a bit cheaper, but what is the potential longer term impact? Finding new ways to bring down the costs of trade is important because it expands the number of trades that are possible, propelling growth and prosperity.

The standardised shipping container was invented mid-way through the last century. Alongside other new technologies such as air freight, it helped transportation costs plummet. Other technologies, such as the formation and success of international trade negotiation bodies (e.g. the World Trade Organization) lowered the regulatory costs of trade. Average worldwide import tariffs fell from around 8.6% in 1960 down to 3.2% in 1995.

Today a different form of costs dominates the frictions in global trade: information costs. We can think about goods as having different attributes: provenance, age, quality, physical location, and so on. Consumers often want to know a product’s provenance. Producers want to know who their final market consumers are. Governments want to know if goods comply with domestic regulations like biosecurity laws.

But where does this information come from? Who produces it and ensures its accuracy? Today we tend to rely on paper-based communications between hundreds of companies along a supply chain. Even when those communications are digitised, they spend much time within, and moving between, confined hierarchies.

As a new institutional governance technology for decentralised ledgers, blockchain might provide a better way. Coupled with other technologies such as the Internet of Things (IoT), blockchain can be applied as a governance mechanism to store and validate a ledger of information about goods.

It would be easy to suggest that blockchains will simply decrease the costs of supply chains and make consumer goods cheaper. In our recent working paper at the RMIT Blockchain Innovation Hub, we draw on economic theory to predict how blockchain might shift how and where we trade, leading to fundamental changes to globalisation.

First, we anticipate de-commoditization of economic goods. Many of the goods we buy are sold for the same price even where their underlying characteristics differ. Those goods are not sold in the same market because they are objectively the same, but because they cannot be economically or reliably differentiated due to information costs. We expect this over-commoditization to be most prominent in markets for luxury or perishable goods, where uncertainty is built into a single market price.

To the extent blockchain trade infrastructure provides deeper and more reliable information, goods can be de-commoditized and be sold in separate markets. Over time we expect price signals to disaggregate—put simply, there will be more prices—and ultimately facilitate better market coordination.

Second, blockchain trade infrastructure might shift economic power and therefore value to the polar ends of supply chains. Supply chains are plagued by information asymmetries—where some party holds information that another does not. These information asymmetries lead to market power. For instance, a primary producer of coffee in a developing economy might lack information about their final consumers or the price at which their coffee is eventually sold, restraining them from seeking new markets.

Information asymmetries persist for many reasons, one of which is a lack of incentives for actors along a supply chain to provide that information. By providing more transparency along the supply chain, blockchain might reduce information asymmetries for producers and consumers.

As a result producers of premium products might be able to charge premium prices, while consumers could more dynamically shift between different supply chains, for instance based on their appetite for organic produce. This suggests greater competition between suppliers of similar goods regardless of existing trade relationships.

Our final prediction is a reduced reliance on quality proxies, including national borders. As consumers we regularly rely on proxies to determine the quality and legitimacy of a product (such as brand reputations and production within national borders).

As uncertainty declines over the precise characteristics of a production, however, we would anticipate that the reliance on proxies as a measure of the quality of a product will diminish. Consumers will be able to more effectively rely on the specific attributes of a product. The longer-term effect might be to shift what products are produced within economies who currently suffer discrimination due to their reputation (perhaps for food and safety regulations).

We have outlined three predictions in this post. Those predictions are necessarily speculative and will play out through as an entrepreneurial and evolutionary process of search and discovery. What can we do in the meantime? Elsewhere our colleagues have suggested the need for open standards and a crypto-friendly policy sentiment, enabling entrepreneurs to build this new blockchain-based trade infrastructure—only then will we see if our predictions are correct.

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Articles

TradeTech and the problem of international policy coordination

[Together with Chris Berg, Sinclair Davidson, Mikayla Novak and Jason Potts this article was published at Cryptoeconomics Australia]


International trade is an information problem.

As goods move between firms and across borders, information about the provenance, characteristics, and compliance liabilities (whether they are subject to taxes or tariffs) of those goods move alongside them.

Handling companies need to know which goods are going where.

Regulators and trade authorities need to know whether the goods crossing a national border are compliant with domestic regulations.

(Does a good need an import permit? Does it require any special documentation? In Australia the Minimum documentary and import declaration requirements policy is a 27 page document.)

And end-users increasingly demand information about where their goods came from and how they were produced.

(Consumers want to know where their food is grown, whether it was grown to organic standards, or was manufactured gluten-free or nut-free. Advanced manufacturing firms want assurances that components — such as aircraft or wind turbine parts — are of high quality. And everyone wants assurances that their goods have been looked after while in transit.)

The result is piles of documentation shipped alongside internationally traded goods.

And the demand for documentation is growing. Supply chains are getting more complex. Regulatory requirements are increasing. End-users want more information about what they’re buying.

Introducing TradeTech

FinTech is the application of new technology — particularly developments in computer science — to the financial services industry. RegTech does the same for regulatory compliance.

Now we have TradeTech — the application of information technology to reduce the information costs of international trade.

TradeTech can reduce transaction costs, increase transparency for firms, regulators, and consumers, facilitate trade finance, and significantly lower regulatory and tariff compliance burdens.

Tackling border costs

One TradeTech application, blockchains used to manage supply chains, have the potential to provide a new digital services infrastructure for international trade in goods.

Blockchains use a combination of cryptography and economic incentives to allow people to come to a consensus on a shared digital ledger without the need for a trusted third party. Blockchains are a technology for secure non-hierarchical information governance.

Blockchains can store information about the provenance and distribution of tradable goods through the entire supply chain in circumstances where firms (and regulators) through the supply chain do not necessarily trust each other.

The invention of the shipping container in the 1950s radically transformed international trade by tackling the high cost — and unreliability — of getting goods on and off ships intact.

But in the 2010s, it isn’t the cost of transport that is the biggest burden on international trade. According to IBM and Maersk, the costs of bringing goods across borders are higher than the costs of transport costs.

In 2018 and 2019 we expect blockchains used in supply chains and to facilitate global trade will be one of the breakthrough blockchain use cases.

The impact of this sort of TradeTech will provide an enormous boost to the potential for global trade.

Facilitating trade flows

The information flows that facilitiate international trade are still to a remarkable degree governed and organised on a one-to-one basis and using paper. Each firm in a global supply chain passes off information relating to a tradeable good to each other one step at a time, vouchsafing that information until it can be passed to the next firm on the chain.

Furthermore, despite two decades of the digitisation of global commerce, it is still the case that international trade is a significantly paper-based process — which is slow, error-prone and raises fraud risks.

The growth of the regulatory state over the last thirty years has significantly increased the compliance costs of trade. While regulatory harmonisation and tariff reductions have encouraged larger volumes of trade, these have been matched by greater demands for information those goods travelling across borders.

New regulatory concerns about labour, environmental, chemical, and biosecurity standards are being reflected in international trade agreements and are translating into more regulatory requirements at the border.

Longer and more complex supply chains as a result of globalisation has multiplied these compliance burdens.

Blockchains can provide a ‘rail’ on which all this information travels.

Blockchains are uniquely suited for an era of advanced globalisation, the regulatory state, and demand for information about product origins and quality.

But TradeTech needs multilateral coordination

Private industry is developing the technology for blockchain-enhanced supply chains.

But there is the need for an international coordination to ensure that industry is able to exploit the opportunities this technology presents.

For example: information rmanaged on blockchains needs to be accepted as valid and compliant by domestic regulators.

One risk is that industry-developed blockchains might not be not treated as compliant with existing regulations. Goods could then remain subject to existing paper-based processes, necessitating double-handling of compliance and reducing the benefits of blockchain-enhanced trade.

Another risk is that individual trading countries adopt their own standards, which would also necessitate double-handling.

A further risk is that standards are developed by early market leaders in the blockchain-facilitated trade space, are adopted by regulators and trade authorities on an ad-hoc basis, and through regulatory lock-in limit the contestability of this trade infrastructure.

The benefits of TradeTech will be realised in a world of open-standards, rather than closed ones.

Multilateral bodies like APEC (Asia-Pacific Economic Cooperation) should be considering these questions now.

We don’t think governments should try to regulate the development of blockchain technology, or compel its introduction. The blockchain is an experimental technology that needs space to evolve. But there is a clear role for multilateral bodies to set standards for information managed through blockchains.

TradeTech doesn’t need government regulation or direction. But it does need government cooperation.

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