Journal Articles

Blockchain and the Evolution of Institutional Technologies: Implications for Innovation Policy

Forthcoming in Research Policy

Abstract: For the past century economists have proposed a suite of theories relating to industrial dynamics, technological change and innovation. There has been an implication in these models that the institutional environment is stable. However, a new class of institutional technologies — most notably blockchain technology — lower the cost of institutional entrepreneurship along these margins, propelling a process of institutional evolution. This presents a new type of innovation process, applicable to the formation and development of institutions for economic governance and coordination. This paper develops a replicator dynamic model of institutional innovation and proposes some implications of this innovation for innovation policy. Given the influence of public policies on transaction costs and associated institutional choices, it is indicated that policy settings conductive to the adoption and use of blockchain technology would elicit entrepreneurial experiments in institutional forms harnessing new coordinative possibilities in economic exchange. Conceptualisation of blockchain-related public policy an innovation policy in its own right has significant implications for the operation and understanding of open innovation systems in a globalised context.

Standard
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.

Standard
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.

Standard
Journal Articles

Blockchain and supply chains: V-form organisations, value redistributions, de-commoditisation and quality proxies

Published in The Journal of the British Blockchain Association

Abstract: We apply institutional cryptoeconomics to the information problems in global trade, model the incentives under which blockchain-based supply chain infrastructure will be built, and make predictions about the future of supply chains. We argue blockchain will change the patterns and dynamics of how, where and what we trade by: (1) facilitating new forms of economic organisation governing supply chain coordination (such as the V-form organisation); (2) decreasing information asymmetries and shifting economic power towards the ends of supply chains (e.g. primary producers); (3) changing the dimensions along which we can reliably differentiate goods and therefore de-commoditising goods and disaggregating price signals; and (4) decreasing consumer reliance on quality proxies (e.g. production within national borders).

Standard
Journal Articles

Blockchain: An entangled political economy approach

Published in the Journal of Public Finance and Public Choice 

Abstract: This paper incorporates blockchain activities into the broader remit of entangled political economy theory, emphasising economic and other social phenomena as the emergent by-product of human interactions. Blockchains are a digital technology combining peer-to-peer network computing and cryptography to create an immutable decentralised public ledger. The blockchain contrasts vintage ledger technologies, either paper-based or maintained by in-house databases, largely reliant upon hierarchical, third-party trust mechanisms for their maintenance and security. Recent contributions to the blockchain studies literature suggest that the blockchain itself poses as an institutional technology that could challenge existing forms of coordination and governance organised on the basis of vintage ledgers. This proposition has significant implications for the relevance of existing entangled relationships in the economic, social and political domains. Blockchain enables non-territorial ‘crypto-secession’, not only reducing the costs associated with maintaining ledgers, but radically revising and deconcentrating data-conditioned networks to fundamentally challenge the economic positions of legacy firms and governments. These insights are further illuminated with reference to finance, property and identity cases. Entangled political economy provides a compelling lens through which we can discern the impact of blockchain technology on some of our most important relationships.

Standard
Book Chapters

Blockchains and the boundaries of self-organized economies: predictions for the future of banking

Book chapter published in Banking Beyond Banks and Money

Abstract: This chapter uses economic theory to explore the implications of the blockchain technology on the future of banking. We apply an economic analysis of blockchains based on both new institutional economics and public choice economics. Our main focus is on the economics of why banks exist as organizations (rather than a world in which all financial transactions occurring in markets), and how banks are then impacted by technological change that affects transaction costs. Our core argument is that blockchains are more than just a new technology to be applied by banks, but rather compete with banks as organizations, enabling banking transactions to shift out of centralized hierarchical organizations and back into decentralized markets. Blockchains are a new institutional technology — because of how they affect transaction costs in financial markets — that will fundamentally re-order the governance of the production of banking services. We then explore this implication through broader political economy lens in which banking moves out of organizations and deeper into markets. We examine this as a form of institutional economic evolution in which the boundary of catallaxy — i.e., a self-organized economy — is enlarged, at the margin of the banking sector. Such institutional competition enables evolutionary discovery in the institutions of banking.

Standard