Building capacity to help Africa trade better

How Can Blockchain Support Intra-African Trade?


How Can Blockchain Support Intra-African Trade?

How Can Blockchain Support Intra-African Trade?

‘Blockchain’ – or Distributed Ledger Technology (DLT) – is a technology whereby a ledger of transactions, or other form or record, is maintained electronically by being distributed across multiple discrete servers. This technology has received a lot of attention of late, mostly due it being the central technology to which cryptocurrencies (such as Bitcoin and Ethereum) owe their existence and their integrity.

The logic is simple – maintain the integrity of a digital value system by ensuring that the record of each and every unit of exchange is stored multiple times; in this way effectively stopping fraudulent activity. By implication of the distribution of the ledger, any attempted fraud (such as for example changing the ownership record of an asset) would need to be perpetrated against every single instance of the record, which is close to impossible.

The same logic applies to records of a non-asset nature, such as educational qualifications, title deeds, contract and registration papers. This goes far beyond simply having a ‘backup’, which would entail one or two additional copies, rather, DLT is a live record with thousands, tens of thousands and even millions of copies.

Although the original application of DLT – cryptocurrency Bitcoin – has not been entirely un-associated with fraudulent activity, most attacks on the system have been related to the theft of user wallets, rather than against the DLT component itself. In fact, an industry guru declares that, with relevance to attacks on crypotcurrencies: “[w]e are not talking about an attack on the blockchain itself; that is almost a non-starter.”[1]

The fact that Blockchain technology is considered so secure by experts has contributed to its adoption in diverse applications in 2018, with many more likely to follow. These applications include private and public sector initiatives and indicate that DLT is clearly no longer exclusively the domain of the dark web tech rebels that innovated cryptocurrencies as a form of rebellion against the establishment for the 2008 financial crisis.

For example, the Canadian city of Calgary announced on the 11th of December 2018 that it would be launching its own cryptocurrency to boost economic activity in the city[2]. The ‘Calgary Dollar’ will be a cryptocurrency for use by Calgary businesses, which will be allowed to conduct up to 100 percent of their business in the currency but obligated to conduct a minimum of 10 percent. Meanwhile in Africa, a joint Bahamian-Kenyan company called Raise has launched African’s first security token platform[3]. This is a platform where DLT is used as the basis for digitalised assets that represent real world assets such as real estate, stocks, commodities and fine art.

The Raise security token is a founding component of the African Digital Asset Framework (ADAF), an initiative supported by the African Union and African Development Bank. This framework, which was announced in July 2018 and launched in November 2018, claims to have found a secure platform for transactions in digital currencies and assets[4]. One primary goal of the platform is to promote intra-African trade both in the assets themselves as well as trade more generally. One way this can be achieved is through the ‘low friction’ of digital assets, which like the internet, are borderless.

Already, services such as ride hailing and accommodation can be bought and sold cross-border, practically without the assent or interference of national authorities. These platforms and their transactions are however, enabled through traditional payment mechanisms such as credit cards. Once payments and transacting are based on peer to peer digital currency systems, an existing point of ‘friction’ will be mitigated. Ride hailing and accommodation platforms such as Uber and AirBnB are services vendors, but trade in goods will become easier and entail less friction too.

Digital payments systems have and will continue to have a stimulating effect on within-border trade, but DLT based systems have the potential to boost cross-border trade too, due to their low-friction qualities and their inherently secure nature. Realistically, cross-border trade based on cryptocurrencies in Africa is some years away, being still in its infancy even in the developed world. This aspect of DLT applications is also not well understood or regulated at present, and authorities need time to develop regulatory frameworks.

What then, are the other ways that DLT can support trade, besides the promise (in the near future) of frictionless international payment? A key benefit of DLT-based systems is the integrity factor. As already explained, DLT systems are essentially hack-proof, by virtue of their distributed and transparent nature. The ledger is transparent – it can be interrogated and queried by anyone with access to a computer/device and internet. The website blockchain.info allows a user to query a specific blockchain-driven ledger (such as Bitcoin or Ethereum) for details around transactions. Users who are more technically adept can also query the blockchain node on their local machine by using a scripting language and some lines of code.

The integrity of the blockchain ledger helps to establish and maintain a critical requirement for cross-border trade: trust. Importers and exporters are enterprises in different sovereign regions, subject to different authorities. The importer faces the risk that the product is defective or not as specified. The importer bears the warranty risk with reference to the domestic market. On the other hand, the exporter faces the risk of non-payment, late payment or short-payment. Although the latter has been substantially mitigated with escrow systems and substantial B2C seller and buyer protection in platforms such as Alibaba, PayPal and eBay, B2B trade is not as protected. However, DLT can become a ‘guarantor of trust’, replacing or substantially reducing the contribution (and therefore cost) required of traditional guarantors: banks, insurance companies, notaries and standards certification authorities.

The DLT ledger is generated from an initial entry point and thereafter maintained by servers in platforms, such as the African Raise platform mentioned earlier. The level of integrity generated is at least as good, if not better than that of traditional guarantors. However, the maintenance of the ledger is passive and entails only a server hosting cost (and overhead), and query access is considerably easier than using traditional institutions. Importers and exporters can therefore have peace of mind when dealing with clients in distant countries, where the language and business culture may be very different. The entry into the ledger of dispatch information, shipping details, customs declarations and payments, fees payments, transit locations and final delivery all will serve to greatly enhance transparency, and consequently, trust.

Besides the direct effect that improved trust will have, a DLT-driven trade details ledger will also speed up cross-border trade considerably. Simply by eliminating the need for traditional agencies and guarantors of trust, goods movement and their payments can happen that much faster. The DLT-driven marketplace allows buyers and sellers to interact directly with each other and without the costly and time-consuming agency of intermediaries.

The preceding analysis presented the role of DLT in trade, from the perspective of private parties to the trade transaction. There are also obviously public parties, most notably the customs and excise authorities, immigration, police and the agencies who enforce quality, sanitary and phytosanitary standards. These agencies could be included in the DLT information process, thereby simplifying their role in overseeing the passage of goods into their territories. This could be facilitated by domestic legislation establishing inter-agency cooperation – providing a legal framework for the system and greater assurance for the trading parties. The DLT could be integrated into a single-window system, whereby the entry point of all required data is the original ledger entry, which is then passed to the customs and excise system. The items could then be pre-processed by Customs, in the same way that courier shipments are pre-processed before physical arrival. Once the physical shipment arrives, customs officials can verify the pre-processing and enter the results into the ledger. This is then immediately available to the exporter and importer; the latter can make payment of any duties that are due, and the shipment can continue.

In order to deliver the considerable potential value that DLT can bring to trade facilitation, the system needs to be robust to the requirements of global value chains. A final product in its destination importing nation may be comprised of the value additions of multiple enterprises in multiple territories. The system would need a way of aggregating the individual transactions under the account for the final consumed product.

A DLT-driven trade facilitation system would also have to deal with and overcome data privacy and security concerns. The data would potentially be generated across several territories and each country may assert ownership and restriction of the data within its ambit. New data tools such as data mining, augmented by machine learning, mean that data has a value for the obvious – and hidden – insights it offers. Not all of these insights have purely commercial value, some have strategic value and pose risks should this information fall into the wrong hands. This underscores that the system would need to be developed (or at least curated) multilaterally, or by a global trade body such as the WTO or the International Trade Centre.

Finally, a DLT-driven trade facilitation system would not obviate all traditional agencies involved in the movement of goods. Certain functions, such as physical inspection of goods and verification of contents, would still need human agency, and at some point in the near future, robotic agency. The blockchain system would over time, however make many of the human agency roles redundant, as explained earlier.

Digital Ledger Technologies and the virtual systems they enable are one of the most exciting sets of technological developments in recent years. Their potential has only just begun to be tapped and they hold much promise for the world of global trade. In many ways, Africa stands to benefit more than the developed world, in a relative sense, because African can transfer the technology when it is ready and skip many of the intermediate steps. In the same way that Africa benefitted by skipping the landline phase of internet connectivity and moving directly to wireless smart devices, it can do similarly by adopting this technology for trade facilitation in the near future.

[1] https://www.tripwire.com/state-of-security/security-awareness/security-concerns-risks-related-bitcoin/

[2] https://bitcoinexchangeguide.com/canadian-city-launches-calgary-digital-dollar-cryptocurrency-to-boost-local-economy/

[3] https://it-online.co.za/2018/12/10/africa-security-token-framework-launched/

[4] https://medium.com/african-digital-asset-framework/introducing-the-african-digital-asset-framework-project-e31d4e090f09

About the Author(s)

John Stuart

John Stuart is an economist and policy analyst with special interests in trade, economic integration, technology & ICT and economic modelling. He began his career in academia at Rhodes University and later the University of Cape Town, after which he entered private consulting first with AFReC (Pty) Ltd and subsequently with management consultancy PBS (Pty) Ltd, where he served as Chief Operations Officer. Following his time at PBS he created agri-tech startup AgriDrone, one of the first UAV startups in Africa. He has subsequently researched and written extensively for tralac and also consulted to various organisations including the UN Economic Commission for Africa and the OECD. He holds an M. Com degree in Economics from the University of Natal (Durban).

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