Blockchain Technology and Its Impact on International Trade
A forum on Disruptive Change: Impact and Challenges organised by the World Islamic Economic Foundation (WIEF) was held last week between the 21st-23rd of November at Kuching, Sarawak. One of the discussions covered was “Blockchain Technology and Its Impact on International Trade”, which involved speakers Daniel Sieberg, Co-founder of the Google News Lab, USA, Armin Osmancevic, Co-founder and Global Chief Executive Officer of MyBazar, UAE, Alan Laubsch, Director of Natural Capital Markets at Lykke, Switzerland and Farzam Ehsani, Blockchain Lead at Rand Merchant Bank (RMB), South Africa.
Blockchain technology is the next age of the internet. Today, we can exchange cross-border information such as email directly from sender to recipient. Tomorrow, in the age of blockchain, people will be able to send anything of value including money, titles, deeds, music, art, scientific discoveries, intellectual property and many more. It provides the strongest case yet for international trade, since blockchain has the potential of establishing a framework where supplier can deal safely and directly with the buyer. But what impact does it have on global prices and most importantly our businesses in the future?
“Blockchain promises to democratize eCommerce and international trade, to make it available to masses but that also means to disrupt existing eCommerce models.”
At the recent forum, I was given the distinct pleasure to be one of the speakers to discuss on Blockchain Technology and Its Impact on International Trade. As an entrepreneur and an enabler of other entrepreneurs through MyBazar platform, I have seen first-hand, many of the challenges eCommerce and cross-border trade faces. Those challenges include strong competition and extremely thin margins, heavily depending on subsidizing everything from marketing initiatives to shopper incentives and merchant incentives. Competitors are bleeding each other out and eCommerce is a massively capital-intensive game, based on huge investments.
Blockchain promises to democratize eCommerce and international trade, to make it available to masses but that also means to disrupt existing eCommerce models. The question is then how and to what extent the existing ecommerce players will adopt the blockchain technology?
Bitcoin and blockchain from the Islamic perspective
Currently, the most popular application of the blockchain are cryptocurrencies which in most cases consists of digital currencies or assets. Bitcoin, being one of them, has been called “digital gold,” and for a good reason. To date, the total value of the currency has surpassed $140 billion.
Clearly, Islam requires any currency to hold intrinsic value before it can be considered permissible. In other words, money that is created out of nothing is not real (halal) money, because it is not backed up by any commodity of actual value. The issue of the cryptocurrencies and Bitcoin in particular, raises many valid questions such as, what is the basis for the value of Bitcoin, who regulates its, who ensures its security, at the end of day who has even issued it in first place are all very important.
Reflecting on such questions, JPMorgan’s CEO Jamie Dimon was saying that Bitcoin is a fraud. And he is not alone, even Malaysian Fatwa Council says, Bitcoin is not suitable to be used as currency because there is an element of extreme speculation, and lack of authoritative body.
“Blockchain will indeed revolutionize our technology and our businesses but on the other hand some of the cryptocurrencies as we know today are not the way forward.”
In my opinion, Bitcoin is clearly the market for speculators only. I fear that by driving up the price of cryptocurrency the speculators will pull in investors as well. I think there is a strong case for regulators to step in to shield markets, investors and public alike.
Blockchain on the other hand is a technology that allows Bitcoin — but also so much more. Hence, we must first distinguish between blockchain and Bitcoin. Blockchain will indeed revolutionize our technology and our businesses but on the other hand some of the cryptocurrencies as we know today are not the way forward.
Other solutions except fintech
Blockchain allows digital information to be stored as “blocks” of information that are identical across its network and recorded into a digital ledger. This is a distributed database designed to be regularly updated and continually reconciled by each user that has a copy of the ledger and can participate in confirming the transaction independently. As it can be programmed to record virtually everything of value, Blockchain becomes a new type of internet allowing for other type of solutions except financial technology or fintech.
Here are some examples:
Supply chain auditing; blockchain provides an easy way to certify companies and their products
Governance; blockchain allows full transparency to elections or opinion polls
File storage; distributing data throughout the network protects files from getting hacked or lost
Crowdfunding; blockchain allows people to have a direct say in product development
IP protection and distribution; blockchain enables artists to sell their creations directly to audiences and divvy up royalties to all creators, automated by smart contracts
eCommerce; blockchain removes middlemen, confirms identities, removes fees & restrictions and follow the transactions from sale to delivery
Security; by storing data across its network, blockchain eliminates the risks that come with data being held centrally
Advertising; customers will get paid a few coins for seeing items and a few more for clicking and then finally even more for buying those items
Every company should implement blockchain
Blockchain and associated innovating technologies will massively disrupt the economic, banking, and financial landscape, with applications to identity management, smart contracts, securing supply chains, authenticating and assuring both real and digital assets and associated intellectual property rights. Companies could operate at much lower costs, minimize fraud while accounting, auditing and assurance services could become redundant.
“This is a wake-up call to SMEs especially as the governments, central banks and regulators will embrace the new paradigm or have their economies waste away behind.”
Given blockchain’s data integrity, there will be a reduction in systemic risk and operational improvements. This is a wake-up call to SMEs especially as the governments, central banks and regulators will embrace the new paradigm or have their economies waste away behind.
Therefore, it is essential for the firms to start integrating blockchain technology in their enterprises. The sooner they start the more gains are to achieve.
Blockchain for developing economies
Coming from Dubai, our company was fortuned to witness Dubai launched its “Blockchain Strategy” in 2016 with the ambition to become the first blockchain government by 2020. It plans to save 25 million work hours annually through paperless transactions by shifting all transactions to blockchain. The Dubai Land Department last month became the world’s first government entity to adopt blockchain. It records all real estate contracts, including lease registrations, and links them with the Dubai Electricity and Water Authority, the telecommunications system and various property-related bills.
“Blockchain allows developing economies to embed its technology as an underlying layer to all initiatives, save money and increase efficiency and the speed of development.”
Similarly, the regulators of the UAE’s financial centres are embracing fintech and its underlying technologies, providing a light-regulation sandbox environment for regional start-ups, one of the first programmes of its kind in the region as well as having global competitions to identify and support innovators in fintech.
With this in mind, blockchain is even more suitable for developing economies where many rules and regulations are not being developed yet. It allows them to embed blockchain technology as an underlying layer to all initiatives, save money and increase efficiency and the speed of development.
The issue of trust
One of the biggest misnomers about blockchain is the trust. I used “trustless” as a term for a while for the Bitcoin as it is a peer-to-peer digital cash system that allows you to send money to anyone in the world. When you work with Bitcoin, you’re trusting the network, consisting of several parties: the miners to secure the network and validate transactions, the developers to maintain and improve the code, and the users to use the platform. This made me uncomfortable as I must trust all three parties who are decentralized or else the whole thing doesn’t work.
But then I learned that this network can be open or closed as well as regulated or not-regulated. If the data is distributed via closed networks with rules and regulations applied, then the trust becomes less of an issue. Likewise, Bitcoin and cryptocurrencies are often identified as the only or true representatives of blockchain. Obviously, that is not the case, but the confusion is still there.
Empowering SMEs and cross-border trade
More than often SMEs suffer from bureaucracy and lack of financing options. Blockchain is especially valuable where there is a need to provide a quick, secure and permanent date and time stamp of transactions. Because of this, it is very applicable to payments, transfer of assets, establishment of smart contracts, validation etc.
“For cross-border trade, blockchain technology allows a great solution, as it removes the cash-flow issue.”
SMEs dealing with import and export of goods are usually facing need of capital, both to acquire raw materials and produce their products but also capital to ship those products to their end destination. Banks are reluctant to lend money to SMEs due to risk of delayed payments. And access to trade financing is often critical to achieving growth for any company, especially SMEs. For cross-border trade, blockchain technology allows a great solution, as it removes the cash-flow issue.
Similarly, importing and exporting goods and services is full of paper-heavy practices, which results in inefficiencies. Through benefits it creates, by for example digital timestamp when goods or services are shipped and received or streamlined settlements, blockchain will most likely disrupt the complete trade and supply chain finance industry.
Many analysts believe that it will probably take another five years for commercial blockchain applications to appear, however the opportunity that blockchain provides to SMEs can simply not be ignored.
eCommerce running on blockchain
Blockchain is a perfect technology for eCommerce because of reduce cost and trust it can provide. When your company’s inventory management system detects low stock on item in demand, it could automatically issue a purchase order to your supplier. The supplier can automatically sign the contract, ship the goods and send invoice — all stored on blockchain. As a buyer, your company can sign the invoice with a promise to pay as soon as the goods are received, through programmable money. The automation of the process and reduction of paperwork should greatly reduce cost and improve efficiencies of the business. Same goes to your end shopper. The pay-out to your company is done automatically as soon as certain conditions are met such as delivery and confirmation has taken place.
As a conclusion, it is evident that blockchain is here to stay and affect our lives in many different yet unknown ways. We shouldn’t be afraid of the unknown and instead we should learn everything we can about blockchain as a technology and think of ways we can use it in our business or everyday life. There’s no need to be an expert, it is enough to be able to make our own decisions as to remove any misconceptions and avoid misuse.
A simple analogy may help. Think of a fire; we can use it to burn the house, but we can also cook food. At the end of the day it’s all about why and how we use it.