How Blockchain and Smart Contracts Can Improve Customs Control
According to Maersk research, the cost of global trade is estimated at $1.8 trillion annually with potential savings from more efficient process of ~10 percent. The cost and size of the world’s trading ecosystems continues to grow in complexity.
Right now, the time and cost of clearing goods for import or export add a significant financial burden on trade due to the copious layers of authorizations to import or export goods, such as permits, licenses, phytosanitary certificates, and others that are required on the grounds of human, animal or plant health or safety. The final arbiter in a border transaction is customs, whose role is to ensure that all such permits have been obtained and that they are valid and that the goods have been lawfully declared and all regulatory requirements have been met.
Just like in other sectors, blockchain and smart contracts have the potential to change the landscape of international trade. Applications driven by the digital ledger technology would help to reduce the huge volumes of paperwork and multiple bureaucratic interventions which are considered necessary in pursuit of legitimate trade. Furthermore, blockchain case studies rooted in financial services have expanded to the domains of transport or the ‘physical’ flows of goods, while digitizing not only financial instruments but traditional trade and shipping documents.
Customs administrations and other border agencies would significantly improve their capacity for risk analysis and targeting contributing to improved trade facilitation. Sharing the relevant data through permissioned blockchains can help customs and other border agencies realize the envisaged end-to-end “data pipeline”. Utilizing blockchains that can be operated by supply chain consortia, and continuously accessed and updated by all participants, these regulatory authorities would be able to ensure they have accurate and reliable data at hand and obtain such data from the right sources. By using a common distributed technical platform, they could leverage the power of blockchain technology to open up new possibilities to share information and resources.
What can blockchain do for customs control and global trade:
- Data integrity. Imagine a blockchain being started by a producer by recording the sale of goods to a distributor and then being augmented by every transformation or change of hands (e.g. storage in a warehouse, consolidation with other goods, inspected by Quarantine on export, packed into container, loaded on ship, cleared by Customs on export, etc.). The distributed ledger concept would guarantee the integrity of the data stored in the blockchain as the blockchain is incremented and, therefore, when it is presented to the authorities of the importing countries they can rely on every piece of information having been generated by its originator.
- Information on any shipment. Whether it be a proof of purchase, a clearance form, a bill of lading. Insurance can be made part of a block, a transparent chain of custody, and be accessible to suppliers, transporters, buyers, regulators and auditors. Therefore, Customs would be able to see the necessary and accurate data (seller, buyer, price, quantity, carrier, finance, insurance etc.) that have been tied with the goods to be declared and also keep track of the location and status of such goods in real time.
- Simplification. Time and effort would be saved all along the supply chain by parties not having to reproduce the information and submit it manually to the authorities or trading partners. Transactions would be made based on original data supplied at source.
- Increased security. Opportunities for corruption or collusion (a common problem in many countries which significantly adds to the cost of trade) would be reduced as the data cannot be retroactively tampered or altered along the way as the ledger represents the single source of truth.
- Multi-use big data. Over time, the blockchains would create a vast repository of ‘big data’ which can be used to analyze patterns and trends of trade to enable increasingly sophisticated risk profiling, which would enhance the border authorities’ risk management capacity.
- Guaranteed confidentiality. Confidentiality of the data would be guaranteed by an encrypted key being originated at the start of the chain and being passed down to the other parties in the supply chain including the border authorities.
In practical terms, the blockchain technology could be embedded into customs’ practices through a common platform which would embrace trade-related commercial entities as they are regularly engaged in trading business, and thus would enable the sharing of information among them. The participation of innumerous shippers (exporters) and consignees (importers), whether corporate or individual, is not necessarily a key to the success of such an initiative so long as the information on related documents by consignment, as recorded by aforementioned business entities on a common and distributed ledger, has been made accessible to Customs.
Such information, once incorporated into the chain of blocks, cannot be erased or tampered with by anyone; therefore, regular customs procedures would be limited to checking the submitted data against their own database. If it becomes a part of the network as a node. Customs could automatically clear goods that have been ‘pre-screened’ by customs on its ledger at an earlier stage, even without withholding them at the time of declaration. In other words, customs would be able to direct their limited resources to the handling of a category of trade which involves operators and financiers as being ‘outside’ of the given framework of public-private partnership.
However, blockchain also presents some major challenges:
- Aligning diverse suppliers and systems. For blockchain to fulfil the objectives above it would have to encompass all the participants in the supply chain from the original supplier of the goods to all the parties who have, in some way, played a part in getting those goods to their final destination as well as the regulatory authorities at the points of export or transit/trans-shipment. In the case of some industries (e.g. garments, electronics) the goods may undergo various transformations and the final product may be assembled from materials or components coming from different suppliers in different counties each with its own supply chain. For this to happen there must be an overwhelming incentive for everyone to participate and every node in the supply chain would need to have a modicum of IT capabilities as well as access to the Internet. Is there a way in which governments in different countries can come together and find some way of ‘incentivizing’ this process?
- Fraud. Organized networks often operate through a complex system of false companies that create false descriptions of goods or false invoices. They could simply start a blockchain of false data. Blockchain does not replace the need for intelligence and risk management but the availability of ‘big data’ could conceivably improve the efficiency of targeting. However, the capacity of Customs and other agencies in handling data would need to be enhanced and their practices, some of them deeply ingrained, would also need to be changed.
- Verifying Transactions. Blockchain may provide proof that a transaction has taken place but how can it guarantee that the terms of that transactions were fulfilled? For example, blockchain may record that goods were loaded into a container but how can one ascertain that the correct goods and the right quantity were actually loaded? This has implications for ‘self-executing contracts’ as well. Unlike Bitcoins where the entirety of the transaction is self-contained, in a real-world supply chain, the validity of the contract depends on external factors such as the quantity or quality of the goods or whether a certain action (e.g. transport from A to B) has taken place.
- Data confidentiality. Even if a blockchain ledger’s access can be restricted to only the participants in that transaction, the confidentiality of the data must be protected even within that restricted membership. For example, a supplier may consign goods destined for a certain buyer to a shipping line but the shipping line also provides a service to that supplier’s competitors. This may present a challenge where the entire ledger relating to a transaction is distributed among the participants.
- Legality. There are a number of legal implications of blockchain that would have to be explored. First and foremost, the issue of jurisdiction and ownership in terms of where the data is stored and where it is used as a declaration to the authorities.
Who is already working on improving customs control?
The Korean Customs Service (KSC) has signed an MoU with the Korean operator of Malltail to develop a blockchain-based customs platform for the e-commerce industry, local media outlet Chosun. Malltail is the leading consumer parcel forwarding service to Korea, with reportedly over one mln users. Its Korean operator, Korea Center, will be tasked with business and technical development of the blockchain-based customs platform, which is to be operated by the KCS for seven Malltail distribution centers across the US, Japan and Germany. The company anticipates that once the technology is implemented at full-scale, the process for customs clearance of goods will be simplified through the data sharing and the automatic generation of customs declarations, resulting in a more transparent and efficient customs service overall.
In January 2018, Maersk and IBM announced the intention to establish a new blockchain platform to provide more efficient and secure methods for conducting global trade using blockchain technology. The new company aims at bringing the industry together on an open blockchain platform that offers a suite of digital products and integration services. The platform is currently being tested by a number of selected partners who all have interest in developing smarter processes for trade.
Conclusion
The power of blockchain could have a great impact on customs’ day-to-day operations. In collaboration with the private sector-driven initiative to enhance the ‘traceability’ and ‘connectivity’ of supply chains all the way through by leveraging distributed ledgers. Customs would be able to have a broader and clearer picture of international trade particularly in terms of the movement of cargoes and consignments as being tied with the flow of capital. This indicates the possibility of ensuring that customs are fully informed and well-prepared in dealing with a variety of risk and threats and thus enabling knowledge-based enforcement in pursuit of stricter compliance and faster clearance. In addition, Customs could be elevated to the position of a fully-fledged border regulator endowed with a broader range of functions including but not limited to combatting cross-border illicit financial flows.
References
- Unveiling the Potential of Blockchain for Customs
http://www.wcoomd.org/-/media/wco/public/global/pdf/topics/research/research-paper-series/45_yotaro_okazaki_unveiling_the_potential_of_blockchain_for_customs.pdf?la=en - Digitizing Global Trade with Maersk and IBM
https://www.ibm.com/blogs/blockchain/2018/01/digitizing-global-trade-maersk-ibm/ - Can Blockchain Revolutionize Trade?
http://blogs.worldbank.org/trade/can-blockchain-revolutionize-trade
