Closing in on the Holy Grail of World Trade:Using Blockchain to Expand Southeast Asia’s Trade

Inclusive Economic TransformationOctober 2018 |

Kati Suominen

Issue Paper

l Inclusive Economic Transformation

Closing in on the Holy Grail of World Trade:Using Blockchain to Expand Southeast Asia’s Trade

Issue Paper

October 2018

Kati Suominen Nextrade group

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Published by

International Centre for Trade and Sustainable Development (ICTSD)International Environment House 27 Chemin de Balexert, 1219 Geneva, Switzerland

Tel: +41 22 917 8492 Fax: +41 22 917 8093 ictsd@ictsd.ch www.ictsd.org

Publisher and Chief Executive: Ricardo Meléndez-Ortiz Managing Director: Deborah Vorhies Development Economist: Sarah MoranSenior Programme Officer: Kiranne GuddoyProgramme Officer: Nicholas Frank

Acknowledgements

This paper was produced under ICTSD’s Programme on Inclusive Economic Transformation as part of a wider effort to empower least developed countries and low income countries across the Indo-Pacific region to achieve sustainable and inclusive growth by taking advantage of opportunities resulting from changes in international trade and production structures.

The author wishes to thank the ICTSD team involved in the conception and review of this paper, in particular Nicholas Frank, as well as Craig Atkinson and Ching-Fu Lin for helpful comments and suggestions on a previous draft of this paper.

ICTSD gratefully acknowledges funding from the Australian Department of Foreign Affairs and Trade (DFAT).

ICTSD is grateful for the generous support from its core donors including the UK Department for International Development (DFID); the Swedish International Development Cooperation Agency (SIDA); the Ministry of Foreign Affairs of Denmark (Danida); and the Netherlands Directorate-General of Development Cooperation (DGIS).

ICTSD welcomes feedback on this publication. This can be sent to Kiranne Guddoy (kguddoy@ictsd.ch) or Fabrice Lehmann, ICTSD Executive Editor (flehmann@ictsd.ch).

Citation: Suominen, Kati. 2018. Closing in on the Holy Grail of World Trade: Using Blockchain to Expand Southeast Asia’s Trade. Geneva: International Centre for Trade and Sustainable Development (ICTSD).

Copyright © ICTSD, 2018. Readers are encouraged to quote and reproduce this material for educational and non-profit purposes, provided the source is acknowledged. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence. To view a copy of this licence, visit: https://creativecommons.org/licenses/by-nc-nd/4.0/

The views expressed in this publication do not necessarily reflect the views of ICTSD or the funding institutions.

ISSN 1995-6940

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CONTENTS

ABBREVIATIONS ivFOREWORD vEXECUTIVE SUMMARY vi1. INTRODUCTION 12. HOW IS BLOCKCHAIN CHANGING SOUTHEAST ASIAN TRADE? 2

2.1 Tracing Products in Global Value Chains 3

2.2 Reducing Logistics Costs 4

2.3 Facilitating and Securing Trade in Customs 5

2.4 Bridging the Trade Finance Gap 5

2.5 Blockchain in Southeast Asian Sustainable Development 7

3. CHALLENGES TO BROAD-BASED USE OF BLOCKCHAIN IN SOUTHEAST ASIA 9

4. BOOSTING BLOCKCHAIN IN ASIAN TRADE AND SUSTAINABLE DEVELOPMENT 11

5. CONCLUSION 14REFERENCES 15

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ABBREVIATIONSASEAN Association of Southeast Asian Nations

3D three-dimensional

EU European Union

GDP gross domestic product

HKMA Hong Kong Monetary Authority

IMDA Infocomm Media Development Authority

IP internet protocol

ISO International Organization for Standardization

KSC Korea Customs Service

KYC know your customer

MAS Monetary Authority of Singapore

SMEs small- and medium-sized enterprises

UK United Kingdom

US United States of America

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FOREWORDDisruptive technologies, including artificial intelligence (AI), distributed ledger technologies (DLTs), and the internet of things (IoT), are driving a transformative reorganisation of economic structures. If correctly harnessed, these emerging technologies have the potential to assist economies in creating new efficiencies, boosting productivity, and enhancing international trade.

ICTSD’s Inclusive Economic Transformation Programme aims to empower least developed countries (LDCs) across the Indo-Pacific region to take advantage of the opportunities and mitigate the risks posed by disruptive technologies. This paper falls within that project and is part of a series of publications that examine the potential of e-commerce and disruptive technologies to advance sustainable development objectives.

This paper, authored by Kati Suominen, CEO of Nextrade, assesses the ways in which blockchain and related DLT technologies are enhancing trade performance, through improvements in supply chain management, customs procedures, and trade finance in Southeast Asia. The paper also analyses the challenges to the broad-based application of blockchain in the region.

From a policy perspective, the paper argues that systematic and innovative policies are required in order to scale up the adoption of blockchain and support the achievement of sustainable development priorities in the region. Policy options include the development of interoperable standards, a regional regulatory sandbox to facilitate the testing of new regulatory approaches, and a regional blockchain lab to support the development of novel trade-related applications of blockchain.

We hope this research paper will help inform the decisions of policymakers, businesses, and relevant stakeholders engaged in international trade as they work to advance the United Nations Sustainable Development Goals.

Ricardo Meléndez-Ortiz Chief Executive, ICTSD

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EXECUTIVE SUMMARYUsing emerging technologies to expand trade is critical for Southeast Asia’s future and for overcoming the region’s most significant challenges: stagnating productivity levels that arrest the region’s economic growth, wage pressures that erode regional firms’ margins in export markets, and aging populations in some countries such as Thailand and Viet Nam that place new demands on improving the productivity of their labour force. Blockchain can be an important part of the equation: it is one of the many emerging technologies such as e-commerce, the Internet of Things, and artificial intelligence that, when put to work, can help the region to generate new efficiencies in production and trade.

Blockchain is on fire in Southeast Asia. Regional companies and governments have become global front runners in piloting blockchain in order to undo the many persistent inefficiencies involved in moving goods from country A to country B—such as to facilitate trade logistics, trade finance, customs clearance, and supply chain traceability. Pilots have produced very promising results, suggesting blockchain has tremendous potential to facilitate and secure trade, close trade finance gaps, and help small- and medium-sized enterprises engage in trade. Blockchain is also accelerating development solutions in the region’s poorer economies, from enhancing access to electricity in the Philippines, to professionalising microcredit in Myanmar, to helping people vote in elections in Indonesia.

The purpose of this paper is to discuss how blockchain is already improving supply chain management, cross-border logistics, customs procedures, and trade finance in Southeast Asia, including in the poorer economies of Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam; to analyse challenges to blockchain’s adoption and scalability in the region; and to present policy ideas to accelerate blockchain’s diffusion in the region, especially to expand and streamline its trade transactions and supply chains.

The paper focuses on blockchain applications that do not have anything to do with cryptocurrencies. I argue that blockchain may yet prove to be the most seminal technology in Southeast Asia’s trade. It helps the region close in on the holy grail of world trade: seamless integration and automation of financial, logistical, informational supply chains that undergird trade transactions. The efficiency gains can be in the trillions of dollars and lift the region’s sagging productivity growth rates.

However, to reap the gains, the region requires systematic and bold policies that catalyse blockchain innovations and enable existing solutions to scale up faster. At this juncture, it is critical that regional governments consider blockchain a new technology—one whose uses, benefits, and challenges are only emerging. Rather than thinking about how to regulate blockchain, it is more fruitful to consider how to enable innovation around blockchain, diffuse the technology across societies, and enhance the scalability of blockchain platforms. I propose several measures to accomplish precisely that in Southeast Asia, such as through interoperability standards that enable users of different blockchains to interoperate, a regional blockchain sandbox for companies to quickly test new applications and for national regulators to learn more about their functioning, and a regional blockchain lab to develop new applications and use cases for blockchain in trade- and development-related areas. The paper stresses that to draw productivity gains from technologies such as blockchain, Southeast Asian economies need to close their skills gaps, for example by aligning education and skills development with the needs of the private sector, and developing public–private funding schemes for technical and vocational education and training and science, technology, engineering, and mathematics education.

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1. INTRODUCTIONSoutheast Asia has had a remarkable run in world trade over the past two decades. Trade has grown from 70 percent of regional gross domestic product (GDP) in 1990 to 93 percent in 2015, a period in which the region’s GDP grew more than six-fold. Businesses in the region have integrated into regional and global supply chains in electronics, food products, oil and gas, and many other sectors. The region’s success in trade is in part due to governments’ work to reduce tariffs, negotiate new trade agreements, and lower trade costs.

More recently, the region has fiercely embraced technologies that transform how companies make, move, and market goods and services at home and across borders. Southeast Asia has birthed such leading companies as Lazada in e-commerce, Grab in ride-hailing services, and Traveloka for online travel reservations. The region’s companies have digitised their operations, governments have digitised customs, and shoppers have taken to their smartphones to buy goods and services.1 Digitisation and technology adoption are still lower in the poorer economies of Cambodia, the Lao People’s Democratic Republic, and Myanmar, but they are improving fast: some 125,000 new netizens are projected to get online daily in the region up to 2020 (Anandan and Sipahimalani 2017).

Technology-driven trade is critical for Southeast Asia’s future, particularly for overcoming the region’s most significant challenges—stagnating productivity levels that lower the odds of economic growth, wage pressures that erode regional firms’ margins in export markets, and aging populations in some countries such as Thailand and Viet Nam—that demand that today’s workers and firms quickly become more productive. Blockchain is one of the many emerging technologies such as e-commerce, the Internet of Things, and artificial intelligence that can help the region to generate new efficiencies in its production and trade, and it may yet be the most influential one. Blockchain initiatives and start-ups have mushroomed in the region,

and equity deals in blockchain start-ups have exploded from US$ 98 million in 50 deals in 2013 to US$ 640 million in 144 deals in 2017 (CB Insights 2018).

While blockchain is often identified with Bitcoin, a digital currency that runs on blockchain, a wide range of blockchain applications are transforming international trade. The technology is only nascent and we will still need to wait for another few years to present conclusive evidence about blockchain’s impact on trade flows. However, pilots to date suggest that blockchain can be transformative and get the world, including Southeast Asia, close to the holy grail of world trade: end-to-end automated trade transactions and digitisation and seamless integration of financial, logistical, and informational supply chains undergirding world trade. The efficiency gains could be in the trillions of dollars and lift Southeast Asia’s sagging productivity growth rates—but to reap these gains, the region requires bold policies that enable innovation around blockchain, new use cases, and scalable solutions.

The purpose of this paper is to discuss how blockchain is already improving supply chain management, cross-border logistics, customs procedures, and trade finance in Southeast Asia, including in the poorer economies of Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam; to analyse challenges to blockchain’s adoption and scalability in the region; and, in particular, to present policy ideas to accelerate blockchain’s diffusion in the region, especially to expand and streamline its trade transactions and supply chains.

Section 2 discusses the properties of blockchain and uses cases of blockchain applications in Southeast Asian trade. Examples from broader East Asia will be discussed as well. Section 3 reviews challenges to a broad-based adoption of blockchain. Section 4 presents policy recommendations for the regional economies to accelerate the gains blockchain delivers. Section 5 concludes the paper.

1 E-commerce sales in Southeast Asia have been skyrocketing; for example, in 2017, online retail sales grew at 55 percent in Indonesia, 23 percent in Malaysia, and 25 percent in the Philippines.

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2. HOW IS BLOCKCHAIN CHANGING SOUTHEAST ASIAN TRADE?

The processes of selling and moving goods from one country to another are rife with inefficiencies. Exporters and importers often fill out numerous paper forms, interact with multiple disparate parties such as logistics providers and customs, and provide the same data many times over. The processes for even the most sophisticated banks to furnish trade finance are time-consuming, paper-based, and prone to errors, fraud, and duplication of efforts. Tracing products to their origin is very complicated for those that have a critical need for the data: for example, supply chain managers seeking to ensure the quality of parts and components they procured, retailers that need to quickly crack down on a foodborne illness, customs that are tasked to verify certificates of origin, and so on. And at a time when cross-border e-commerce purchases are growing and bringing millions of parcels to countries’ borders, border agencies struggle to share data with each other efficiently and in real time.

The challenges are particularly significant for small and medium-sized enterprises (SMEs), which have limited in-house capabilities and often limited profit margins, making it prohibitive to hire many middle managers to run their trade operations. There are a number of reasons why blockchain can be an excellent tool to lower coordination and transactions costs in trade (see also Suominen forthcoming b):

• Blockchain can run without a central hub or authority or clearing house in the middle, but with data and transactions visible to all parties within the network. Exporters and importers tend to rely on many intermediaries in trade transactions, such as customs brokers, freight forwarders, and banks that provide trade finance. While these players assist businesses in navigating the complexities of cross-border logistics, payments, and customs clearance, their work can be paper-based and inefficient. There are also coordination costs among

the various players, such as border agencies, shippers, banks, and importers and exporters that “touch” any one trade transaction but do not share data with each other well. Blockchain can reduce these costs: essentially a decentralised database, it can be composed of exporters and importers or lenders and borrowers that interact directly with each other, without a bank in-between. Each transaction made on a blockchain has an internet protocol (IP) address attached to it, which enables anyone to view every transaction any given IP holder has ever made and with whom. All transactions are secure and carried out among anonymous private parties, but also visible to all market participants from the bird’s-eye view. These properties are extraordinarily useful for improving the efficiency of international trade transactions.

• Each entry on a blockchain is immutable, meaning it cannot be altered or deleted. In trade transactions, many parties have their respective databases, which can be modified accidentally or fraudulently. A variety of criminal practices such as double invoicing for goods have fooled even the leading banks into losing hundreds of millions of dollars. Blockchain can be a game-changer in two ways. First, it is the users of blockchain, not a central authority, that jointly validate each entry made on blockchain. And second, entries cannot in principle be removed or altered after they have been made. This property of the system can, among other things, help the importing country’s customs to manage the determination of origin of products, or manufacturers to trace and assess the quality of their inputs. Moreover, the fact that each user builds a log of transactions can help firms—even smaller, sporadic traders—build confidence with customs during export–import processes and with banks when making loan applications.

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• Smart contracts built on a blockchain can automate the fulfilment of contractual obligations. Trade contracts, just as contracts in general, state what party A is to do when event X occurs—for example, what the importer’s bank is to do when the importer gains possession of the shipment sent by the exporter. Authoring contracts and verifying events can be an arduous process involving time-consuming interactions between different parties. In contrast, if the importer and exporter use a smart contract, the importer’s bank will automatically pay the exporter when the importer has contractually gained possession of the shipment. This obviates the many interactions among banks and other players that are needed to verify that Y (shipment has arrived) has indeed happened before agreeing to do X (release payment). The cost savings can be significant: some 56 percent of banks’ costs for a letter of credit arise from this long and often still manual document handling and checking (Bain & Company 2016).

These various properties of blockchain have inspired several applications in Southeast Asia. Most of these are “permissioned,” or applications where a business or an organisation manages the blockchain and allows parties to join the network, as opposed to “permissionless” systems such as Bitcoin that are open to all. The following sections examine various areas where these applications prove useful.

2.1 Tracing Products in Global Value Chains

Southeast Asia is highly integrated in regional and global value chains. Foreign value-added exports (value added of inputs that were imported in order to produce intermediate or final goods or services to be exported) make up 40 percent of all Association of Southeast Asian Nations (ASEAN) exports (Yamaguchi 2018). Foreign value-added exports from the region increased by 12 times over the period 1990–2013, while domestic value added increased 10-fold (Yamaguchi 2018). However, supply chains are complex to manage, especially when

they cross borders. The company that “owns” the supply chain and its tier I supplier(s) faces high coordination and informational costs to ensure that all suppliers produce good-quality products in a timely fashion and steer clear from unsavoury practices such as child labour.

By giving all parties visibility into the products and processes in a supply chain, blockchain can dramatically improve the traceability of products and lower the coordination costs of managing complex supply chains. For example, blockchains can enable manufacturers to assess the quality, origin, and intellectual property rights of three-dimensional (3D) printed parts and components, by codifying and encrypting the data on both the production process and the products. The United States (US) Navy is already using blockchain for this purpose. General Electric has patented a technology to use blockchain to validate and verify 3D files and the 3D printing process, and thus to enable certification of 3D printed parts (Koslow 2018).

These types of practices are now also proliferating in East and Southeast Asia. For example, in Singapore, the International Chamber of Commerce is piloting moving electronic certificates of origin onto a blockchain with the 10 largest issuers of origin certificates, so that all parties to a shipment are able to trace the goods across the supply chains (Bermingham 2018). Users can scan a QR code associated with a product and linked to a blockchain address, in order to verify the product’s authenticity. If the importer’s country does not use blockchain, a paper document is also created, linked to the digital counterpart stored on the ledger.

Food supply chains are also becoming “blockchained.” In response to East and Southeast Asian consumers’ weariness about mislabelled and contaminated foods, various companies and organisations have piloted blockchain in food supply chains. The Trace Alliance composed of Entobel, TMA Solutions, the Vietnam Food Integrity Centre, and OriginTrail is using blockchain to give consumers data on the origin of their fish, mangos, and pet foods—including who processed them,

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who shipped them, when, and from where (OriginTrail 2018). For example, fishers register their catches to the blockchain via a text message, and additional data are later verified and added by non-governmental organisations. Once the information is transmitted through the supply chain, it cannot be altered, and the data remain visible throughout the product’s whole journey.

These applications of course also help retailers and restaurants that are bringing food to consumers, incentivise players in the supply chain to keep to a high standard, and build trust among buyers and sellers conducting transactions remotely, such as in cross-border e-commerce. In China, a hotbed of food safety scares, e-commerce giant Alibaba is launching a blockchain initiative in partnership with PricewaterhouseCoopers, Blackmores, and Australia Post, aimed at helping Chinese consumers to separate legitimate, good-quality foods (such as Australian health supplements, beer, wine, honey, and cherries) from counterfeit products online (Palmer 2017). China’s other major e-commerce platform JD.com uses blockchain to track the production and delivery of frozen beef with Kerchin, a Mongolian-based beef manufacturer (Huang 2017).

2.2 Reducing Logistics Costs

In today’s digital era, trade logistics remains a bastion of paper. The many players involved in an international trade transaction—importer, exporter, logistics company, liners, banks, and so on—maintain their respective databases separately and all too often have to rekey information from the paper letter of credit for an invoice, packing list, and the many other (often paper-based) documents multiple times, dealing with the various parties involved. The shipping giant Maersk has calculated that an exporter of cut flowers from Kenya needs to carry out 200 separate communications involving 30 players such as farmers, freight forwarders, land-based transporters, customs brokers, governments, ports, and carriers to move a shipment to the Netherlands (IBM 2017). According to Infocomm Media

Development Authority (IMDA) in Singapore, shipping and logistics companies process over 40 documents for a single shipment, and up to 70 percent of their data are re-entered at least once, which takes time and increases the odds of errors occurring (IMDA 2016; Williams et al. 2016). Different databases need to be reconciled against each other and sources of discrepancies hunted down, often by sifting through paper documents by hand—a costly process prone to error. All in all, these hassle factors add as much as 20–30 percent to firms’ shipping costs (IMDA 2016; Williams et al. 2016).

Blockchain can generate enormous efficiencies for processes involved with moving goods from A to B. Perhaps the most promising pilot is Maersk’s new blockchain platform developed with IBM, piloted in various settings such as in shipping mandarins from California and pineapples from Colombia to the port of Rotterdam in Europe. Instead of dealing with disparate databases, missing documents, and duplicate data entries, all players share a bird’s-eye view of the transaction, can access all related documents, and can instantly share the same data and information with everyone involved. All entries are immutable and updated in real time.

Blockchain-based trade logistics solutions are also diffusing across East and Southeast Asia. For example, PSA International, Pacific International Lines Ltd, and IBM Singapore have successfully used blockchain to execute bookings of multimodal logistics and check regulatory compliance and to track cargo movement from Chongqing, China to Singapore (Yamaguchi 2018). Such end-to-end digitised trade transactions have also been piloted inland: Thailand Post uses blockchain technology to track high-value parcel deliveries, such as packages carrying expensive and luxury items (Alper 2018).

Further north, Alibaba’s Tmall has adopted blockchain-based technology for its cross-border supply chain with logistics company Cainiao, whereby the parties can record information on exports and imports on to a

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blockchain that keeps track of the products’ country of origin, shipping and arrival port, shipment method, and customs information (Zhao 2018a). This enables Chinese netizens to track provenance and logistics data for 30,000 goods from 50 countries on their smartphones. Korea’s Samsung is using blockchain to move 488,000 tons of air cargo and over a million 20-foot shipping containers annually. As a result, it has reduced its shipping costs by a fifth and, critically, lowered the time elapsing between a product’s launch and its shipping, thus competing better with rivals launching similar products.

2.3 Facilitating and Securing Trade in Customs

E-commerce is booming in Southeast Asia, bringing vast numbers of packages to countries’ borders. The challenge for customs is how to facilitate this expanding stream of trade while also making it secure and identifying customs fraud. These aspirations are hard to meet in a world of billions of packages, paper-based customs documents, and handwritten, sometimes illegible bills of lading or certificates of origin. Things fall through the cracks: for example, in 2015, a Singaporean company director was found to have submitted hundreds of false certificates of origin and import and export permits in re-exporting boxes of zips and sliders originating from China to Europe, rather than, as he claimed, from Indonesia, which would qualify for lower European Union (EU) tariffs (Abu Baker 2015).

Blockchain and predictive analytics are highly promising tools for facilitating and securing trade. Blockchain is already being tested by many customs agencies, including in the Costa Rica, Peru, the Republic of Korea, the United Kingdom (UK), the US, and 15 countries in east Africa. Nowhere is the urgency greater than in the UK: if the UK leaves the EU Customs Union, its customs declarations will shoot up from 55 million to over 250 million (its non-EU trade plus its EU trade where previously no customs documents were needed; Suominen 2018). In Asia, Korea Customs Service (KSC) is a front runner. It is developing a blockchain-

based platform to facilitate customs clearance and to verify shipment data with e-commerce logistics companies. KSC’s pilot involves over 50 companies domestically on the exporting side and 5 working groups and 10 companies based in Viet Nam and Singapore for imports (Das 2018). In 2017 KCS participated in a successful blockchain pilot of a door-to-door trade transaction between the Republic of Korea and China with Samsung, Korean Ministry of Oceans and Fisheries, Hyundai Merchant Marine, IBM Korea, and Ktnet (Ji-hye 2017).

The data generated by such efforts can be especially useful for facilitating trade when combined with other technologies, such as artificial intelligence and predictive analytics. For example, in Singapore, machine learning algorithms have spotted fraudulent activities such as underpayment of duty for cigarettes through analytics that showed that the weight of goods declared for the cigarettes was lower than the historical norm (Basu and Rohaidi 2017).

2.4 Bridging the Trade Finance Gap

International trade finance is about ensuring that the seller of a product in country A will get paid once the buyer in country B gets the product shipped by A. Sellers task banks and insurance companies to ensure buyers will pay, track products as they make their way to the buyer, and release payment to the seller when the buyer is in possession of the product. As simple as this sounds, trade finance is tremendously arcane and highly susceptible to fraud. For example, in 2008, JPMorgan Chase was defrauded of almost US$ 700 million with fictitious purchase orders and fake invoices used to secure loans for non-existent metal shipments (Chanjaroen 2016). According to business intelligence company Kroll, 82 percent of executives globally and 86 percent of Chinese executives reported experiencing fraud in trade (Yee 2017).

To ensure their bases are covered, trade finance-providing banks produce piles of paper that for bigger transactions can run to dozens of pages and take several weeks to draw up.

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One time-consuming aspect is regulatorily mandated “know your customer” (KYC) processes. Banks must request new customers, whether an individual or corporate entity, to submit identification documents each time they start a new relationship with that bank (such as opening an account, applying for credit, or seeking an insurance policy), and to monitor the flow of funds to detect potential money laundering. What adds time and complexity in particular to trade finance operations is that each bank currently runs its own KYC check, duplicating efforts and requiring customers to provide the same information multiple times to different institutions. In large transactions, ascertaining parties’ identities can take weeks. Trade finance for SMEs is collateral damage: given the high fixed due diligence costs, banks prefer to get involved with larger deals rather than SMEs’ transactions. Partly as a result, Asian SMEs are found to have US$ 900 billion in unmet trade finance needs.

Blockchain can significantly reduce the cost of preparing a letter of credit as documents and data are digitised and easily shareable among all parties. It can also accelerate and automate the execution of trade finance contracts. This is not lost on Southeast Asian banks and governments: numerous regional consortia are testing blockchain in trade finance. For example, in August 2017 IMDA, the Bank of America, and HSBC launched a blockchain application to improve the letter of credit transaction process among banks, importers, and exporters, while in March 2018 the Hong Kong Monetary Authority (HKMA) unveiled a trade finance platform based on blockchain with the accounting firm Deloitte and five banks.

In Thailand, 14 banks, 3 state enterprises, and 4 corporations have come together to create a common letter of credit platform to handle tens of billions of dollars of trade finance (Kasikorn Bank 2018). The participating banks expect the platform to halve their operating costs. Digitising documents and shifting them to the blockchain is also expected to reduce turnover time from days to a mere 30 minutes (Milano 2018). By cutting out the intermediaries and

boosting efficiency, some estimates show that blockchain and smart contracts built on them could reduce participating banks’ overhead and infrastructure costs by US$ 15–20 billion annually through to 2022, and reduce errors and inconsistencies. The system is being tested in the Bank of Thailand’s regulatory sandbox that enables companies to bring new innovations to market without having to meet all regulatory requirements. Malaysian banks also recently announced plans to develop their trade finance platform in partnership with the country’s central bank.

Blockchain can also improve and accelerate KYC checks. In 2017 OCBC Bank, HSBC, IMDA, and Mitsubishi UFJ Financial Group became the first consortium in Southeast Asia to successfully complete a proof of concept for a KYC blockchain. Customers of participating banks only have to provide their information once, all parties can access the same information in real time, and data are secure (Strzalek 2017). Blockchain can be used similarly in anti-money laundering processes and in combating the financing of terrorism.

Use of blockchain can also speed up clearance of payments in trade. For example, Standard Chartered found that using blockchain reduced the time to clear cross-border payments from the 48 hours it takes for a typical trade finance payment to less than 10 seconds (Das 2016).

Southeast Asian governments have actively supported the use of blockchain in trade finance. For example, Thailand’s Electronic Transactions Development Agency is looking for ways to allow the use of blockchain-powered smart contracts, a fitting complement to its blockchain-based trade finance platform. The People’s Bank of China has discussed blockchain as a means to combat chronic fraud in trade finance deals. HKMA and the Monetary Authority of Singapore (MAS) have been especially proactive, implementing the Global Trade Connectivity Network, a bilateral blockchain-based trade finance platform. Other countries that want to tag on to the network can do so by connecting their own blockchain system to the HKMA–MAS platform

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(Piscini et al. 2017; Applied Science and Technology Research Institute 2016).

2.5 Blockchain in Southeast Asian Sustainable Development

Pilots suggest blockchain can be an excellent means to improve Southeast Asian trade logistics, trade finance, customs clearance, and supply chains, and to expand the region’s trade. But blockchain can also have positive impacts on many other areas and sectors, and improve firms’ competitiveness. For example, in a survey of Asia-Pacific financial services executives, 70 percent said that their motivation for using blockchain was to gain a competitive edge, while 53 percent said blockchain would create new business opportunities, such as new markets, service lines, and customer segments (Bahl 2017). Blockchain is also seen as useful for company-internal projects that are aimed at reducing organisational complexity, improving efficiency, and lowering costs. Executives across industries tend to share these sentiments, and many are already applying blockchain to solve some of the thorniest challenges to sustainable development, as set out in the following examples:

• Remittances. In 2017 Philippine migrant workers sent US$ 28 billion home in cash remittances. These funds have significant impacts on the recipients, the welfare of their families and communities, and the Philippine economy. To lower the intermediation fees banks charge on remittances, blockchain company Coins.ph enables migrants to move their money back to the Philippines using bitcoin. The Maybank Singapore is planning to use blockchain technology to allow 19,000 migrants to transact without banks. MAS is already working with the Bank of Canada on a cross-border remittance solution based on blockchain (Zhao 2018b). These systems could eventually be based on a government-issued cryptocurrency rather than on bitcoin. For example, Bank Indonesia has announced plans to launch digital rupiah (Ariffin 2018).

• Start-up stocks. Governments in Southeast Asia, as in most parts of the world, are developing policies and programmes to fuel entrepreneurship, innovation, and job-creation by small firms in their economies. The Stock Exchange of Thailand is launching a start-up company stock trading marketplace based on blockchain, enabling new companies to essentially go for an initial public offering early in their lifecycles. Already, over 600 companies have registered (DiCaprio and Beck 2017).

• Microfinance. Microfinance is a decades-old tool of sustainable development—one with a rather positive track record and that has become a sophisticated and digitised industry. Myanmar’s microfinance institution BC Finance is working with a Japanese partner firm to accelerate its path to become a sophisticated microfinance provider by using blockchain to record financing transactions (DiCaprio and Beck 2017). The project is aimed at reducing the administrative complexity of tracking large numbers of small transactions, and reducing overhead costs. The benefits can be especially great in countries, such as Myanmar, where many small businesses and entrepreneurs do not have digitised accounting systems.

• Energy supply. In the Philippines, almost a fifth of the population do not have access to electricity, a fact that begets many other challenges such as limited time for school children to study, poor food storage and health care, and low internet access. Chinese start-up Energo Labs is setting up a blockchain-based microgrid platform in the Philippines that enables “prosumers”—households and businesses that may have excess energy produced, for example, by solar panels—to sell their power to others (Energo Labs 2018). The application mimics the Brooklyn-based LO3 Energy’s microgrid. In Singapore, Electrify is developing a smart contract-enabled system built on blockchain to enable more equitable outcomes for everyone.

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• Medical tourism. HealthFX in Singapore is aiming to become the “TripAdvisor of medical tourism,” a booming industry in Southeast Asia and a source of services export revenue and jobs (Mariano 2018). The initiative aims to go beyond helping foreign medical services consumers to find service providers by assisting the customer through a range of services such as booking care, insurance processing, and after-care.

• Tax filing and voting. Sustainable development requires good governance. The Indonesian Government is looking to blockchain to better manage data on its 250 million citizens (Suroyo and Diela 2018). A local company, Online Pajak, has launched a blockchain-based app to enable Indonesians to share secure, encrypted tax data with institutions such as tax and treasury offices, banks, and the central bank. The Indonesian Government is also interested in using blockchain to

enhance transparency in voting. Several other governments are using blockchain to manage citizen services. For example, Dubai looks to bring 100 million annual government documents, including all visa applications, bill payments, and licence renewals on blockchain by 2020, a project that is expected to save 25 million worker hours annually (Dutt D’Cunha 2017; Eriqat 2017).

It is positive that Southeast Asian non-profit-making organisations and governments have created a number of initiatives to further these types of blockchain innovations. For example, in Malaysia, NEM Malaysia, backed by a foundation in Singapore, has launched the NEM Blockchain Centre as learning hub, incubator, and accelerator for blockchain businesses in Southeast Asia (Tan 2018). Singapore’s IMDA has launched a blockchain competition with government funds to boost blockchain innovation in the region (Zhao 2018b).

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3. CHALLENGES TO BROAD-BASED USE OF BLOCKCHAIN IN SOUTHEAST ASIA

Blockchain is “on fire” in Southeast Asia. The region has quickly become the global front runner in applying blockchain in trade logistics and trade finance. The most venerable businesses of the region have embraced and piloted blockchain, and the region’s governments have been exceptionally fast to leverage blockchains for their own operations, consider appropriate standards to scale blockchain applications, and support and participate in blockchain initiatives. Pilots suggest it can have transformative impacts on the region’s trade and development. Innovations in the region appear to be diffusing fast; the wealthier economies are offering the poorer countries of Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam front-row seats for finding ways to leverage blockchain for trade and development.

At the same time, there are several challenges for the region to take full advantage of blockchain.

First, to produce trade and development gains, blockchain, like any technology, needs workers with the skills to use it and ingenuity to apply it in various areas of life. Several recent studies show that Southeast Asian economies have significant skills gaps hindering them from leveraging disruptive technologies. The region has been compared to the US in the 1980s: it too is experiencing an acceleration of demand in cognitive labour and reduction in demand for manual, routine labour (Ra, Chin, and Liu 2015). In half the countries, less than half of young people have completed upper secondary education, well below the Organisation for Economic Co-operation and Development average of 82 percent. These gaps are due to, among other things, inadequate science, technology, engineering, and mathematics and technical and vocational education and training in schools, and school–industry integration, overreliance on public-sector education, and lack of opportunities for continuous education (Singapore is an exception; Boyd 2017; J.P.

Morgan and Singapore Management University 2017). There are also significant disparities in the region between the wealthier countries and Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam: while 55 percent of the Singaporean workforce is highly skilled, only 10 percent in Viet Nam and 5 percent in Cambodia are. Business leaders also highlight a lack of leadership skills and ability among engineers to grasp how best to apply blockchain to real-world problems.

Second, blockchain’s scalability is a function of the network of users and interoperability among blockchains (such as between two blockchain systems in trade finance, or among ledgers used by a postal service and customs). The proliferation of blockchain consortia and platforms based on different technology and governance principles risks a situation of “digital islands”—that is, ledgers whose respective user bases do not interact optimally and thus limit gains for all. It is not clear how the various technology platforms and systems integrate, how information and data among the users are shared, and how users are expected to treat the data (such as in terms of providing access to the chain and integrating on-chain data with off-chain databases), and how liability is assigned. These issues can be more complex still in cross-border blockchains if countries’ regulatory frameworks differ significantly.

Third, it is not completely clear in any country how domestic laws in such areas as data privacy and transfer and identity protection apply to blockchain. While there is no reason why existing laws would not apply, in some instances laws may clash with blockchain’s modus operandi. For example, data privacy rules that deem that a person has a “right to be forgotten” and have their data removed from internet services may conflict with the fact that blockchain entries cannot be erased once they have been made. It is also not always clear who is liable for transactions on blockchains—the blockchain manager, the

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miners that record transactions, or the users—and whether smart contracts enabled by blockchains are enforceable in courts. There are also cross-border questions. For example, which country’s laws apply in settings where parties of different nationalities agree to use a smart contract, yet one country’s law deems a smart contract enforceable in a court, while another country’s law does not?

Fourth, while blockchain is an excellent means of sharing data and facilitating processes among disparate organisations involved in a transaction, it can be challenging to create a value proposition that is equally compelling for all parties and induce everyone to share data. There can also be political economy challenges given that blockchain can disintermediate intermediaries that benefit from informational asymmetries in trade, and generate revenue from preparing trade documents and managing trade transactions. The largest banks seem to have concluded that they can leverage their large networks of users to profit from blockchain rather than fear being disintermediated. But certain smaller banks, law firms, customs brokers, and freight forwarders may feel threatened by the technology.

Fifth, a big question and one that is unresolved internationally is who is liable for a blockchain and interactions and transactions that take place on it? This is especially pertinent in the case of a permissionless blockchain where no one owns the system and the network of users runs it. In permissioned systems, the case could be made that the blockchain manager is liable—but this can freeze investments in blockchain start-ups and initiatives, just like passing all liability for the content generated by their users on to internet services companies would likely freeze investments in internet start-ups.

It is important to keep in mind that blockchain is a work in progress: it is a nascent technology that needs time to mature and that is being perfected around the world—and whose trade effects will need to be analysed in years to come. There are still a variety of technical and governance challenges related to it, such as how to best ensure the integrity of data on ledgers while enabling users to analyse the data, how to govern the integration of on-chain and off-chain data, and how to author smart contracts in ways that they execute obligations in the way all parties to a contract expect.

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4. BOOSTING BLOCKCHAIN IN ASIAN TRADE AND SUSTAINABLE DEVELOPMENT

Southeast Asia is well on its way to thinking about blockchain and has a golden opportunity to leverage the technology and work its way through challenges. At this juncture, it is critical for regional governments to consider blockchain as a new technology, one whose benefits, use cases, and challenges are only surfacing (see Suominen forthcoming a). Perhaps with the exception of cryptocurrency-related issues, something this paper does not focus on, there is no rush to regulate blockchain. Besides, if and when regulated, blockchain-related applications are likely to be most usefully regulated sector by sector: for example, energy blockchain impacts on how energy is apportioned and priced and how utilities operate, and regulation, if developed or revised, should target that sector. For example, Malaysia, Singapore, and Thailand have made progress on blockchain regulations related to sectors where the technology is more widely applied, such as FinTech and cryptocurrencies.

Overall, at this early point in blockchain’s lifecycle it is most fruitful to consider how governments can enable blockchain innovations and use cases, diffuse the technology across societies, and enhance the scalability of blockchain platforms. Here are some ideas as to how they could do so.

Scale what already works. There are already several successful blockchain applications in the region that can be scaled up, such as the Singapore–Hong Kong blockchain trade finance pilot that other countries can readily tag on to and the multistakeholder KYC pilot that can transform banking and trade finance, especially for SMEs. There are also replicable initiatives, such as the blockchain initiatives seen in customs in the Republic of Korea and the Thai postal service, that many other countries can consider and that could be scaled up to the less developed regional economies. Building on what already is in place can also facilitate interoperability of ledgers going forward, for

example between banks in trade finance, or among postal operators and customs across the region.

Develop regional interoperability standards, collaborating with trading partners. Blockchains’ utility is stunted if they do not interoperate. While the International Organization for Standardization (ISO) is working on blockchain standards in various domains including trade supply chains, Southeast Asian economies may want to accelerate the development of common voluntary industry standards, working with the many regional and global private-sector-led consortia that are working to develop minimum private blockchain standards in areas such as trade finance and transportation. Australia, a major ASEAN trading partner whose Standards Australia was the key instigator of the ISO process, could be a valuable partner. China is working to quickly develop its own blockchain standards and should be consulted for collaboration and lessons learned. It is positive that some standards have already been fashioned; for example, Malaysian’s central bank has introduced new legislation to set blockchain standards for the country’s exchanges.

Ultimately, however, any regional industry standards should be compatible with global industry standards: the worst outcome would be disparate national or regional blockchain standards that fragment the global blockchain ecosystem. Smaller and poorer countries may end up being “standards takers” rather than their shapers; however, as long as standards promote adoption of the technology and interoperability among parties, the trade-off of going with the flow and adopting common regional standards will be significantly accelerating the diffusion of blockchain applications and expanding their benefits. The worst outcome would be national rules and standards that fragment the global blockchain ecosystem, one whose power lies precisely in scalability across borders, into national fiefdoms.

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Set up a regional blockchain sandbox. Regulatory sandboxes are widely used around the world to enable FinTech applications in particular to deploy quickly with temporary regulatory authorisation for a certain period of time, such as 24 months. Playing in the sandbox, companies can quickly and more cheaply test the market for their technologies, and regulators can learn about technologies’ uptake and operation, and learn which, if any, regulations might be desired. Southeast Asian nations have done excellent work in adopting sandboxes especially for FinTech applications; some have extended these sandboxes to blockchain applications related to finance. Now is the time to think bigger and adopt a regional blockchain sandbox for companies that are testing blockchain to be able to deploy across the region, and for the various national regulators to work together to assess technology uptake and operation.

A regional sandbox does not mean that every participant country would have to adopt the same regulations, if any are adopted; it would simply enable companies to pilot across a broader set of markets and regulators to converse together and learn from each other. Recently 11 countries (including the Hong Kong Special Administrative Region and Singapore) with different legal systems and regulatory structures launched a common FinTech sandbox, precisely to enable multi-jurisdictional testing (Binham 2018). Such a regional sandbox and process could also by default help build regulators’ capacity and knowledge, especially in poorer nations, and accelerate the development of good regional rules.

Consider safe harbours for blockchain managers. Regulators may also want to consider safe harbour protections from the behaviours of their users for blockchain platform managers: just as in social media or e-commerce sectors, few entrepreneurs and investors would be interested in building blockchain innovations if held liable for every transaction and measure that users make on their platforms.

Build a regional blockchain lab. Southeast Asian governments can accelerate the innovation and testing of blockchain applications in trade and economic development, working with businesses, impact funds, and each other. The region could create a blockchain lab, for example at the ASEAN level, to develop blockchain applications poised to solve real-life business and societal problems, to create new value, to find compelling business models, and to generate economic, social, and financial return on investment. The lab could offer prizes for groundbreaking “moonshot” blockchain innovations. In the area of trade, moonshots could involve such inspiring goals as doubling the number of SMEs trading, halving trade costs by 2025, doubling the speed of customs clearance by 2020, fully securing 3D printable parts in supply chains by 2025, halving disparities in access to electricity and energy between Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam and Singapore by 2020, and so on.

Measure the adoption and impact of blockchain, and challenges to them. Governments (especially in developing regions) have yet to properly measure how enterprises in their countries use various technologies such as e-commerce, artificial intelligence, and blockchain. To fully understand how and to what extent these technologies are applied, Southeast Asian governments should include detailed questions about them in national economic censuses and manufacturing surveys. This is necessary for getting past news headlines about blockchain pilots to map the actual diffusion of these technologies and to measure their impacts on businesses and consumers. It is also essential to measure the “before and after” of blockchain applications, to understand the social, economic, and financial returns of blockchain on enterprises of different sizes, in different sectors, and in different regions, and to understand the challenges firms face in adopting these technologies. Such better measurement will also help governments spot disparities in the adoption of technologies in different regions and by segments of the population—and thereby

13Inclusive Economic Transformation

see where there are market failures that the government could bridge.

Stage regular region-wide public–private blockchain dialogues to review the adoption and uses of blockchain in trade and other sectors, share use cases, enable policymakers and regulators to learn about new blockchain applications and discuss with business how to best facilitate the adoption of blockchain in private and public sectors. These dialogues should also rigorously measure and assess blockchain-related policies, regulations, and their effects in the region and beyond, to identify best practice frameworks. They could have specific development dialogue that assesses the adoption of blockchain in Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam and its impact on reducing regional economic disparities. Governments could also take stock of their own work in enabling blockchain.

Mainstream blockchain into trade and development work. Blockchain is a seminal cross-cutting technology poised to transform social and economic life across sectors and perfect the way markets work. However, thinking of blockchain myopically as a stand-alone technology is not helpful; a more powerful approach is to think of how blockchain can apply to many different problem types in trade and development that businesses and governments are seeking to solve, and to use blockchain to augment the power of other technologies such as additive manufacturing

and artificial intelligence. To systematise the development of blockchain applications, Southeast Asian economies and donor nations can encourage mainstreaming blockchain into trade and development planning, and use blockchain applications to help poorer segments of societies.

Build a skilled, creative workforce. To become a global technology hub and draw productivity gains form technologies in their trade and industries, Southeast Asian economies, and Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam in particular, have to close their skills gaps. While just about all these countries have a framework or plan to further technical and vocational education and training, there is a need to ensure that national assessment and certification systems are in place, that teachers have training centres to keep upgrading their own skills, and that education and skills development align with the needs of the private sector (Aring 2015). This could be operationalised through public–private funding schemes for technical and vocational education and training and science, technology, engineering, and mathematics education: businesses could be enticed to provide on-the-job training for technical roles for university graduates with tax breaks and other incentives. Donors can step up further their role as funders and facilitators of these efforts in Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam, which still lag far behind the regional benchmark of Singapore.

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5. CONCLUSION

Southeast Asian economies have been among the global front runners in leveraging blockchain in trade—specifically, to improve trade logistics, trade finance customs operations, and supply chain management. Trade is the right place to apply the technology: there are high coordination and intermediation costs, frequent concerns about the integrity and veracity of data, and multiple parties that need access to the same data and often need to coordinate efforts. Blockchain is an excellent response to these problems: it enables parties to a trade transaction to interact faster, more cheaply, and better, and to gain visibility into the origin and quality of goods that are traded.

Indeed, the properties of blockchain are so seminal for trade that twenty-second century historians may view it as more impactful on global commerce than the many other technological breakthroughs behind globalisation—steam engines, containers, standardised railroad gauges, and the internet and computers. Southeast Asian governments appear to share this aspiration: they have both applied blockchains in their own work and created incubators, tax incentives, and regulatory sandboxes in support of blockchain start-ups and applications. As in many economies, in Southeast Asia blockchain can also be very helpful in raising lacklustre productivity levels and help the region’s aging economies make more of their labour forces.

However, work remains ahead to ensure blockchain is nurtured and used in Southeast

Asia: that there are standards that ensure its scalability, educated workforces that can apply it, funding to catalyse blockchain innovations, and common international understandings of the legality and enforceability of transactions completed under smart contracts. This paper has offered several ideas on how Southeast Asian economies can best address these areas, such as through a common regional blockchain sandbox and blockchain development fund, and concerted work with other partners, especially the private sector, on regional and international blockchain standards. Governments will also need to take care to support innovations and processes that safeguard both users’ identity and access to data on blockchains.

Of course, much more than blockchain alone is needed to facilitate Southeast Asian trade. For example, the region needs more and better transportation systems—better roads, ports, airports, and warehouses. Blockchain can help facilitate the movement and flow of data and documents between players using these facilities, but it cannot pave a road or build a warehouse. The region also needs more highly educated people able to use emerging technologies and build on them: there is no technology gap—there is a human capacity gap that together governments, businesses, and schools need to bridge urgently. Regional governments need to work with the private sector to explore the many ways in which blockchain can fuel trade and sustainable development, and to scale what works, including through co-financing and common standards.

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www.ictsd.org

Other recent publications from ICTSD’s Programme on Inclusive Economic Transformation include:

• Financial Services: The Trade and Gender Nexus Ben Shepherd, 2018

• Service Negotiations in Southeast Asia: Implications for Low-Income Countries in the Region Batshur Gootiz, 2018

• Promoting Capability Enhancing Development ICTSD, 2018

• Value Chain Upgrading for Competitiveness and Sustainability: A Comparative Study of Tea Value Chains in Kenya, Sri Lanka, and Nepal

Sarah A. Mohan, 2018

• Opportunities for Sustainable Development in Global Value Chains: A Case Study of the Myanmar Garment Sector

Samah El-Shahat and Violante di Canossa, 2018

• How Regulation and Standards Can Support Social and Environmental Dynamics in Global Value Chains

Raphael Kaplinsky and Mike Morris, 2017

• Tailoring Aid for Trade for the Services Economy in Low Income and Least Developed Countries ICTSD, 2017

• Leveraging the Services Sector for Inclusive Value Chains in Developing Countries Judith Fessehaie, 2017

• The Role of Aid for Trade in Building the Capacity of Developing Country Firms to Meet Sustainability Standards

Jim Redden, 2017

About ICTSDThe International Centre for Trade and Sustainable Development (ICTSD) is an independent think-and-do-tank, engaged in the provision of information, research and analysis, and policy and multistakeholder dialogue, as a not-for-profit organisation based in Geneva, Switzerland; with offices in Beijing and Brussels, and global operations. Established in 1996, ICTSD’s mission is to ensure that trade and investment policy and frameworks advance sustainable development in the global economy.