By Nir Kshetri*
Blockchain is transforming supply chains and facilitating cross-border transactions. In 2020, Anglo-Australian mining, metals and petroleum company BHP completed its first trade with Chinese iron and steel company Baowu on MineHub Technologies’ blockchain-based platform. China Minmetals and BHP have also used MineHub’s platform to share inter-company and cross-border data, such as information related to emissions and metals assay.
Likewise, Japanese manufacturer Toyota tracks auto parts across various countries, factories and suppliers, sharing information on a real-time basis with manufacturers, finance companies, insurers, service providers, regulators and customers through the use of blockchain technology. Toyota expects to reduce recall rates and increase safety through the adoption of these platforms.
Most supply chains are long and complex. In addition to physical goods, supply chains involve non-physical flows of information and finance —for example, payments. Without blockchain, information exchange relies largely on email and paper documents. A single cross-border trade transaction involves the exchange of an average of 36 different documents and 240 copies of such documents. These documents must be verified for legitimacy, authenticity and accuracy.
Communications and document exchanges are also prone to fraud. From April to September 2014, China found US$10 billion worth of fake trade transactions. Due to such concerns, Chinese banks charge higher interest rates and have a lower tendency for collateral financing. The consequence is a significant gap between demand and supply of supply chain finance and trade finance. According to the Asian Development Bank, the global trade finance gap was US$1.5 trillion in 2018.
Consumers are also victims of supply chain fraud. For instance, when a Chinese consumer buys a package labelled ‘Australian beef’, there’s only a 50–50 chance the meat inside is Australian beef. It could just as easily contain rat, dog, horse or camel meat.
Blockchain is a decentralised ledger that maintains digital records of a transaction simultaneously on multiple computers. After a block of records is entered into the ledger, the information in the block is mathematically connected to other blocks. In this way, a chain of immutable records is formed. Due to this relationship, the information in a block cannot be changed without changing all the other blocks.
Blockchain’s value proposition is embedded in decentralisation, which eliminates the need for a trusted third party in the transfer of value, enabling faster and less expensive transactions. Blockchain-based transactions are also immutable, which makes them auditable, improving transparency
By eliminating paper records, reducing fraud and improving regulatory compliance, blockchain provides a substantial cost-saving opportunity. According to the US blockchain software company BanQu, the adoption of blockchains has helped companies realise average supply chain savings of 15 per cent and reduce exposure to risk by 50 per cent.
In light of growth in fraudulent transactions in the Asia Pacific, blockchain’s potential to reduce fraud by enhancing supply chain transparency and traceability deserves consideration by actors across the region. A study suggested that fraud cost about US$4 for every transaction in the Asia Pacific in 2021 — compared to US$3.40 in 2019 — indicating that the magnitude of this problem is only growing.
Blockchain systems can also eliminate other risks, such as fake invoices. It is estimated that the global trade finance gap could be reduced by US$1 trillion through the use of blockchain. Small and mid-size enterprises in emerging markets could benefit even more from the implementation of blockchain than from tariff removal or trade deals.
Supply chain finance and trade finance are popular blockchain applications. Key platforms in this area include Easy Trading Connect, Komgo, Chained Finance, eTradeConnect, Contour and the Bay Area Trade Finance Blockchain Platform.
Governments are also focusing on blockchain’s use in supply chains. The Australian government’s ‘National Blockchain Roadmap’ announced in 2020 identified supply chain tracking as a key use for blockchain.
Among notable solutions, Alipay Australia uses blockchain and logistics data generated by ‘internet of things’ devices to provide trade financing. Milestone payments are made to suppliers’ digital wallets as shipments move along supply chains. For example, 30 per cent is paid to suppliers when the shipment clears Australian customs, 30 per cent is paid when it clears Chinese customs and the rest is transferred when the product is delivered.
Blockchain solutions have also been deployed to address risks in food supply chains. Chinese e-commerce giant Alibaba teamed up with New Zealand and Australia-based companies to develop a blockchain-based solution known as the Food Trust Framework, which is used to track high-value food products imported from New Zealand and Australia. Each item is assigned a QR code for consumers to see details about the product. Each step in the supply chain is authenticated and information related to production, transportation, customs, inspection and transfer of ownership is stored by Alibaba and other participants.
Blockchain increases transparency and provides a shared source of truth in supply chains. Blockchain’s distinctive value proposition stems from its potential to combat fraud, which is especially important in the Asia Pacific due to the significant and increasing costs of fraud in business transactions in the region.
Some recent high-profile examples of fraud in the food supply chain and the banking industry have triggered these industries to accelerate their adoption of blockchain. The importance of blockchain platforms in fighting fraud is set to become even more important in the future as fraudsters and criminals become more sophisticated.
Supply chains in the Asia Pacific are set to significantly benefit from the transparency and efficiency that blockchains can provide. Trade networks and supply chains backed by blockchain technology will continue to reduce fraud and inefficiency, driving economic development across the region through the adoption of blockchain technology.
*About the author: Nir Kshetri is a Professor at the University of North Carolina-Greensboro and a research fellow at the Research Institute for Economics and Business Administration at Kobe University in Japan.
Source: This article was published by East Asia Forum