Part one: Unveiling the Potential of Blockchain for Customs

Comptroller-General of Customs, Nigeria, Hameed Ali

By Yotaro Okazaki of World Customs Organisation (WCO)

“Blockchain” refers to a type of data structure that identifies and tracks transactions digitally and shares this information across a distributed network of computers, thus creating a sort of distributed trust network. “Smart contract” is another term to characterize the blockchain technology: a computer protocol allowing the performance of contracts without the involvement of third parties. The advantages of blockchain technology are: time and cost savings, more secure documents made all the more robust through encryption and sharing within the network. There are still some concerns concerning blockchains; the first is linked to stakeholders’ privacy as, unlike cryptocurrencies, smart contracts need to be linked to identities. A second concern is the relationship between trust and performance: the more numerous the nodes are within the network, the more reliable the network is, but each transaction requires more energy and time to be performed, as all processed transactions are shared by all nodes.

However, these concerns ought not to be considered as obstacles. Blockchain projects are currently in the beta testing phase in the finance sector (facilitating inter-banking system processes), insurance sector (preventing fraud and accelerating coverage) and international trade. With regard to the latter, this paper focuses its attention on two initiatives. The first was launched by MAERSK-IBM as a global trade digitalization platform to which Customs administrations are expected to join (see figure 2.). A second initiative consists of an “information highway”, joining the National Trade Platform of Singapore and the Trade Finance Platform of Hong Kong, with a view to creating a Global Trade Connectivity Network (GTCN).

These initiatives are examples of just two projects among a myriad of endeavours developed all over the world by trade and transport companies. In this regard, there is no doubt that blockchains will soon become part of the Customs landscape. What will be the impact on Customs administrations?

(i) Customs will become more data-driven. Through their participation in the blockchain, Customs would be able to collect the necessary data in an accurate and timely way (all data tied to the commodity like seller, buyer, price, quantity, carrier, finance, insurance, status and location of the commodity, etc.).

(ii) Customs may become part of the blockchain and become more embedded within trade processes. Data conveyed by the blockchain could be integrated automatically into Customs systems and checked against the data submitted by traders and transporters. In a more integrated version, Customs could even automatically clear the goods within the blockchain itself.

(iii) Blockchain can enhance revenue compliance and cooperation between Tax and Customs. The automated access by Customs to data lodged in export countries’ systems will encourage revenue compliance in import countries. This would help Customs with issues around valuation and transfer pricing and underpin further cooperation between Tax and Customs authorities.

(iv) Blockchain can help Customs to better combat financial crimes. Customs and relevant authorities would be updated regularly on events occurring within the banking system that could be misused to conceal illicit financial flows. The iterative comparison between trade data submitted by operators and a capital transfer recorded by financial institutions would lead to a greater probability of detecting financial crimes.

The blockchain technology represents a step forward for Customs as it offers several opportunities for them, from collecting accurate data to automatically detecting fraud and collecting taxes and duties. In this regard, WCO Members and the Secretariat ought to continue their efforts to explore the potential of blockchains as well as their legal and technical constraints.

Introduction

The idea behind blockchain sprang from a need to create a mechanism to secure digital currencies from the risk of replication – the holder could make a copy of the digital token1 – and helped to create the world’s first cryptocurrency, Bitcoin2. Cryptocurrencies, which have been steadily growing as a digitized form of exchange utilizing strong cryptography, are simply an application of blockchain; however, it is worth noting that blockchain was invented to form the basis of Bitcoin’s architecture and to serve as its public transaction ledger (database).

Blockchain is expected to capitalize on its potential in a manner that revolutionizes global trade and on a greater scale since the phenomenal shift towards the standardization of shipping containers that began in the 1960s. In short, documentation and communication required for the transportation of goods across continents would be automated to a considerable extent and, what is more, with precision, security and reduction of time and costs associated with these tasks.

The World Customs Organization (WCO) has initiated work to identify possible case studies and uses of blockchain for Customs and other border agencies with a view to improving compliance, trade facilitation, and fraud detection (including curbing of illicit trade through the misuse of blockchains and Bitcoins), while touching on associated adjustments in legal and regulatory frameworks. The objective of this paper is thus to discuss ways in which Customs could leverage the power of blockchain and the extent to which the future of Customs could be shaped by the use of blockchain-based applications.

 Characterizing blockchain

Basic concepts

Blockchain is closely related to the prevalence of digital currency; it was originally developed to serve Bitcoin, which was envisaged as “[a] purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.”4 As the earliest manifestation of a blockchain, Bitcoin has triggered widespread experimentation of Blockchain technology in the financial services sector. As blockchain has gained traction in the public domain, businesses are exploring uses of the technology that could meet a wide range of needs in different sectors.

Before discussing blockchain in the context of its application for the supply chain, however, it is important to outline a few of the very basic concepts governing the technology. Firstly, what does the term blockchain mean, and what does it signify? ,The term, blockchain, is a combination of “block” and “chain”; the “block” denotes a number of transactional records, whether financial or non-financial, which may involve the ownership of physical assets to be transferred from one to another; these records are linked altogether by the “chain” component, equipped with a hash function – with which any given data (keys) of arbitrary size can be converted into those of fixed size with another format (hashes).  Once created, every transaction is subject to confirmation by a group of people taking part in the ecosystem – a category of (competing) participants called “miners” or “nodes” – before being paired up with the previous entry in a manner that ensures the consistency of all the existing data on the chain of digital blocks. The “miners” work on transactions in order to export the information into a virtual block with limited recording capacity, whereas the “nodes” verify all the transactions (and hashes) by referring back to each of the prior blocks.

Blockchain is characterized by its decentralized structure within a certain computerized network; no single entity, whether inside or outside the network, has the authority to administer the network by monitoring, checking and validating all the transactions taking place between and among the participants of the network. This is because blockchain is a form of “distributed ledger” technology, with which all updates to a single ledger (database) are automatically shared with other ledgers being distributed to each participant node of the network, rather than being held in a single host commuter or a central server. The fact that each node replicates and saves identical copies of ledgers undoubtedly ensures the integrity and resilience of the entire data network. While each node constructs and records updates to a copy of the ledger independently, these updates are subject to voting by nodes and need to be agreed upon by the majority. The ‘voting and agreement’ is called “consensus”, which needs to be agreed upon before the distributed ledger updates itself and saved on each node.

“Smart contract” is another term commonly used to characterize the blockchain technology; this is a computer protocol which aims to allow the secured and facilitated performance of contracts without the involvement of third parties and thus reduces the transaction costs associated with contracting. The very prototypic application of this idea is a real-world ‘vending machine’ which automatically provides users with a finite item of goods (such as drinks, snacks, stamps and tickets) only after it has received certain data (on their specific choices) and values (the equivalent amount of cash or credit for the item). As with the case of the vending machine, smart contracts enable the automatic execution of various contracts involving the transfer of financial values and properties (e.g. an option contract which executes itself only when certain triggering events in terms of date and price are hit according to its specific terms). The US Congress’ 2018 Joint Economic Report (where cryptocurrencies and the related technologies are highlighted) describes it as follows: “The concept is rooted in basic contract law. Usually the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts, a program enforces the contract built into the code”.9 Smart contracts is merely a phrase to describe the code being used to facilitate the exchange of financial means or assets and properties with certain values; however, it functions as a self-performing computer program when running on Ethereum, a distributed public blockchain network. According to the Ethereum Foundation, a Swiss non-profit organization whose developers have created the network, “Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference”.10 Blockgeeks, an educational platform on blockchain, denotes the ‘Ethereum blockchain’ as being focused on “running the programming code of any decentralized application”, in contrast with the ‘Bitcoin blockchain’ being simply and specifically “used to track ownership of digital currency (bitcoins).” Furthermore, they assert that “Ethereum allows developers to create whatever operations they want.

Many of the current blockchain-based applications run on Ethereum-engined technology, the execution of which is managed automatically by the network; the parties, having formed an agreement, do not need to rely on third party intermediaries to confirm it, thereby saving a substantial amount of time and cost. In addition, the digital documents relevant to the agreement are encrypted on a shared ledger; there is no way to lose them. Similarly, assets or transactions once featured on the blockchains can never disappear. Automated contracts are not only faster and cheaper in terms of performance but are also a useful mechanism to ensure the accuracy of the information contained therein.

 

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