[Davos Recap Video] How to avoid fragmentation of the global trading system

January 24, 2019 James Niccolai

Global trade depends on transparency and trust, which is why fragmentation in commerce is such a huge issue. When small enterprises are cut off from digital networks, they have no transaction history and are effectively invisible. That means banks won’t lend them money and large buyers won’t do business with them.

Distributed ledger technologies can address this by creating visibility in supply chains without the need to agree on a central authority, according to panelists in the Tradeshift Sanctuary on Tuesday.

“It creates a system we can collectively trust, even if we don’t trust each other,” said Brian Behlendorf, Executive Director of Hyperledger.

That creates an opportunity for smaller enterprises and widens the field of suppliers for large buyers. But while open networks are an obvious benefit, the blockchain ecosystem needs to mature before it provides the underpinnings.

“One way of thinking about the whole blockchain space is as the world’s biggest economic laboratory,” said Gert Sylvest, Co-founder of Tradeshift and General Manager of Tradeshift Frontiers

Digital trading platforms need scale to be effective, which means getting multiple participants on board. Some governments, including Singapore and Dubai, have built national trading platforms that could serve as incubators for blockchain startups, said Gerry Mattios, EVP, Supply Chain/Global Trade Practice Leader APAC Singapore at Bain & Company.

But companies need an incentive to participate, which means they must understand the benefits. “It’s not about a lack of technology. It’s about every participant asking themselves ‘What’s in it for me?’” said Sylvest.

The World Bank conducted a pilot project with mango farmers in Haiti which showed that blockchain technologies can increase efficiency in the supply chain and help them capture a fair share of revenue, said Thérèse Couture, Director of the Treasury Operations Department at the World Bank.

But blockchains need agreed-upon standards and operating frameworks. “It doesn’t matter if you have this fantastic technology if you can’t agree on what’s a receivable or what’s a bond,” Sylvest said.

Governments have a role to play, since some efficiencies depend on connecting with customs systems and other national infrastructure. But they can’t mandate the rules or they become another central authority,

“Governments will always be playing catch-up when it comes to technology; that’s not the role they should play. But they do have to be the adult in the room, calling out bad actors and setting the guardrails for how things should be operating,” Mattios said.

Blockchains can prevent some of that misbehavior through the transparency they create, Behlendorf said. “To a large degree, distributed technologies make it hard for bad actors to get away with what they’d like to get away with,” he said.

Whether it’s blockchains or something else, the current trading system has vast inefficiencies that need to be fixed, the panelists agreed. It can easily take 10 days to settle an invoice and 90 days to clear an outstanding payment. Add this up and there’s an estimated $7 trillion to $9 trillion in liquidity trapped in the global trading network.

And that’s a big incentive for change.

“When you add all this together — more efficient turnaround times, lower working capital, lower inventories, fewer or no errors in processing — that provides an amazing economic opportunity for all trade players globally,” Mattios said.

The panelists predict big changes in the next two years. The current disruption in global trade deals is forcing companies to redesign their global supply chains, and they’ll use AI and machine learning to do so, he added.

Sylvest noted that real-world currencies are starting to be represented on blockchains. This will drive wider use, he predicted, since enterprises will no longer be put off by the volatility of cryptocurrencies.

 

About the Author

James Niccolai

James Niccolai was a technology reporter and editor for 20 years in San Francisco and Paris. He is now a content director with Bateman Group.

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