Navigating cross-border trades with blockchain – 7 factors to success
Moving anything across multiple jurisdictions is complex, as systems and rules created by one country differs from another and standardising them with a single system is complex. Blockchain offers an ideal solution, but success depends on some key factors, as Sunil Senapati, COO of XDC Network, explains.
Cross-border trades involve legal, technical, and operational complexities. Collaboration is required among very varied stakeholders, including governments, regulatory bodies, businesses, and technology providers, to establish interoperability, regulatory alignment, and standardised practices that enable the efficient and secure use of technology in international trade.
Digital solutions to address paperless trades have been around for 20-plus years, but without much mass adoption. Many trade bodies are coming together to standardise the processes, documents, data types and more to make a very favourable solution. Adoption of the UNCITRAL Model Law on Electronic Transferable Records (2017), (MLETR) for example, is most welcomed and 2023 will see more countries added to the current list of seven. You can find out more about MLETR here.
Blockchain has been a perfect technology for addressing trade finance digitisation, and the following must occur to see successful mass adoption:
1. Legal and regulatory compliance
Cross-border trades involve adhering to diverse legal and regulatory frameworks across different jurisdictions. Blockchain implementation must align with existing laws and regulations related to trade, customs, taxes, and data privacy. Harmonising these requirements across borders can be challenging, as countries may have differing approaches to blockchain adoption and use cases.
Blockchain networks need to seamlessly interact and communicate with each other for cross-border trades. However, different blockchains come with their own protocols, consensus mechanisms, and smart contract languages. Achieving interoperability between these disparate systems is a complex task, requiring standardisation efforts and the development of protocols that enable cross-chain communication. API use can be well leveraged here.
3. Identity and KYC (Know Your Customer)
Establishing the identity of participants involved in cross-border trades is crucial for compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Blockchain-based identity verification solutions can enhance trust and security, but integrating such systems with existing identity frameworks and ensuring cross-border recognition of identities pose challenges.
4. Smart contract complexity
Cross-border trades often involve complex contracts with multiple conditions and clauses. Implementing such intricate smart contracts on a blockchain can be challenging, especially when different legal systems and languages are involved. Ensuring that smart contracts accurately reflect the terms of the trade and are enforceable across borders requires careful consideration and legal expertise.
5. Cross-border payments and currency exchange
Blockchain can streamline cross-border payments by reducing intermediaries and transaction costs. However, managing currency conversions and ensuring liquidity in multiple jurisdictions can still be complex. Volatility in cryptocurrency markets and the integration of blockchain-based payment systems with traditional banking infrastructure further complicate cross-border payment processes.
6. Trade documentation and compliance
International trades involve various documents, including invoices, bills of lading, certificates of origin, and customs declarations. Blockchain can digitise and automate the management of trade documents, reducing the risk of fraud and streamlining the verification process. However, establishing standards for document formats, integrating blockchain with existing electronic data interchange systems, and ensuring acceptance by customs authorities globally are ongoing challenges.
7. Cross-border dispute resolution
In the event of a dispute arising from a cross-border trade, resolving it can be complex due to jurisdictional issues and differing legal systems. While blockchain offers the potential for transparent and tamper-proof records, the enforcement of blockchain-based evidence in legal proceedings may not be uniformly recognised across borders. Developing cross-border dispute resolution mechanisms that leverage blockchain technology requires international cooperation and legal frameworks.
Certainly, a few of the points above are big asks of blockchain. I look forward to sharing more on just how we can achieve all of them.
See Sunil’s talk, ‘Navigating Cross-Border Trades with Blockchain: A Global Focus’ on Day 4 of Blockchain Week 2023.