Blockchain for supply chains and international trade STUDY Panel for the Future of Science and Technology EPRS | European Parliamentary Research Service Scientific Foresight Unit (STOA) PE 641.544 – May 2020 EN Blockchain for supply chains and international trade Report on key features, impacts and policy options This study provides an analysis of blockchain technology in the context of international trade. It analyses the potential impacts of blockchain development and applications in eight use cases for supply chains and international trade. It also provides an analysis of the current legislative framework and existing initiatives. Based on this analysis, and following a broad consultation of relevant organisations, the study identifies several challenges in international trade documentation and processes, and presents a range of policy options for the European Parliament. STOA | Panel for the Future of Science and Technology AUTHORS This study was written by Bertrand Copigneaux, Nikita Vlasov and Emarildo Bani of IDATE DigiWorld, N ikolay Tcholtchev and Philipp Lämmel of Fraunhofer Institute for Open Communication Systems, Michael Fuenfzig, Simone Snoeijenbos and Michael Flickenschild from Ecorys, and Martina Piantoni and Simona Frazzani from Grimaldi Studio Legale at the request of the Panel for the Future of Science and Technology (STOA) and managed by the Scientific Foresight Unit, within the Directorate-General for Parliamentary Research Services (EPRS) of the Secretariat of the European Parliament. ADMINISTRATOR RESPONSIBLE Philip Boucher, Scientific Foresight Unit (STOA) To contact the publisher, please e-mail [email protected] LINGUISTIC VERSION Original: EN Manuscript completed in May 2020. DISCLAIMER AND COPYRIGHT This document is prepared for, and addressed to, the Members and staff of the European Parliament as background material to assist them in their parliamentary work. The content of the document is the sole responsibility of its author(s) and any opinions expressed herein should not be taken to represent an official position of the Parliament. Reproduction and translation for non-commercial purposes are authorised, provided the source is acknowledged and the European Parliament is given prior notice and sent a copy. Brussels © European Union, 2020. PE 641.544 ISBN: 978-92-846-6530-3 doi: 10.2861/957600 QA-03-20-263-EN-N http://www.europarl.europa.eu/stoa (STOA website) http://www.eprs.ep.parl.union.eu (intranet) http://www.europarl.europa.eu/thinktank (internet) http://epthinktank.eu (blog) Blockchain for supply chains and international trade Executive summary This document is the final deliverable of the 'Blockchain for supply chains and international trade' study commissioned by the European Parliament. It presents the complete results of the study, including policy options. The report is subdivided in three parts, corresponding to the three phases of the study. The study methodology and process are set out in Annex 1. • Part 1 (Sections 1 to 3) presents the key features of blockchain and the potential use cases in international trade. • Part 2 (Section 4) presents an analysis of the potential impact of the development of blockchains in eight selected international trade cases studies. For each of them, the analysis is conducted in terms of trade as well as economic development, social perspective, technical and security maturity, environmental impact, data protection and transparency. • Part 3 (Sections 5 to 8) presents the conclusions of the study and sets out key challenges and policy options. Blockchain: a tool to promote cooperation Blockchains comprise several data storage technologies. A diverse range of implementation types and variants exist (as set out in Section 1). They offer secure, robust, authenticated storage that is resistant to modification. Their most distinctive feature is their decentralised control. No single actor has full control of the infrastructure, which is controlled by consensus rules. The core value proposition of blockchains is their ability to provide an infrastructure that is neutral, in the sense that the control of the technical infrastructure is shared among the stakeholders. This is particularly suitable for ecosystems in which participants need to cooperate while retaining potentially conflicting or competing interests. This applies rather well to international trade processes that involve numerous actors in complex relationships across various regulatory frameworks. It can be seen as a tool to promote cooperation and trust. Potential applications in international trade The use of blockchain in international trade is considered in several use cases, in various areas of the overall trade process: • Commercial transactions can be modified, with fully decentralised blockchain-based marketplaces, or through the use of blockchain to register and follow commercial transactions. • Trade finance presents several opportunities for blockchain use, from letters of credit to open-account trading and cross-border payments. • Blockchains could also be used as an infrastructure to digitalise exchanges related to customs duties, as well as other trade-related administrative processes (sanitary certificates, conformity certificates, import and export licences), or even in government to government exchanges. • In logistics, blockchain initiatives have been launched to streamline and digitalise exchanges of information along the supply chain. Additionally there are some blockchain implementations for maritime insurance. • Blockchains can also be used to add another level of tracking, traceability and transparency to trade, which could be useful for enforcing trademarks, property rights and regulations, and for providing the end consumer with additional information. I STOA | Panel for the Future of Science and Technology Strong expectations exist around the use of blockchain in international trade as it is expected to decrease costs and delays, optimise efficiency and help to reduce fraud and litigation. However some of these expectations are not specific to blockchain, but rather derive from the digitalisation of trade processes. While there are many potential uses of blockchain in supply chain management and international trade processes, the present study focused on eight specific use cases: • decentralised marketplaces; • blockchain-based letters of credit; • cross-border payment systems; • maritime insurance; • tracking systems for shipping documents and supply chain events; • blockchain-based e-certificate of origin; • proof of authenticity of luxury products; • tracking of ethical sourcing in the food industry. A sound technological option The analysis of these use cases shows that they have all achieved an initial, credible level of technical proof of concept. Overall, this shows the viability of blockchain as a technology that could impact trade. In some cases advanced proof of concept and early commercial solutions have been developed, and no major technological barriers exist for the use of permissioned blockchains in trade. The overall security of blockchain-based solutions can be considered strong. They rely on sound cryptographic principles and architectures. If their usage spreads, however, there could be a need for industrial security standards, certifications and audit procedures to ensure quality and compliance. From a data protection perspective, the technological solution proposed also appears able to ensure data protection and compliance with data regulations. In many of the solutions proposed, the use of permissioned blockchains ensures that data is only shared by the data owner with other stakeholders on a need to know basis. Trade facilitation The main impact of blockchain-based solutions on international trade would be to contribute to the facilitation of trade. They are by no means a single solution that would by itself ensure the digitalisation of trade document exchanges, but they have the potential to contribute to the digitalisation process. Their main benefits would be to provide a trusted and secure infrastructure for documentation exchanges and for the automation of some processes. The decentralised control of blockchains, ensuring relative equality between the stakeholders and peer control over the infrastructure, could also be an argument to convince stakeholders to collaborate openly. The proposed solutions would, in most cases, result in overall cost reductions. This could be seen as the main economic impact of the use cases, although they could also increase the overall transparency of the trade process and document exchange. Societal perspective The study identified societal impacts including better access of SMEs to trade and trade finance (with use cases such as cross-border payments or blockchain-based letters of credit). Other use cases (such as proof of authenticity, traceability use cases, or certificates of origin) could also increase the information available to consumers on products, with potential benefits in more ethical and environmentally responsible consumption. However these positive impacts are not a given for every II Blockchain for supply chains and international trade potential use of blockchain. They are linked to specific use cases, and could require dedicated efforts. They would also have to counterbalance other potential impacts such as an increase in the digital gap (blockchain, like any digital technology, will require access to digital technology, infrastructure and skills, potentially leaving out less advanced actors),