SEPTEMBER 24, 2018

By Neeladri Chakrabarti, Domain & Technical Lead, TCS Limited

Blockchain technology - which works basis a distributed ledger ecosystem - is slowly gaining the ability to be a transparent, tamper proof, working environment worldwide. Leveraging the potential to access and reliably process real time information for all stakeholders, blockchain technology (blockchain) is slowly becoming the go-to for a variety of business processes.

In the world of Customs and its inherent revenue / document controls, where each stakeholder and the government are co-existent on each other and minutely dependent on the provision of mutually verifiable data, blockchain finds itself an ideal sandbox to develop and gain the confidence of both taxpayers and tax authorities. The potential for adopting blockchain into the tax system, especially in a Customs ecosystem, where the symbiotic provision of verifiable information couples with the working processes of revenue collection and seamless movements, is huge. Blockchain in Customs ticks the concepts of transparency and responsible data ownership and could immensely be a game changer to reduce administrative burden and collect tax at a potentially lower cost, while helping narrow down tax gaps and fraud.

Recognizing this global potential, The World Customs Organization (WCO) has initiated various pilot projects in collaboration with border agencies, important stakeholders, technology companies, and businesses with a view to understand compliance upgrades, trade facilitation, fraud detection, and the extent to which the future of Customs can be molded with the use of block chain based applications. It is now possible to say, with a certain degree of confidence, that a greater transparency could be achieved, movement of goods be tied securely to flow of revenue, and the inherent capabilities of Customs and Border protection enhanced by the introduction of blockchain technology.

The potential benefit of blockchain to enhance value is well documented. Blockchain has the capability to establish trust in an ecosystem, by leveraging its inherent security distributed ledger of transactions in a network. This is vital in the world of Customs, where a blockchain could enhance transparency (ownership of cargo, traceability of stakeholder); Security (digital ledgers are tamper proof as data entered cannot be changed); Process information faster in real time (data in ledgers are updated for all stakeholders instantly, reducing dwell time) and provide a layer of enhanced control to authorities, as information is restricted to identified users only.

'Smart contracts' is another term commonly used to characterize blockchain technology. This is a computer protocol that aims the secured and facilitated performance of contracts without the involvement of third parties and thus reduces transaction costs associated with general contracting. In businesses, smart contracts operate on the principle of automatically executing contracts, providing finite items of goods only after it has received identified data of choice (number) and value (cash or credit). Smart contracts function as a self-performing computer program used to facilitate the exchange of financial means or assets with properties of certain value, once key conditions are triggered. This is a game changer where cargo movement is mainly dependent on financial terms, LC(s), transfer pricing, insurance and certificates, payment of duties and location of goods. If this entire system is somewhat automated and updated in real time for all stakeholders, it has the potential to revolutionize trade and clearances, as we know it today.

While the advantages range from cost saving, reduction of dwell time, security leveraged encryptions and revenue stability by plugging tax leakage, there are concerns about blockchain. The disadvantages range from comprising privacy (smart contracts have to be personally digitally signed and identified); the relationship of the system of trust versus performance (more nodes in a blockchain build more reliability, but each transaction uses more processing power and leads to increase in performance time); and the ever present fear of a 51% attack (if more than half of the computers working as nodes to serve the network tell a lie, the lie will become the truth). In a unified chain working as a single ecosystem, if a majority of the network's computing power become compromised, this will prevent the network identifying and rejecting fraudulent transactions. However, each new system comes with its inherent flaws and possibilities improve once they are operational.

On an operational level, the World Customs Organization (WCO), along with Maersk and IBM in January 2018, to collaborate and maximise the potential of blockchain in order to digitize global trade, has launched a significant pilot project. The expectation is that blockchain will enable regulatory authorities to closely monitor the flow of goods, carry out risk assessment and regulatory processing in a more efficient manner. The companies are jointly developing a platform leveraging cloud-based technology, the Internet of things (IoT), AI and data analytics to allow the tracking of traded goods across borders. Two core capabilities of this platform ensure end-to-end supply chain visibility and 'paperless trade' - with the digitization and automated filing of all trade paperwork. Singapore, Hong Kong, and Australian Customs are developing other use-cases today to test further possibilities.

To conclude, blockchain is a possible enabler to ensure a more data-driven Customs with 360-degree visibility. Information on any shipment can be part of a block with a transparent chain of custody and be accessible to suppliers, transporters, buyers, regulators and auditors. The regulator would be able to see accurate data (seller, buyer, price, quantity, duty, carrier, finance, insurance etc.) that bind the goods and further keep track of the location and status of such goods in real time. Such a complete visibility, if built into the sphere of regulatory oversight, would ensure a better-informed Customs function in terms of day-to-day operations, improving the capabilities of risk assessment and targeting. Customs functions will also be embedded within the trade process and in enhancing the connectivity of supply chains by leveraging distributed ledgers authorities would also be able to have a clearer picture of international trade, particularly in terms of the movement of cargoes and consignments tied with the flow of capital. This would address an ongoing challenge for tax authorities, where access is granted to the full spectrum of information from business and their relevance to tax. Blockchain addresses this problem as it allows reliable information to be captured from all perspectives, verified by all stakeholders. This may simplify collection, combat oversight, save time and mitigate financial fraud bringing better stability to the ecosystem.

(The views expressed are strictly personal)