Much discussion has centered on the use of blockchain, the technology that underlies the digital currency bitcoin, as a tool to improve transparency and efficiency in financial services. Its greatest potential however lies in the provision of a critical element underpinning all economic transactions: trust.
In its purest form, blockchain is a digital ledger of transactions recorded across a network of participants in a tamper-proof chain visible to anyone. If all kinds of financial, legal and product information can be protected against manipulation or fakery, this would provide an unprecedented level of trust and enable greater economic activity.
The World Economic Forum has predicted that by 2027, some 10% of global gross domestic product will be stored using blockchain. Both traditional and digital industries will stand to benefit.
Last September, Barclays, the British lender, reported the first blockchain-based trade finance deal as it guaranteed the trade of $100,000 worth of cheese and butter. Also last year, Commonwealth Bank of Australia and Wells Fargo utilized blockchain to automatically transfer ownership and payment for 88 bales of cotton shipped from Houston to Qingdao, China.
In the burgeoning sharing economy, Goldman Sachs has estimated that securely storing "social and trust credentials" on blockchain could accelerate the adoption of peer-to-peer lodging systems such as Airbnb, potentially generating $3 billion to $9 billion in incremental revenue opportunities through 2020.
At a time when globalization is retreating, as exemplified by the apparent demise of the Trans-Pacific Partnership and the World Trade Organization's Doha Round of negotiations, blockchain may well make up some of the trust deficit. Asia, as the dynamic heart of the world economy, is the perfect place for blockchain to empower trade.
The emerging economies of East Asia now account for a quarter of total global trade and 21% of global GDP. Despite the rising anti-globalization tide, regional integration growing stronger. As of February 2016, there were 133 free trade agreements in East Asia. With the eclipse of the TPP, the Regional Comprehensive Economic Partnership, spearheaded by the Association of Southeast Asian Nations, is now the flag bearer for global free trade. China's Belt and Road Initiative, covering over 60 countries, meanwhile promises to rejuvenate trade links between Asia and Europe.
All these efforts provide many opportunities to rethink the systems and processes underpinning trade flows. As DBS Bank has suggested, one of the biggest obstacles to intra-Asian trade is the low level of trust in both commercial and political regimes. This leads businesses to be risk averse, maintaining supply chains with known entities only. New business relationships are slow to be established and are often based on family ties or referrals by trusted parties.
A credible and tamper-proof blockchain system however would allow even the least trusting parties to open up and comfortably conduct business. A case in point is the prevalence of counterfeit components along the manufacturing supply chain. The Automotive Aftermarket Suppliers Association has estimated that the global automotive industry loses around $12 billion annually as a result of parts counterfeiters. A large share of those fake parts are reported to be from China.
Frost & Sullivan, a research and consulting company, urged automotive original equipment manufacturers to wake up to blockchain technology's benefits for real-time monitoring, auditability and scalability. It predicted that by 2025, the penetration rate of blockchain in functional areas such as supply chain logistics and smart manufacturing would be over 37%.
The good news is that Asia is recognizing the potential of the new technology. Major financial hubs have introduced various incubation programs, regulatory sandboxes and tax incentives to spur innovation. With financial technology investment in the Asia-Pacific region rising to $11.2 billion in 2016 from $5.2 billion in 2015 and eclipsing that of North America for the first time, robust blockchain experimentation is emerging.
Last August, the Infocomm Development Authority of Singapore, in collaboration with Bank of America and HSBC, launched a blockchain application to improve the letter of credit transaction process among banks, importers and exporters. This past March, the Hong Kong Monetary Authority unveiled a trade finance platform based on blockchain technology with the accounting firm Deloitte and five banks. The People's Bank of China, that nation's central bank, has signaled its desire for banks to adopt blockchain to help combat chronic fraud including fake trade finance deals. According to business intelligence company Kroll, 86% of Chinese executives surveyed in 2016 reported experiencing fraud, 4 percentage points above the global average.
The development of blockchain is not without its challenges. For one, different industry sectors across the supply chain need to accept the new technology and collaborate closely. Blockchain transcends national boundaries by nature, so cross-border cooperation among regulators is critical. New international standards are needed to support the rollout of blockchain technology. More importantly, digital data is core to blockchain. Asia needs norms and protocols to ensure the free flow of data and confront the headwinds of data sovereignty and digital protectionism.
Those policymakers who seek to advance their economies will remember economist Adam Smith's vision of humankind's progress: trust plays a central role in making that progress possible. Asia's geopolitical context is unique in that countries are eager to trade with each other, yet levels of trust between them are lagging behind. Getting the conditions right will ensure that Asia can realize the full potential of blockchain, as a technology for trust, to promote trade flows and economic growth.
Andy Yee is a research fellow at the University College London Centre for Blockchain Technologies and public policy director for Visa for greater China. This article expresses the author's personal views.