Blockchain can be used in small ways to have big impacts. Our work with four customs agencies is an example.
First, some background on this technology before getting into the details. Blockchain can help us trust the information we are given. Knowing that the data is true and hasn’t been tampered with is a big deal in everything from food labels to financial transactions.
Blockchain is the digital evolution of the paper ledgers used to record transactions in Mesopotamia, over 7,000 years ago. Unlike clay, papyrus or paper, blockchains are secure digital ledgers that can be shared, replicated and updated across multiple locations in near real-time.
Blockchain opens new opportunities for peer-to-peer collaboration.
Trade is a natural fit for blockchain because it is rich in exchanges of information across borders, from bills of lading to letters of credit and certificates of origin. And customs administrations are the neural points of this flow of information that underpins our supply chain networks.
To facilitate trade and to combat smuggling and money laundering more effectively, customs agencies need to know which actors involved in the global supply chain – importers, exporters, shipping agents, customs brokers, warehouse operators – can be trusted for expedited treatment, and which ones should be subject to more scrutiny.
Authorized Economic Operators
In 2005, the World Customs Organization came up with a framework to identify secured and trusted actors, or to use the technical term, the Authorized Economic Operators (AEO). Almost 80 countries have compiled lists of entities that are certified to meet AEO standards.
To make the system work, customs administrations need to share their lists of AEOs with their counterpart agencies. Otherwise, an exporter would get expedited treatment on one side of the border but not the other.
This sharing of lists is known as mutual recognition arrangements (MRAs). To date, 60 MRAs have been signed and 40 more are being negotiated.
These agreements can be bilateral or multilateral, the latter being the case of the customs administrations of Pacific Alliance member-countries Colombia, Chile, Mexico, and Peru. For an exporter in Peru shipping, to say, Mexico, the MRA can make the difference between sitting in a port for hours or for days.
The problem is that lists of AEOs change. New actors are added or removed. To inform each other of these changes, designated customs officers in each customs administration send, by email, an Excel file containing the data of their respective AEOs. This usually happens once a month.
The data is then incorporated into risk management systems. There are obvious limitations with this setup: email systems are not totally secure, and entities that are added or suspended from the AEO list may be communicated to counterpart customs agencies with delays.
CADENA, blockchain for safer trade
Enter blockchain. To set up a secure data exchange system, since 2018, we at the Integration and Trade Sector of the IDB have led, along with AEO program officers and IT specialists from Mexico, Peru, Chile, and Costa Rica, in alliance with Microsoft, a novel pilot project to develop the business functionalities and technological architecture of a blockchain-based application called CADENA.
The idea of this solution is for each transaction to be both secure and protected by an immutable audit trail.
Goods coming from an AEO exporter could receive preferential treatment with fewer inspections in the country where goods are imported as soon as they obtain the AEO certification in their country of origin. CADENA works on real-time, cutting red tape, increasing transparency and trust.
The solution took seven months from concept to design and is currently in the final stage of the testing phase, having proven to be a sound and efficient tool to share data across borders.
CADENA meets LACChain
The usual challenges involving new technologies apply. These range from upgrading regulatory frameworks to tackle governability elements, to ensuring the designed solution can be integrated with other custom administration’s systems, and to building the adequate technological architecture for data privacy and further scalability.
These issues will be addressed in phase II of CADENA, currently being designed in partnership with LACChain, an alliance to promote the use of blockchain for Latin America and the Caribbean launched in 2018 by the IDB LAB and key technologies partners.
We are optimistic our pilot project can be scaled up. Colombia just joined the initiative and we are in discussions with other countries to join CADENA. Ideally, every customs administration in LAC and elsewhere should join a blockchain-based system of information exchanges. Exporters and importers would see their goods processed faster at borders and ports. Customs could focus their scarce resources on non-certified actors.
This will not eliminate trade-based money laundering and smuggling, but it will make it harder to carry out these activities.