Currently available technology enables global trade to become fully digital. To support this, technical standards must be created, and rules and legislation must be harmonized internationally. Public administrations are to invest in digitalization to the same extent as those trading and also the numerous service providers around trade. The outcome will be promising, but one success factor is close collaboration between the various players.
The volume of globally produced goods and services has approximately doubled in the past 30 years and trade has more than tripled. Many areas of production and trade have been digitized, but in the absence of a universal approach to digital networking, siloed systems have been implemented, creating countless ‘digital islands’. Data is still transferred between the participants’ computer systems on printed documents or as unstructured PDFs. This burden is caused by the lack of interoperability and needs to be overcome, if the potential of digitalization is to be fully leveraged, and to change processes to become safer, more reliable, more sustainable and less expensive. Addressing this challenge would also support preventing criminal or dubious business practices, such as trade-based money laundering, fraud or sustainability claims which are difficult to verify. It will also serve to make trade finance a great deal more accessible to SMEs and so help to close the so-called ‘trade finance gap’ and would also spur sustainable economic growth.
Over the same period of time, the past 30 years, information and communications technology has developed very dynamically. While home computers were expensive in the early 1990s and mobile phones were luxury goods, smartphones are now the global standard. Almost all of the performance parameters of these handheld computers exceed those of the supercomputers of the 1990s at drastically reduced energy consumption. The miniaturization and integration of circuits now allows networked sensors and actuators to be connected to machines and everyday objects, which are also becoming increasingly available everywhere. This is the so-called Internet of Things (IoT). Machines ‘talk’ to each other and also interact via smartphones, wearables or voice commands with humans. Ubiquitous computing has become a reality. Data processing can now happen everywhere, at all times and for all purposes!
Again, over the same period, internet and mobile networks have developed just as rapidly. While the focus at the start of digital mobile communications was still on voice transmission, this is now a marginal quantitative event, accounting for less than 1% of the data volume generated in the networks. Data transfers predominate, connectivity speeds and data amounts per month are being sold, the call minute has become obsolete as a billing unit. High quality mobile networks have been commissioned on a global scale. Satellite constellations are being put in the sky and will complement mobile networks to entirely close existing connectivity gaps. Every point on the earth’s surface will be networked with high bandwidth and low latencies. Production facilities in Germany, copper mines in Zambia, container ships in the middle of the Pacific and aircrafts flying over China or Brazil will as a result become participants in a continuous data exchange.
This data exchange, running everywhere, at any time and for any purpose can be called ubiquitous networking. Through combining ubiquitous computing and ubiquitous networking, endpoints for human interaction with processes modelled in software become available everywhere. Also machine to machine interactions, more precisely between the software processes running on them, become available everywhere and at any time.
Decentralized business networks, DLT, IoT, AI
The administration of foreign trade takes place within a multitude of systems, most of which are operated in the data centers of trade participants and their service providers. Paper or paper substitutes with poorly structured data are still used in most instances to transfer data between systems. A PDF file is an example of a paper substitute. Although this file is generated and transmitted digitally, it often only replaces the slow mail delivery and does not readily support programmed end-to-end processes. Also the providers of Enterprise Resource Planning (ERP) systems have insufficiently addressed this challenge so far. Although datasets can be exchanged between the ERP systems of sellers and buyers, this scenario seems to lack technical standards or “neutral ground”. Often data transmissions entail a legal background, for which time stamps are desired along with a legally binding signature. The development of distributed business networks, featuring a certain degree of decentralization and being located between ERP systems may close this gap.
In the future, decentralized business networks will serve as orchestration means for most complex business processes between stakeholders and service providers. Business interactions related to financial services, logistics services, insurance, customs clearance, inspection certification, certifying origin and other required services can be undertaken within these distributed systems. Required data will be entered into and retrieved from these networks. This will obsolete re-keying of data and data quality will increase as a consequence. For most service providers in the supply chains, decentralized networks may become the primary point of sale.
Generally, the networks are underpinned by a distributed ledger, which restricts system entries to consensus based append only mode, on the basis of predetermined, programmed rules. This creates ‘technical trust’ and will allow the automation of cross-organizational business processes on an unprecedented scale. Smart contracts determine the agreed rules and defined procedures for business processes in code and will be programmed across company boundaries.
A number of technical standards and protocols already exist for exchanging data between different networks, the participants’ back-office systems and the environment’s IoT data sources and sinks. Others are in the design stage and are being developed. The end-to-end use of ISO standards and compliance with United Nations Economic Commission for Europe (UNECE) recommendations is becoming a prominent quality feature of trading systems. Certification of the standard conformity of these systems may become a service. Extensive data permeability between the networks is the goal, and zero configuration scenarios may become a possibility through standardization. Efficient access to data facilitates the use of artificial intelligence alongside prescriptive and predictive analytics. Use cases could be around fraud deterrence, meeting regulatory obligations without effort, and enabling promising big data based applications. Paper as a means of data sharing will be considered old fashioned and eventually become obsolete. Or even suspicious. But how will the wet ink signatures look like in this new world? How will a data transfer or a data based transaction become legally valid?
Digital identities
Digital identities for organizations, people, objects and software processes will be means to grant access rights to numerous systems and networks and to the transactions managed on them. Directory services, which today assign role based access privileges in software systems, and regulate access to organizations' resources and services, will gradually be replaced by external services for digital identities, and so migrate into the decentralized space between the companies. Roles and privileges will in this way be exposed in a programmable and verifiable way to the outer world, into a fabric of digitally rendered services.
In simple terms, a digital identity consists of one identifier (or many) and several verifiable credentials attached to it. Both components have been extensively standardized by the W3C. As the Legal Entity Identifier (LEI) is a company’s globally unique identifier it will serve well as root of an organization’s identity. The verifiable Legal Identifier will allow to amend the LEI by verifiable credentials, some of which can grant an organization’s employee access to transactions in third-party systems. The verifiable credentials granting access or certifying facts are digitally signed by those granting or certifying, and hence programmatically verifiable by the stakeholders of the respective transactions by means of software processes This can therefore take place automatically, reliably and audited.
An example from the field of digital identities illustrates this: To process a letter of credit, a bank will need to access several business networks in which the purchase order, commercial invoice, bill of lading and certificate of origin are all digitally recorded. The access rights to the respective transactions in these third-party systems will be transferred into the bank’s digital identity as a set of verifiable credentials as soon as the buyer specifies in a B2B-network or letter of credit network that the bank has been commissioned to issue the letter of credit pertaining to the transaction. The bank may then delegate the access right to these datasets to its employees involved in the process, by transferring a corresponding verifiable credential into their personal digital identity. This will allow the bank’s employees or even the bank’s software autonomous processes to act on their behalf.
The transaction conducted by means of a digital identity relies on an X.509 certificate, which is part of a chain of trust that ends at the trust root. The authorization and authenticity of the transaction carried out by these means is cryptographically guaranteed and is likely to be covered in Germany by the eIDAS implementing act and the legal directives issued for this purpose. Equivalent regulations in non-European legal areas would be necessary and should be asserted, produced and enacted.
Creating network effects
Similar questions about ‘statutory congruence’ arise when using electronic records for trade documentation. Little progress can be made if the use of electronic records for bills of lading and consignment bills is legally admissible in the exporting country, while the importing country enforces a fallback to expensive and slow paper processes for legal reasons. The legal basis for doing business in globally strung networks should be standardized. In 2017 the United Nations Commission on International Trade Law (UNCITRAL) presented a proposal for national laws to be adapted, the ML-ETR, i.e to cater for globally harmonized legislation on the transfer of property titles securitized in negotiable trade instruments.
The vision of an internet of trade also requires considerable joint efforts on a technical level to become a reality. Technical standards ensure interoperability and should be jointly developed and also deflated where several existing standards compete for the same purpose. A technical commercial language of uniform vocabulary, semantics and syntax is desirable as it would significantly ease, cheapen and accelerate the interlinking of the multitude of systems and networks. An example is the core business vocabulary in the EPCIS standard from GS1.
Trading parties and their service providers, such as banks, insurers, logistic service providers and inspectors are facing major changes. These will impact internal IT and process landscapes, qualifications of employees involved in trading processes and products offered. Public administrations and customs authorities should play a leading role in this process and ideally set a global course. Peppol is a European example for this.
The ICC has taken up the role as a global convenor of the numerous standardization bodies working towards these goal. The ICC Digital Trade Standards Initiative has started operations in mid 2020.
The changes will be so sweeping that even large organizations and enterprises will not be able to make a difference on their own. To create a network of networks and realize the full potential of network effects, all parties must cooperate in a coopetion effort. COVID-19, besides being a regrettable misery for many, has worked as an unprecedented accelerator for global digitalization efforts.
Conclusion
World trade will become almost entirely digitalized and networked in the course of the next decade. Siloed systems and paper-based documentation are becoming increasingly sidelined and will soon be deemed in arrears. From the convergence of different technologies, a nervous system of the world economy is emerging and is about to be woven with ever increasing density.
The ability to participate digitally in commercial trade is becoming critical and requires companies to embrace new processes and skills. Public administrations should seize the opportunitiy and rapidly progress their digitalization efforts and promote technical standards. Global cooperation among the large variety of stakeholders around trade is required.
This article was originally posted on International Chamber of Commerce Germany (ICC Germany Magazine) in German. It has been translated and amended for the GLEIF blog.
If you would like to comment on a blog post, please identify yourself with your first and last name. Your name will appear next to your comment. Email addresses will not be published. Please note that by accessing or contributing to the discussion board you agree to abide by the terms of the GLEIF Blogging Policy, so please read them carefully.
Hans J. Huber is the product owner for Trade Finance Research & Development at the DLT Lab of Commerzbank AG. He has worked for 25 years in international teams at the interface between IT and subject matter departments, and has experience in the logistics, marketing and financial industries. Hans was a driving force behind the foundation of the ICC DSI, the trade standardization body of the International Chamber of commerce.
