Expand Free Trade by Enhancing Digital Trust

Blockchain and artificial intelligence can lead us to a new era of more equitable trade.

Free trade has been an enduring goal of the international community for more than a century. Despite broad technological progress, modern transaction systems remain heavily burdened by antiquated practices.

This creates friction that slows global commerce and hinders service delivery of all kinds.

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Emerging digital technologies can help reduce frictions by enhancing digital trust in transactions.

Banks, for example, still issue letters of credit to importers, a practice that has remained virtually unchanged for 700 years since its origin in medieval Italy. The practice requires the costly and time-consuming entry of a banking intermediary into many transactions.

Cross-border regulations, customs delays, fraud and corruption are also frictions that add a significant layer of costs, time and complexity to global trade and business flows. An IBM test determined that paperwork alone accounted for 15 percent of the cost of a shipment of produce from Africa to Europe.

Emerging digital technologies, in the form of blockchain and artificial intelligence, can help reduce or eliminate these frictions by enhancing digital trust in transactions.

AI and blockchain work together

Blockchain became famous as the technology underpinning the digital currency Bitcoin, but its uses go far beyond payments. Blockchain puts data into shared, distributed ledgers that allow every participant access to the entire history of a transaction using a “permissioned” network – one that is highly secure and can distinguish who can see what.

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AI can use blockchain data to gain valuable insights and detect patterns in nearly real time.

And because it can process and analyze massive quantities of data, AI can use blockchain data to gain valuable insights and detect patterns in nearly real time. AI systems can employ this data to generate hypotheses, piece together reasoned arguments and make recommendations for action.

IBM and Everledger, a company that tracks and protects high-value goods, have built a system based on this approach. It applies AI to analyze secure data on 1 million diamonds that are kept on a blockchain in a fraction of the time humans could.

Among other benefits, the platform ensures that diamonds are authentic and compliant with thousands of regulations, including those imposed by the United Nations to prevent the sale of conflict diamonds.

Removing barriers

Friction not only inhibits trade and business flows, it also inhibits people. Small farmers, evaluating the costs of shipping produce overseas – from bank fees to paperwork to bribes – may decide it is simply not worth the time and money to try to sell outside of local markets.

Digital technologies can remove barriers to economic participation by lowering costs and building trust into business relationships. For example, blockchain eliminates the prospect that a trading partner will have to engage in an expensive and time-consuming audit should a transaction with a smaller, lesser-known party go wrong.

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It’s estimated that AI and blockchain can optimize more than $300 billion in global commerce costs.

With a single version of transaction data on a ledger, all the required information to settle a dispute may be evident and visible to everyone who has permission to see it. The audit trail is laid out in one place and there is no need to involve costly intermediaries.

IBM estimates that digital technologies like AI and blockchain can optimize more than $300 billion in the underlying costs of global commerce.

A simulation conducted by our chief economist’s office of the impact of blockchain adoption on the economies of Kenya, Nigeria and South Africa found lower prices and significant improvements in real GDP and fiscal balances across each country. These findings are detailed in a new book published by the International Monetary Fund called Digital Revolutions in Public Finance.

The good news

The good news for governments is these technologies can be adopted at a relatively low cost through the internet and cloud computing. Moreover, their benefits have been shown so far to require small changes to legal and regulatory frameworks.

However, private sector cooperation and participation are essential. Businesses must agree to a new set of government policies on transactions and data-sharing built around blockchain.

The democratization of secure transaction processing depends on effective public-private partnerships. National governments have every incentive to create them. Millions of people who have been denied access to the marketplace will benefit from the removal of friction from international commerce.

In this way, the expansion of digital trust can lead us to a new era of free and more equitable trade.

Photography by Adam Birkett, Unsplash.

This article first appeared on the IBM THINK blog and was republished with permission.

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Arvind Krishna is senior vice president, Hybrid Cloud, and director of IBM Research.

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