Module 4 - Implementing blockchain for trade

1.1 Module 4: Implementing blockchain for trade

1.2 Navigation help

1.3 Objectives

WATCH THE FOLLOWING VIDEO TO GET AN OVERVIEW OF THIS MODULE.

Welcome to module 4, “Implementing blockchain for trade”.
[Link]
Welcome to Module 4, “Implementing Blockchain for Trade”.
As demonstrated by the example use cases in Module 3, blockchain
technology’s features make it particularly interesting for enhancing
transparency, improving cross-border processes and developing new
business models.
Yet, distributed ledger technology is only one approach to digitalization and
consideration must be given to the value and challenges of transitioning to,
and maintaining, a blockchain-based solution.
More specifically, the implementation of “blockchain for trade” is a complex
endeavour that requires a supportive ecosystem and the integration of
processes that often span multiple actors, both businesses and governments.
In addition, cost reductions may not be linked solely to the technology, but to
this necessary integration and streamlining work.
At present, blockchain use cases for international trade may rely on
companies’ ability to work in “cooperative competition” through consortia as
well as directly with government authorities.
For these reasons, this module explores the “blockchain for trade” ecosystem,
introduces key stakeholders and provides two tools - a checklist and a flow
chart - to help decide if blockchain, and which type, may be an appropriate
solution to a well-formulated problem.
The module further addresses legal issues and how policymakers can use
innovative approaches, such as “regulatory sandboxes”, to foster a conducive
environment for the adoption of blockchain technology.
Finally, although blockchain may create new opportunities, the module
describes some of the other challenges to its widespread adoption, including
those affecting micro, small and medium-sized enterprises.
The overall objective of this module is to recognize when blockchain is an
appropriate solution and to identify challenges to the implementation
of the technology.

In this module, you will learn:

[Link] the blockchain for trade ecosystem is and how to decide if the
technology is an appropriate solution to a specific problem;
[Link] the legal issues are and how policymakers can foster a conducive
regulatory environment for the implementation of blockchain for
international trade; and
[Link] of the other challenges to the deployment and adoption of
blockchain technology.

1.4 Engaging An Ecosystem For Implementation

1.5 Answer the question

Feedback
The correct answer is: true.
Similar to the way natural processes require an ecosystem, the use of
blockchain as a solution to the “problems” of trade relies on an ecosystem of
users, community, financing, infrastructure and the technology itself.
1.6 What is the “blockchain for trade” ecosystem?

WHAT IS THE “BLOCKCHAIN FOR TRADE” ECOSYSTEM?

The blockchain for trade ecosystem reflects a complex set of stakeholders
that interact to create value (or fulfil their mandate):
• Companies (e.g. technology, finance, trade and supply chain/logistics);
• Civil society organizations;
• Software developers;
• Academics;
• Governments;
• Intergovernmental organizations.
Stakeholders involved in blockchain projects often form consortia. A
consortium is an association, combination or group of two or more individuals,
companies, organizations or governments, formed to undertake a project
together.
The intention of a consortium is to combine individual resources and
strengths of contributing parties.
Blockchain for trade projects by established companies and start-ups often
involve working hand in hand in a collaborative manner in “cooperative
competition” via consortia (e.g. technology development; the operation of
blockchain platforms/distributed ledgers).
For more information, see - World Economic Forum Blockchain Toolkit
(Ecosystem Module)
[Link]

WHAT ARE DIGITAL ECOSYSTEMS AND HOW DO THEY ENABLE

SOLUTIONS?
Digital ecosystems represent the interconnected information technology (IT)
resources that allow for a blockchain-based solution to operate in practice.
Spanning the numerous stages of a trade transaction, the development of
end-to-end use cases increases the need to implement solutions within a
functioning digital ecosystem that aims for:
Harmonization: ability for most parties involved in a transaction to interact via
one platform;
Efficiency: process automation/ simplification, real-time data exchange and
cost reductions for participants;
Transparency: secure sharing of data directly between relevant parties;
Security: ability to authenticate parties and record transactions to reduce the
chance of fraud.
For more information, see - Trade Finance Global Digital Ecosystems in Trade
Finance
[Link]
finance/

THE ROLE OF OPEN SOURCE SOFTWARE

Consortia often work in open source to develop computer software (i.e.
source code) released under licence where the copyright holder grants users
the right to use, study, change and distribute the software to anyone and for
any purpose.
Open source software can be developed in a collaborative and public manner.
Software developed in open source under consortia is critical to enabling
digital ecosystems that underlie blockchain use cases for trade.
For more information, see - Open Source Initiative - The Open Source
Definition.
[Link]
THE HYPERLEDGER PROJECT
A collaborative project hosted by the Linux Foundation, Hyperledger is a key
effort in the development of enterprise-focused blockchain frameworks and
tools in open source.
Hyperledger technologies are now widely used in projects and initiatives for
international trade.
For example: Hyperledger Fabric, a distributed ledger technology (DLT)
framework, allows for “plug and play” modular components (e.g. consensus
protocols) in support of a range of industry use cases.
CORDA
Developed by R3, Corda is a permissioned blockchain platform that powers
DLT applications that enable businesses to transact directly and in strict
privacy with one another. Corda puts a strict emphasis on the privacy of
transactions (only peers that are party to a transaction can view the
transaction data).
ENTERPRISE ETHEREUM
Governed by the Enterprise Ethereum Alliance, Enterprise Ethereum is built
around the Ethereum codebase (but is a private and permissioned
implementation).
QUORUM
Developed by JP Morgan, Quorum is a fork of the Ethereum blockchain
platform specially designed for use in a private blockchain network.
1.7 The Periodic Table of Trade-related DLT Projects

• The blockchain for trade ecosystem has rapidly developed to include many
companies
and consortia.
• The WTO/Trade Finance Global “Periodic Table of DLT Projects” provides a
means to conceptualize and differentiate between major projects.
• Like a periodic table of elements, each entry is presented with its
underlying technology and current stage of maturity.
•
Note: The above is for illustrative purposes only. The list of projects is not
exhaustive. This version was published in 2020.
For more information, see - WTO/Trade Finance Global Blockchain & DLT in
Trade: Where Do We Stand?
[Link]
1.8 Key standardization initiatives and bodies

• The development of standards plays a central role in shaping the ecosystem

for blockchain use cases in trade and fostering interoperability: the ability of
computer systems or software to exchange and make use of information.
• Different categories of initiatives are working toward DLT standards:
• International standards bodies
• General trade focus
• Sector- or process-specific
• General - private sector-led
• National/regional*

*Note: This course provides examples of globally relevant initiatives.

INTERNATIONAL STANDARDS BODIES
International Organization for Standardization (ISO)
A global network of national standards bodies, ISO hosts a technical
committee (ISO/TC 307) to develop standards for blockchain/DLT.
• For more information, see ISO/TC 307 Blockchain and distributed ledger
technologies
[Link]

International Organization for Standardization (ISO)

A specialized agency of the United Nations (UN) responsible for all matters
related to information and communication technologies, the ITU has
established a Focus Group on Application of Distributed Ledger Technology
(FG DLT) to:
• Identify and analyse DLT-based use cases and services;
• Draw up best practices and guidance to support global implementation;
and
• Propose a way forward for standardization work in study groups.
• For more information, see - ITU Focus Group on Application of Distributed
Ledger Technology
[Link]

1.9 Standardization bodies and initiatives

TRADE-FOCUSED STANDARDIZATION INITIATIVES AND BODIES

General trade-focus initiatives and bodies

• The International Chamber of Commerce (ICC)

• The largest business organization in the world, the ICC has
launched the Digital Standards Initiative (DSI) with an aim to
develop digital standards to establish a globally harmonized
environment for trade.

• United Nations Centre for Trade Facilitation and Electronic Business

(UN/CEFACT)
• A subsidiary body of the United Nations Economic Commission for
Europe (UNECE), UN/CEFACT is a focal point for trade facilitation
and electronic business standards.
 • UN/CEFACT provides more than 40 recommendations to simplify,
standardize and harmonize trade procedures and information flows
(e.g. use of electronic means and electronic data structure
standards for information exchange):
• Developed the Core Components Library (UN/CCL) and is
behind the UN Electronic Data Interchange for
Administration, Commerce and Transport (UN/EDIFACT)
standard.
• Developed various supply chain standards and is working
on a variety of blockchain projects.
• For more information, see UN/CEFACT White Paper (Technical
Applications of Blockchain to
UN[Link]
aperBlockchain_TechApplication.pdf/CEFACT deliverables).

General private sector-led initiatives

● World Wide Web Consortium (W3C)
o A technical standards body for the open internet, W3C hosts
business community groups focused on blockchain, including the
Blockchain Community Group, to generate message format
standards for blockchain and guidelines for usage of storage.
● For more information, see W3C, Blockchain Community Group
[Link]

● Institute of Electrical and Electronics Engineers (IEEE)

● A technical professional organization that fosters technological

innovation, the IEEE has created a blockchain initiative to coordinate
projects and activities related to blockchain.
● The IEEE has been actively pursuing blockchain standardization efforts
through activities in multiple industry sectors.
Sector and process-focused initiatives and bodies

● Blockchain in Transport Alliance (BiTA)

o A consortium of manufacturers, trucking companies and logistics
companies, BiTA aims to develop common standards around
blockchain applications in the transportation industry (e.g. speeding
up transactions and securing data transfers).

● The Digital Container Shipping Association (DCSA)

o A non-profit, independent organization established by several of
the largest container shipping companies, the DCSA seeks to
develop digital standards in the container shipping industry.
 ● Global Standards 1 (GS1)
o A not-profit organization that develops and maintains global
standards for business communication (the most well-known of
which is the barcode), GS1’s global standards for identification and
structured data enable blockchain network users to scale enterprise
adoption.

● World Customs Organization (WCO)

o The WCO has developed a data model that is used by customs
and other cross-border regulatory agencies to exchange information
related to cross-border transactions.

1.10 From ecosystem to implementation: how do you decide if blockchain is

an appropriate solution?

As a basic guide, four steps can be followed to decide if and how to consider
implementing a blockchain for trade project:
1) Identify a problem to be solved and set goals;
2) Decide if blockchain is an appropriate solution;
3) Choose a type of blockchain; and
4) Determine a model of implementation.

Note: Implementing a blockchain project may require significant investment,

coordination, and changes to existing systems and culture.
It is recommended that companies and governments seek professional advice,
weigh trade-offs and assess all risks before initiating a project.
There is no need to develop a blockchain platform to benefit from the
technology. Benefits can come from simply using blockchain tools and
platforms developed by others.

For more information, see -The Beeck Center/Georgetown University The

Blockchain Ethical Design Framework.
[Link]
[Link]

1.11 Step 1: Identify a problem to be solved and set goals

Have a clear understanding of the problem you are trying to solve

What is a precise issue that affects either conducting or regulating
international trade transactions?

Approach the problem from a user’s perspective

Take a human-centred approach to understand the conditions under which a
solution will operate (e.g. user access to internet and device technology; skills
requirements).

Set goals to be achieved

Remain cognizant that most blockchain projects involve multiple entities
working together towards common objectives.
Consider the Principles of Digital Development
[Link]
1.12 MSMEs: Not all users and developers may be created equal

MSMEs: Not all users and developers may be created equal

Blockchain may facilitate the participation of MSMEs and small producers in
trade as well as empower the development of local solutions.
While individuals and businesses do not need to develop blockchain solutions
to benefit as users, it is critical to consider all possible impacts of the
technology:
• Some sectors may benefit more than others
• Blockchain carries with it the risk of disrupting certain sectors and
categories of workers. Opportunities and benefits may not be
shared equally.
• New business models based on blockchain could shake
entire sectors, forcing existing companies, including small
ones, to adjust or risk being left behind.
• The fear of losing ground to competitors may explain the
number of companies, in particular in the services sector,
which are rushing to investigate blockchain’s potential.
• Barriers to entry are not likely to fall for everyone
• While users of blockchain platforms are likely to benefit from lower
barriers to entry, companies that compete directly with “platform
insiders” will likely face higher barriers.
• The level of investment needed to become one of the
“keepers” of a platform could cut out latecomers and make it
harder for new entrants to expand in a given market.
• MSMEs may find it difficult to become “platform insiders”
• While blockchain can enhance competitiveness, it may also lead to
greater collusion.
 • It cannot be ruled out that a single blockchain platform could
become dominant in a particular sector, leading to a
reduction in the level of competition and higher barriers to
entry, which could affect MSMEs disproportionally.
It is important for MSMEs and governments to closely follow trade-related
blockchain developments.

1.13 Step 2: Decide if blockchain is an appropriate solution

• Assess the identified problem against generic use cases for blockchain
technology, such as:
• Multiple actors require access to a specific set of information;
• There is value in making data transparent;
• There is value in shared information being immutable.
• Consider the requirements for a blockchain-based solution to address the
problem
• Context: What does the ecosystem look like?
• Aside from potential users, all contexts should be evaluated:
• Community
• Infrastructure
• Financing
• Technology
• Rules: Is there an element of mistrust?
• Data: What type of data is involved?
• Who should be able to access the information?
• Who should/can maintain the infrastructure?
Blockchain Decision-Making Tool #1: Checklist
 • Answering “Yes” to a checklist of 10 questions can further help to decide
if blockchain may be an appropriate solution for solving a well-defined
problem.

1.14 Step 3: Choose a type of blockchain

If blockchain technology appears to be an appropriate solution:

• Clarify which configuration of blockchain can best address the identified
problem
• Each form of blockchain has advantages and disadvantages.
• It might not be immediately clear what type of blockchain should be used
to solve a specific problem.
• Consider several aspects when determining a blockchain configuration, for
example:
• A public blockchain may be appropriate if information has value in being
viewable by anyone.
• A permissioned blockchain may be appropriate if only a limited group
should have access to the information.
• Many use cases for international trade fall into the category of
permissioned consortium blockchains.
• Blockchain Decision-Making Tool #2: Flow chart
• In addition to deciding if blockchain may be an appropriate solution to the
problem you are trying to solve, this flow chart can also help with
choosing a type/configuration (public or permissioned blockchain).
Can you articulate the problem you are trying to solve?
Are you trying to store structured information?
Do multiple parties need to access or audit this information?
Do multiple parties need to access or audit this information?
Is the database likely to be attacked or censored?
Is there value in having multiple copies of the information?
Would all the participants trust a third party?
Is there value in the data being public?
Do you need to control who can make changes to the blockchain software?
Do you need high throughput? (>30 transactions per second)

1.15 Step 4: Determine an implementation model

After choosing to proceed with a blockchain project, an implementation model

must be determined.
Key criteria should include:
• Stakeholders: Which actors (business and/or government) will be involved in
the implementation process?
• Structure: Will the project be implemented through an existing
company/organization, a partnership or a consortium model?
• Governance: Who has which rights? How will decisions be made? How will
disputes be resolved? Under which jurisdiction will the project fall? (I.e. what
will be the applicable law?)
• Human resources: Who can develop the technology?*
• In-house staff/hiring new talent
• A blockchain development service
 • A combination of both
* Despite growing deployments of the technology, the number of developers
with skills to design, build and maintain blockchain projects remains limited.
• Financial: How will staff, suppliers and other operational costs be managed?
• Technology: Can the solution be based on an existing blockchain/platform or
does it require its own platform and/or network? Is there an underlying digital
ecosystem?
For more information, see -UN Innovation Network A Practical Guide to Using
Blockchain within the United Nations.
[Link]

1.16 Answer the question

Feedback
The correct answer is digital ecosystem - particularly for trade, a blockchain-
based solution requires a digital ecosystem of diverse, interconnected IT
resources to exist and operate.
1.17 Answer the question

Feedback
Many blockchain for trade projects are implemented via a consortium model,
whether for the development of technology or the implementation and
operation of solutions.
1.18 Answer the question

All of the above are correct! The impact of blockchain for MSMEs, both users
and developers, will depend on how the technology is deployed on a wide
scale.

1.19 Fostering A Conducive Regulatory Environment

1.20 Answer the question

Feedback
The correct answer is: true.
Blockchain requires a coherent regulatory environment at national and
international levels, especially in support of paperless trade. Debate
surrounds whether or not to regulate the technology, what to regulate and
how.

1.21 Legal issues raised by blockchain

 • To foster a conducive regulatory environment for blockchain, it is
important to understand two types of legal issues presented by the
technology:
1) General classification issues (the legal validity of blockchain
transactions, applicable law and liability);
2) Specific issues (based on the particular nature of a blockchain use
case or legal context).
• For example: In customs use cases, an authorization delivered by a
specific government agency could be required to automate certain
trade processes via a smart contract.
• Specific legal issues need to be kept in mind by both governments and
companies.
• Considerations also relate to policy interactions with data regulations, the
legal identification of companies and the digitalization of law.
Are blockchain transactions legally valid?
• The legal status of blockchain transactions and smart contracts remains
uncertain. Blockchain raises classification issues:
• Does information stored on a blockchain representing ownership
or the existence of an asset prove true ownership or the real
existence of that asset?
• To what extent (if any) would a court recognize blockchain as an
immutable, tamper-proof source of truth?
• Are smart contracts legal contracts?
Issues of applicable law
• Blockchains can span several jurisdictions, posing the question:
which national law applies in the event of a dispute or fraud?
• Different types of blockchains raise different issues of applicable law:
• Public blockchains: Nodes can be located anywhere in the world
and the anonymous nature of a public blockchain makes it
extremely difficult, if not almost impossible, to identify the
processing entity and to pinpoint the “place” where any
contentious transaction is located.
• Permissioned blockchains: The issue is less acute, as participants
are known, but the applicable jurisdiction remains key in the event
these blockchains cross jurisdictional boundaries. The applicable
jurisdiction can be decided as part of the design of a blockchain
platform.
1.22 Some of the liability issues

Some of the liability issues

• In the absence of a central entity administering a platform, blockchain
technology raises liability issues for transactions and the resolution
mechanism in case of conflict, technical problems or unintentional action.
• For example: Smart contracts are computer programmes and, like
any programming code, they could contain unintended mistakes. If
a smart contract fails to work as expected, which party is liable?
• Certain legal issues might need to be addressed if a contract has
been miscoded, including enforcement and liability issues.
Developing industry-specific rules that determine who has liability at each
stage of a particular process may be needed in certain trade use cases (e.g.
for letter of credit processes).
Status of jurisdiction and liability issues
Permissionless blockchains: Issues of jurisdiction and liability remain wide
open.
Permissioned blockchains: Many issues related to jurisdiction and liability
allow for a technical workaround.
For smart contracts, a solution could be to have a “real”, conventional
contract that would govern the parties’ relationship, covering both what the
blockchain is supposed to do (e.g. allowing damages to be claimed in the
case of a wrongful code in a smart contract), as well as formal legal aspects
like jurisdiction or applicable law.
This contract, legally binding, would be stored on the blockchain, thereby
ensuring that the latest version would be available and immutable, unless
changes were agreed to by all parties.
In addition, applicable jurisdiction and liability issues can be diced as part of
the design of the blockchain platform.
Data regulations that could affect blockchain technology
Like other digital technologies, the implementation of blockchain on a large
scale could be hindered by requirements imposed by national regulatory
authorities, including:
Data localization rules;
Data protection and privacy requirements; and
Barriers to cross-border data flows.
Data localization can take various forms:
Explicitly required by law;
A series of restrictions that make it impossible to transfer data (e.g. specific
local storage and data processing requirements or government approval to
transfer data);
To target specific sectors or services; and
Some countries prohibit all data transfers.
Barriers to cross-border data flows typically involve:
Restrictions on the transfer of personal data to jurisdictions deemed to
provide a lower level of data protection;
Limitations on information that governments consider sensitive.
Data privacy requirements and the “right to be forgotten” could be seen as
incompatible.
A primary function of a blockchain, immutability, may run into conflict with the
growing body of privacy legislation.
THE EU GENERAL DATA PROTECTION REGULATION (GDPR)
Much has been said about the possible incompatibility between the European
Union’s General Data Protection Regulation (GDPR) and blockchain
technology.
The immutable nature of blockchains makes
it very difficult to update, erase, change
or correct data.
Articles of the GDPR seem incompatible with blockchain, namely the right to
rectify or obtain the erasure of personal data:
“right to rectification”
“right to be forgotten”
Article 17 of the GDPR, the right to erasure (commonly referred to as the “right
to be forgotten”), states that a “data subject shall have the right to obtain from
the controller the erasure
of personal data concerning him or her without undue delay”.
However, the immutable nature of blockchain prevents data from being
deleted. This contradiction between the functionality of DLT and the legal
requirements of countries poses concerns.
Under Article 25, “Privacy by Design” obligations, privacy concerns must be
addressed during the initial design stage of a blockchain network in order to
be compliant with the regulation.
It is important to note that the GDPR applies
to personal data only, defined as “any information relating to an identified or
identifiable natural person”. Therefore, it only has limited direct relevance to
international trade, as most information contained in trade documents relates
to companies, not individuals, but it could impact specific situations (e.g.
when the personal contact details of a person at business need to be given for
exports of dangerous goods).
1.23 How data regulations could impact blockchain

• As distributed ledgers, blockchain platforms are a priori relatively immune

to data localization policies.
• To ensure that data is stored and processed locally, the goal of most data
localization policies is automatically met.
• A key principle of blockchain is that all participants in the network
have a local copy of the transactions and every fully participating
node must process every transaction.
• Each time a transaction is added to a blockchain, the digital ledger
is updated on all of the nodes simultaneously.
• Yet, requirements for government approval to transfer data would have an
impact on the ability of potential participants in the countries concerned
to participate in blockchain consortia that bring together actors from
various jurisdictions.
• Actors using a blockchain platform have to ensure that its technical
design meets the requirements of all relevant regulatory framework(s),
including data privacy and protection laws.
1.24 BLOCKCHAIN: AN OPPORTUNITY FOR DATA PROTECTION?

• For data privacy, blockchain is an opportunity or catalyst for greater

personal data protection and new forms of identity management.
• The use of various cryptographic tools gives users control over
their personal data, allowing them to manage and share their
personal data only with trusted parties.
• Public blockchains: Enable users themselves to implement “privacy by
design” at an individual level.
• A feature of public blockchains is that they allow transactions
between parties without any party having to disclose their identity
to any other party or to the public.
• Public blockchains make it possible for the data subjects to remain
anonymous or to use a pseudonym and to control how their data is
used.
• Consortium/private blockchains: Privacy levels are determined by the
management of the platform.
Participants are known and identified, but permissions to read and write some
of the data added to the platform can be restricted to certain participants to
protect confidentiality.
1.25 Creating a conducive regulatory environment

Creating a conducive regulatory environment

• Taking into account general legal issues, while providing flexibility for the
technology to thrive, blockchain requires a regulatory environment that:
• Recognizes the legal status and validity of blockchain transactions;
• Clarifies applicable law and liabilities;
• Assigns responsibilities and the way data can be accessed/used;
and
• Ensures legal interoperability of networks.
• Without a general regulatory layer, the implementation of blockchain
technology could be confined to distinct, unconnected projects.
How legal frameworks support paperless trade and the use of blockchain
technology
• Blockchain use cases for international trade depend on legal frameworks
for paperless and cross-border paperless trade that:
• Provide for e-authentication methods and the recognition of e-
signatures, e-documents and e-transactions;
• Recognize the authority of government entities to issue required
documentation (e.g. e-certificates);
• Allow for the transfer of electronic records (e.g. electronic bills of
lading); and
• Allow for the sharing of certain types of information between
government authorities at two levels:
1) National (many electronic exchanges cannot be sent
between agencies of the same national government, because
 a sufficient legal framework has not been put in place);
2) International (accept electronic exchanges and documents
from other countries).
[Link]
• For more information, see -United Nations Readiness Assessment Guide
for Cross-border Paperless Trade
The role of intergovernmental organizations
• An intergovernmental stakeholder, the United Nations Commission on
International Trade Law (UNCITRAL) is helping to clarify the legal status
of electronic transactions and business processes.

• UNCITRAL is formulating modern and harmonized rules on commercial

transactions, including conventions and model laws.
• Model laws are designed to assist national governments in
reforming and modernizing their laws. They consist of proposed
laws pertaining to a specific subject that governments may choose
to adopt (i.e. transpose into national legislation in whole or in part).

1.26 Why would countries adopt UNCITRAL texts?

Why would countries adopt UNCITRAL texts?

• Critical for blockchain technology, the adoption of UNCITRAL texts is
recommended for establishing a legal environment for electronic
business and seamless interaction between commercial operators and
public bodies (e.g. customs authorities).
• UNCITRAL texts of relevance to blockchain use cases for trade include:
• Model Law on Electronic Commerce (1996, revised in 1998)
 • [Link]
mmerce
• Model Law on Electronic Signatures (2001)
• [Link]
gnatures
• The Convention on the Use of Electronic Communications in
International Contracts (2005)
• [Link]
communications
• Model Law on Electronic Transferable Records (2017)
• [Link]
nsferable_records
• UNCITRAL model laws, while important in terms of legislative guidance,
do not have any legal bearing unless transposed into national legislation.
• They are templates for countries to use when developing their own
legislation.
• For more information, see -UNCITRAL A Guide to UNCITRAL
• [Link]
documents/uncitral/en/[Link]
Model Law on Electronic Transferable Records (MLETR)
• The UNCITRAL Model Law on Electronic Transferable Records (MLETR)
enables the use, and sets out the conditions that must be met, if an
electronic record is to be treated as a transferable document:
• A transferable document entitles the holder to claim fulfilment of
the obligation indicated in the document. For example, bills of
lading, bills of exchange, promissory notes and warehouse
receipts.
• Adopting the MLETR into national legislation is critical to permit the legal
use of electronic transferable records both domestically and across
borders using blockchain.
• The MLETR usefully complements the UNCITRAL principles that guide
electronic commerce.
• The principle of neutrality allows the use of all methods and
technologies, including distributed ledgers, to be accommodated.
• A data message stored on a blockchain is deemed to meet the
paper-based requirements of writing and a signature, provided that
it satisfies required conditions.
• For more information, see -UNCITRAL Explanatory Note to the UNCITRAL
MLETR
[Link]
documents/uncitral/en/mletr_ebook_e.pdf
1.27 Overcoming political barriers

• A regulatory obstacle to blockchain use cases for trade could, in fact, be

political.
High-level political support is needed to drive trade integration and help
establish a conducive legal framework.
• Initiatives require the engagement and political will of all those involved as
well as a considerable amount of coordination.
Political dimensions are compounded by the implementation of the
technology itself. For example, only a limited number of single windows
around the world are fully integrated. Many are built on interfaces that allow
the electronic exchange of information, but not the processing of data. One of
the reasons is authorities’ reluctance to share data via electronic means with
other authorities.
1.28 Blockchain and customs: systems integration challenges

• The integration of customs systems into blockchain platforms raises

several legal issues.
• In addition to difficulties related to cross-border government-to-
government (G2G) interactions, processing customs declarations on the
basis of information retrieved from a blockchain platform could raise
liability issues.
• Information required for customs clearance usually has to be
submitted by a single declarant, who is liable.
In a blockchain system, information can be added by various stakeholders,
making it impossible to pin down a single declarant unless the regulatory
framework is adjusted to clarify liability issues.
1.29 Regulatory “sandboxes”: A policy tool to test innovations

Regulatory “sandboxes”: A policy tool to test innovations

• As blockchain technology is still maturing, it may be too early to regulate
it without first understanding the effects of its implementation.
• Early regulation could limit further development and fail to
adequately control its use.
• Given the complexity of regulating blockchain transactions, some
governments have put in place regulatory “sandboxes” to better assess
the legal implications of use cases.
• Popular for understanding the impact of financial technology
(fintech), a regulatory “sandbox” is a formal programme that tests
innovative solutions and business models with the market, subject
to safeguards and oversight.
• These approaches could help to lower the cost of innovation,
reduce barriers to entry and allow regulators to collect key insights
before deciding if and how to regulate a technology.
• The need to compromise between ensuring legal protection and
encouraging innovation is an issue that regulators must address, and
highlights the need for innovative approaches as well as adequate
governance fora.
• For more information, see -United Nations Early Lessons on Regulatory
Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory
Sandboxes, and RegTech
<[Link]
09/UNSGSA_Report_2019_Final-[Link]>.
1.30 A generic regulatory sandbox process

A generic regulatory sandbox process

• For a disruptive technology like blockchain, a regulatory sandbox process
can involve four steps.

1) Disruptive innovation
• The emergence of a disruptive technology like blockchain creates
a need to better understand the legal issues associated with its
implementation.
2) Regulatory sandbox
• Well-established companies and start-ups can test solutions or
business models in a safe environment, monitored by regulators.
• Regulators can use a sandbox to facilitate adoption of a
technology while adapting to the impact of its “disruption” with
appropriate policies.
3) Requirements and implementation
• Given the results of the market test, requirements may be imposed
that, otherwise, give way to further implementation and scaling of
the technology.
4) Full authorization
• A technology is granted full authorization to be implemented,
subject to a legal framework informed by the results of the
regulatory sandbox.
1.31 Why is global governance needed?

• The problem in approaching the regulation of blockchain technology,

especially in a way that is conducive to use cases for international trade,
is bigger than any national government or stakeholder.
• Important issues relate to coordination and content, as blockchain
applications are decentralized, distributed and often span several
jurisdictions.
• Lack of coordination and of common understanding on how best to
regulate blockchain technology at a global level could well result in a
“spaghetti bowl” of regulations that could ultimately be more harmful than
the lack of regulation itself.
• Akin to the internet, blockchain requires a global approach to regulation
and governance.
1.32 Answer the question

Feedback
All of the above are correct. Blockchain use cases for trade require legal
frameworks for electronic modes of exchange
1.33 Answer the question

Feedback
The correct answer is: true.
UNCITRAL model laws such as the MLETR only act as a “blueprint” for
countries in enacting their own national frameworks.

1.34 Implementing Blockchain: The Remaining Challenges

1.35 Answer the question

Feedback
The correct answer is: true.
Diverse stakeholders are working toward solving some of the other challenges
related to the widespread implementation of blockchain. These efforts include
contributions related to trade and small business development.

1.36 Some other challenges to the implementation

Some other challenges to the implementation of blockchain technology

 ● A variety of challenges must be overcome before blockchain can see
wider implementation:
o Scalability
o Security
o Interoperability
o Skills and technology access
● The need to address these remaining challenges involves stakeholders
from the broader blockchain ecosystem as well as the global development
community.
● Each issue should be considered when designing and implementing
use cases for international trade.

1.37 Scalability: Can blockchain be widely deployed?

• The limited scalability of blockchains is due to:

• The predetermined size of blocks; and
• Energy consumption issues.
• Scalability challenges apply more to some types of distributed
ledger technologies than others. For example, scalability is one of
the biggest challenges faced by public blockchains (an area of
discussion in the blockchain community).
• In implementing a solution, it is critical that businesses and governments
keep blockchain’s scalability needs in mind to ensure its efficiency and
relevance over time.
How scalability varies by type of blockchain
• With the number of blockchain transactions increasing at an exponential
 rate, public blockchains are growing increasingly more congested,
leading to delays in the validation of transactions.
• Scalability is less of an issue for permissioned blockchains, which do not
face the same limitations.
• Permissioned blockchains: They provide control over every node
in the network. They can ensure that nodes are computers with
high-bandwidth internet/high computing power and that additional
power is added when needed to reduce network congestion.
• Consortium permissioned blockchains: They offer great potential
for international trade and are more easily scalable. They can use
less computationally intensive protocols for transaction verification.
• New DLTs (many of which are moving away from the concept of
processing transactions in blocks) are being developed that provide for
greater scalability.
1.38 The energy debate: A “permissionless issue“

• The process of validating blocks can, for some blockchains, be

computationally intensive and require a high level of energy.
• Controversy surrounding blockchains’ energy consumption is, above all,
a permissionless blockchain issue.
• Most of the energy debate stems from the Bitcoin blockchain’s
high level of consumption.
• Bitcoin is far more energy-intensive than the Ethereum public
blockchain - 163 kilowatt-hours (KWh) per transaction versus 49
KWh.
• In contrast, permissioned blockchains typically use consensus
mechanisms that are significantly less energy-intensive.
• Ultimately, it’s not possible to generalize about the energy footprint of
blockchain platforms.
• Individual platforms are based on different configurations and
algorithms that consume various levels of energy.
• More energy-efficient algorithms are being developed that
drastically reduce the computational power and level of energy
required to validate transactions.
1.39 Security: How secure and for how long?

• Although blockchains are highly resilient compared to traditional

databases, they are not completely immune to security challenges.
• Security weaknesses remain with:
• Smart contracts;
• User interfaces* (the mobile phone, tablet or computer used to
access the internet);
• Private keys used for encryption (e.g. theft of keys via conventional
attacks if saved on a device or a centralized server).
• * The layer where most security flaws occur in a blockchain
system.
• As introduced in Module 2, connecting physical goods and events to a
blockchain often requires enabling technologies like the Internet of
Things (IoT).
• This connection can also represent a security vulnerability, as
physical items and IoT sensors can be tampered with.
51% attacks
• In theory, a blockchain network can be compromised if a validator or pool
of validators is in control of more than 50% of the network.
• While such a “51% attack” is a problem common to all types of
blockchains, it is particularly critical in the case of public
blockchains, given the difficulty of determining who, in effect,
validates blocks.
• Although still relatively difficult in practice, a 51% attack is more
possible in the case of permissioned blockchains (significantly less
nodes in comparison to a public blockchain).
1.40 The threat of quantum computing

• Growth in computing power could eventually represent a threat to the

adoption and use of blockchain technologies.
• Blockchain’s security relies on encryption and algorithms, whose strength
is based on computing power.
• Advances in technology, in particular quantum computing, could
eventually represent a threat to blockchain technologies.
• At present, quantum computers do not have sufficient computing
power to break cryptographic algorithms.
• However, the cryptography community is getting ready: “post-
quantum” algorithms, resistant to quantum computing, are a topic
of active research.
1.41 Interoperability challenges

Interoperability challenges
• A key challenge to fulfilling blockchain technology’s potential,
interoperability raises various issues:
Technical: How different technical interfaces (e.g. blockchain
platforms) “talk to each other” (e.g. they may use different
consensus algorithms)
Semantics and data models: How information is understood
(semantics) and exchanged (e.g. through data models) by
different actors (e.g. businesses and governments
Regulatory interoperability: How blockchain transactions fit
within the regulatory framework (see slide 24)
• Addressing interoperability issues at both technical and semantic levels is
crucial. A lack of coordination between stakeholders could stifle the
technology’s deployment.
• This problem is compounded by the development of various unconnected
solutions that meet particular industries’ needs, but often follow different
approaches.
• As with digital technologies in general, failing to address interoperability
issues will negate many of the benefits that blockchain could bring.
• Lack of interoperability limits the use and scalability of both the
technology and projects.
• Ad hoc bridges between platforms can be built, but such tailor-
made solutions cannot easily be scaled up.
What is the “digital island” problem?
• Numerous blockchain platforms do not “talk to each other” and use
different interfaces/consensus algorithms.
This “digital island” problem is the subject of research and development in the
blockchain community and technical solutions are emerging.

1.42 Why interoperability should be a design goal

• Making interoperability a design goal is critical to:

• Avoid conflicts between disparate approaches;
• Ensure blockchains can “talk to each other”; and
• Allow the technology to be used to its full potential.
• Interoperability issues matter particularly for international trade, as a
single international trade consignment can touch various ledgers, from
finance to logistics, customs and provenance.
• For parties involved in such transactions, hosting many different
nodes would be highly impractical.
• One of the approaches being discussed in the blockchain community to
address the digital island problem consists of creating an inter-ledger
notarization system to allow authorized parties to verify transactions,
irrespective of which ledger they are created on.
• At the cost of reintroducing some degree of centralization, inter-
ledger notarization could be performed by a sole entity or different
entities.
1.43 Why standardization is important for blockchain for trade

● Aside from the technical interoperability aspects at the level of

interfaces, customs, logistics companies and traders often do not use the
same semantics and view data differently.
● The standardization of information exchanged via blockchain
technology must be addressed to ensure that senders, receivers and other
actors involved in the digital ecosystem can understand the same data in
the same way.
● Blockchain for trade requires smart and flexible standardization to:
o Align the semantics (the meaning of the data or information to be
exchanged);
o Develop standard datasets that cover all data exchanged (import,
export, transit, all modes of transportation and finance); and
o Integrate processes.
● International organizations are looking into semantics-related
interoperability issues.
o UN/CEFACT and the WCO have developed libraries of semantic
models for cross-border data exchange.
o The IPPC has published a standard format for ePhyto certificates.
o The ICC Digital Standards Initiative aims to build on existing
standards for trade documents and processes and to fill existing
gaps to develop a globally harmonized, digitized trade environment.
● However, blockchain cannot address inherent standardization issues.
o Implementing a blockchain platform without having rationalized
processes and aligning the semantics beforehand would defeat the
very purpose of a blockchain-based system.
● Globally agreed standards that ensure, among other things,
 interoperability will need to be further developed in order to allow the
technology to be used on a wider scale.

1.44 Skills and technology access issues

Many of the opportunities for small business presented by blockchain can

only be realized if users and developers have:
1) Appropriate skills
● Ensuring that potential users and developers, especially small
businesses located in developing and least developed countries (LDCs),
have the appropriate skills to leverage blockchain technology.
2) Access to device technology and the internet
● Increasing access to device technology (e.g. smart phone; computer).
● Addressing the gap in access to the internet and adequate bandwidth is
critical to the widespread adoption of blockchain technology.
The “double digital gap”
● While progress has been made in connecting people to the internet,
more remains to be done to close the growing digital divide between
advanced and less developed economies.
● Worldwide, disparities remain significant in:
o Access to the internet: Fewer people in developing countries, in
particular LDCs, have access to the internet.
o Bandwidth: People in developing countries also have less access
to sufficient telecommunications installations and bandwidth.
● If nothing is done to address the “double gap” in access to the internet
and bandwidth capacity, inequality will continue to grow and the deployment
of technologies like blockchain may worsen disparities by essentially cutting
from participation those without technological capacity.
“Global Goals”: The UN Sustainable Development Goals (SDGs)
● UN Sustainable Development Goal 9c calls on the international
community to “significantly increase access to information and
communications technology and strive to provide universal and affordable
access to the Internet in least developed countries by 2020”.
While this target has yet to be achieved, the risk of inaction is significant and
evidence shows that MSMEs are lagging behind in adopting digital
technologies.
1.45 Answer the question

The correct answer is permissionless. Blockchain’s energy consumption

debate primarily involves permissionless blockchains.
1.46 Answer the question

Feedback
The correct answer is: all of the above - all of these issues may hinder
widespread blockchain interoperability.
1.47 Answer the question

Feedback
The correct answer is: true.
The digital island problem is a threat to interoperability, especially with the
rapid development of many disparate, industry-specific solutions.
1.48 Module summary

An ecosystem of stakeholders is critical to the success of a blockchain-based

solution for international trade.
Cooperation between actors within an industry, but also cross-industry and
with standard-setting organizations and governments is paramount.
Not all MSMEs may benefit from the technology.
Efforts are underway to address legal issues. Regulations must be developed
to clarify applicable laws, regulate responsibilities and create an environment
for paperless trade.
In the absence of standards that ensure that blockchain platforms talk to each
other at the technical level, but also the levels of semantics and data models,
efforts to digitalize international trade will only have a limited impact.
Skills development as well as appropriate access to device technology and
adequate internet are essential for MSMEs to benefit from the technology.
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