Impact of Cryptocurrencies on Global Supply Chains (Part 2)
Cryptocurrencies are still far away from being widely adopted at on a global scale. Until cryptocurrencies’ price has stabilised its use as a payment system and hence its role in global trade is limited.
Before assessing cryptocurrencies’ application in the supply chain it is important to appreciate how blockchain has impacted the business world. To understand the fundamentals of cryptocurrencies you can read Part 1. The key drivers to blockchain’s implementation in the supply chain have been to increase transparency, improve security and reduce costs. The following are some of the benefits it provides:
- Reduced paperwork and administrative costs
- Improved visibility of supply chain channels
- Increased traceability of materials in the channels
- Prevent theft and piracy
- Improved trust and transparency between business parties
Minespider is a recent example of how blockchain can be used to improve the traceability of raw materials. Minerals like gold, tin and copper are essential components in most electronic devices today and are essential to tech giants such as Apple. The use and extraction of these valuable ores pose crucial ethical and legal risks for all companies involved, since many of them are extracted from conflict-torn countries further funding violence. Minespider’s blockchain protocol allows companies to create and sell certification data. Thus incentivising all stakeholders in the sector to source responsibly, from extraction and to end manufacturers.
Cryptocurrencies will have a huge impact on procurement
Currently, international businesses are being held back by…
- high banking fees
- poor currency conversion rates
- human errors in documentation
- Slow payments
- Improper document storage
In addition, import and export regulations present additional challenges to multinational companies with global supply chains.
Procurement with cryptocurrency means paying for goods and services with digital coins rather than traditional country-backed currency and credit.
According to the World Economic Forum’s report on Enabling Trade, reducing the barriers faced by global supply chains could increase global trade by up to 15% and increase overall GDP by 5%. This equates to around a $3 trillion uplift in global economic output per year.
How do cryptocurrencies solve these problems?
Owing to blockchain, cryptocurrencies provide companies with a digital public ledger that records information securely, publicly and with an indisputable time stamp. As such their data is recorded transparently and securely. Smart contracts, a feature of blockchain, allows for the distribution and collection of digital assets — without the need for middlemen.
Think of smart contracts like vending machines.
If a certain condition is met, then a predetermined outcome is executed. With a vending machine, if you put $1 into the machine you then get a can of coke. Smart contracts act in a similar way and can be customised to meet business needs. Theoretically, anything of value can be traded via a smart contract.
Global infrastructure to transfer value can and should be disrupted.
Cryptocurrencies are doing exactly that. In June 2018, the popular cryptocurrency, Litecoin, was used to transfer $99 million worth of value. The transaction took a few minutes to validate and the sender was charged $0.40 in fees.
Cryptocurrencies are not without their challenges — here are some key issues:
- Value Fluctuation: Ensuring that the appropriate value changes hands at each purchase is a huge challenge given that in some cases there is a span of time between price negotiation and actual purchase.
- Cash Flow: Cryptocurrencies are more like cash than digital banking payments. If the currency is not in the buyer’s digital wallet at the time funds are owed, they will have to delay the purchase or borrow funds.
- Taxation: Crypto is not entirely immune to tax. Currency held too long in a digital wallet is subject to capital gains taxes.
What impact do cryptocurrencies have on trade finance?
Trade finance is critical for supporting the global flow of goods, as it helps reduce the risks associated with global trade by reconciling the divergent needs of an exporter and importer. The World Trade Organisation estimates that global merchandise exports totalled $19.5 trillion in 2018 , with 80% to 90% of it relying on some form of trade finance.
The adoption of cryptotechnologies in trade finance still faces a number of challenges, including an unclear legal and regulatory environment, the need to ensure the confidentiality of data and the need to provide the stability of the technology, and the challenge of creating a network effect to spur adoption of distributed ledgers in the trade finance space.
I identified these cryptocurrencies that have been designed to solve problems in the supply chain…
Conclusion
Currently cryptocurrencies’ impact on global trade is limited. However, leading investors and financial services experts believe that cryptocurrencies have the potential to have a greater impact than the Industrial Revolution especially with regards to blockchain and smart contract technology. The potential to transform the supply chain and unlock growth opportunities previously hindered by traditional trade finance methods is certainly there.
