Compliance 360: Building blocks for blockchain

Decentralized technology could change some of the fundamental ways that the trade community keeps in line with government regulations.

Compliance 360: Building blocks for blockchain

Decentralized technology could change some of the fundamental ways that the trade community keeps in line with government regulations.

Compliance 360: Building blocks for blockchain

Decentralized technology could change some of the fundamental ways that the trade community keeps in line with government regulations.

 
   While blockchain’s use in the trade compliance arena continues to develop, it could ultimately change some of the fundamental ways that companies involved in international trade conduct their business.
   However, private-sector representatives, who spoke at recent conferences, stressed that potential commercial uses of blockchain will serve in a supporting role for overarching compliance processes, not as a replacement.
   “It’s not a database,” Tom Gould, senior director for customs and international trade at Sandler Travis, said at the National Customs Brokers and Forwarders Association of America (NCBFAA) Annual Conference in May. “It’s not a place to store all of your transactional data, so it’s not going to replace ACE (Automated Commercial Environment). It’s going to enhance ACE and enhance those of us that interact with ACE in our ability to deal with ACE and to really trust what’s in ACE.”
   Amsterdam-based Guardtime is working to ensure that blockchain will function effectively in business contexts, including through seamless integration into existing systems, “because people don’t want to have to rebuild, rip and replace all their systems,” Guardtime General Manager of Critical Infrastructure Randy Bishop said during the U.S. Chamber of Commerce’s Sixth Annual Global Supply Chain Summit in late May.
   Individual “blocks” in the blockchain environment contain unique, locked-in signatures associated with the elements that they capture, which serve as distinguishing marks of each link in a “chain,” and the individual blocks cannot be changed once they are completed.

   Those in the U.S. government and industry working on potential trade applications hope that blockchain will be usable for compliance-related functions, such as checking the veracity of supply chain documentation related to chain of custody and origin, for instance.
   Customs entries themselves might not easily translate to the blockchain environment, but certain elements of these filings, in terms of “business rules” and what U.S. Customs and Border Protection (CBP) “requires in terms of classification and valuation and such,” could foreseeably have applications, Dan Gardner, president and co-founder of Trade Facilitators, said at the NCBFAA conference.
   “A fixed smart contract — what is it? It’s a digital version of an agreement,” he said. “The terms of the smart contract are measured against the actual transaction taking place. … The terms of any agreement are already out on the blockchain, and as the transaction actually takes place and the blocks are built, if they’re not pursuant to the original agreement, expressed as that digital smart contract, that’s where new blocks have to be added based on consent of the parties.”
   Gardner said the concept of smart contracts in the blockchain environment could cover things like purchase orders and ocean bills of lading.
   The purchase order itself contains information on quantities, product description, price, currency of sale and last shipment date, he noted.

   As the order is filled, it must be filled according to the original terms of the contract, and blockchain potentially can be used to confirm that the different elements of the purchase order have been met, Gardner said.
   Properly administered, blockchain guarantees that no data in the earlier blocks of a chronology are changed.
   “We put in attributes about what is its greater chain, who or what created or changed it and when,” Bishop said. “From a supply chain perspective, that’s really important.”
   Potential supply chain applications include ensuring that manufacturers aren’t overproducing, that there are no counterfeit parts in a shipment, that suppliers and distributors are telling the truth and that manufacturing facilities’ cyber infrastructures haven’t been compromised, Bishop said.
   “There’s certain countries, certain manufacturers, that after five o’clock, they keep producing, and they sell that stuff on the black market,” Bishop said. “Can you prove that it happened?”

   The Department of Homeland Security (DHS) is contracting with software companies to test whether blockchain can help the department and, specifically, CBP, accomplish their missions, Gould mentioned.
   Gould said there could be blockchain applications to CBP Form 28s (CF28s — CBP requests for information), which are generally issued when there is insufficient information on the entry summary package to determine admissibility, appraised value or correct classification.
   “If we can move the CF28 process from a monthlong process to a seconds- or minutes-long process, is that going to benefit Customs?” he said. “That’s the kind of stuff we’re looking at.”
   Gould is on a working group in which DHS/CBP personnel and industry members are evaluating whether blockchain can be used to verify a NAFTA claim.
   “It’s about saying that that document you’re presenting to Customs today is the document that was prepared before the NAFTA claim was made — and nothing’s changed,” he said.

   One of the specific things the test is looking at is CBP’s ability to, essentially, verify that NAFTA certificates have remained unchanged by viewing a hash or “fingerprint” of the certificate included in the blockchain, Gould said.
   The project started in October, and CBP hopes to finish the project this fiscal year, Gould said.
   The agency expects the project to enter a proof-of-concept demonstration phase starting in September, after CBP “broke ground” on development for the test on April 30, a CBP spokesperson said.
   Once it starts, the test is expected to last for two to four weeks. It won’t take place at any specific port, but will utilize virtual personnel from the Centers for Excellence and Expertise and CBP’s Office of Regulatory Audit, the agency spokesperson said.
   An assessment will be produced at the end of the test evaluating whether the tested blockchain function can meet the legal, policy and technical aspects for Customs’ purposes. CBP/DHS will test specifications on reduction of duplicative data, usefulness for law enforcement and interoperability in the form of “the ability to speak to multiple blockchain programs at the same time,” the spokesperson added.

   In general, expect government and business applications of blockchain to grow much wider throughout the next year, Guardtime’s Bishop said.
   “It will become, ‘What if?’ to ‘How we can make that work?’ and ‘How can it apply to my problem set?’” he said.
   If trade compliance functions start moving to the blockchain environment, they should, from the get-go, be less vulnerable to potential malfunction or information compromise than existing processes.
   As blockchain figures to take a larger role in compliance, it would be beneficial for members of the trade to tune into the steps that the government and its industry partners are taking to ensure the integrity of both the underlying composition of the blocks and the mechanism by which they are built.
   Any transitions to blockchain should be controlled, secure and seamless — as intended.

   Care should be taken that any rollout of this new and exciting technology for trade compliance is not rushed and that any potential loopholes have been completely sealed shut.
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