Chapter 9: Digital Currency and Blockchain Technology in International Trade

“Blockchain is the most disruptive technology since the internet.”

– Don Tapscott, Blockchain Expert

The advent of digital currencies and blockchain technology is revolutionising international trade and finance. With the rapid growth of cryptocurrencies like Bitcoin, Ethereum, and Ripple, businesses are exploring the potential of decentralised technologies to improve cross-border transactions. Blockchain’s ability to provide transparency, security, and efficiency is transforming global trade by reducing transaction costs, enhancing supply chain visibility, and increasing trust between parties. This chapter examines the role of digital currencies and blockchain in international trade, the challenges associated with their adoption, and the future potential of these technologies.

The Rise of Digital Currency in International Trade

Digital currencies, also known as cryptocurrencies, have seen explosive growth over the past decade. Bitcoin, the first and most well-known cryptocurrency, was created in 2009 as a decentralised, digital alternative to traditional currencies. Since then, the market for digital currencies has expanded significantly, with thousands of cryptocurrencies now in circulation. While initially regarded as a speculative asset, cryptocurrencies are becoming increasingly accepted for use in global trade.

“Bitcoins” by Jorge Franganillo is licensed under CC BY 2.0.

One of the key advantages of digital currencies is their decentralisation. Unlike traditional currencies, which are controlled by central banks, cryptocurrencies are governed by algorithms and operate on a peer-to-peer network. This decentralisation eliminates the need for intermediaries like banks, which can significantly reduce transaction costs and speed up cross-border payments. For instance, a company in Germany wishing to pay a supplier in China can transfer cryptocurrency across borders within minutes, avoiding the lengthy delays and high fees associated with traditional banking systems.

Despite these benefits, the volatility of digital currencies is a significant challenge. The price of Bitcoin has fluctuated wildly, making it difficult for businesses to rely on it as a stable medium of exchange. For instance, in December 2017, Bitcoin’s price surged to nearly $20,000 before crashing to around $4,000 in 2018. This volatility creates uncertainty for businesses that wish to use cryptocurrencies for international trade.

Blockchain Technology: Enhancing Transparency and Security in International Trade

While digital currencies are perhaps the most widely discussed application of blockchain technology, the true power of blockchain lies in its ability to enhance transparency and security in business transactions. A blockchain is a decentralised ledger that records transactions across a network of computers in a way that is secure, transparent, and immutable.

In international trade, blockchain can be used to track the movement of goods and verify transactions. By recording every transaction in a transparent and immutable ledger, businesses can ensure the authenticity of goods and reduce the risk of fraud. For instance, IBM’s TradeLens platform, developed in collaboration with Maersk, uses blockchain to track shipments as they pass through global ports. By providing real-time visibility into the supply chain, TradeLens reduces the need for paperwork and enhances the efficiency of global logistics.

Blockchain is also transforming the way businesses handle trade finance. Traditional trade finance is often slow, cumbersome, and subject to fraud due to the reliance on paper-based systems and intermediaries. Blockchain can streamline these processes by providing a secure, transparent way to manage letters of credit, bills of lading, and other trade documents.

Challenges of Adopting Blockchain and Digital Currencies in Trade

While the potential of blockchain and digital currencies is immense, their adoption in international trade is not without challenges. One of the primary hurdles is regulation. Governments around the world are still grappling with how to regulate cryptocurrencies and blockchain applications. The lack of clear regulatory frameworks creates uncertainty for businesses that are hesitant to fully embrace these technologies.

For instance, countries like China have banned cryptocurrency trading and mining, while others like Japan and the United States have introduced varying degrees of regulation. The absence of consistent global regulations poses a challenge for companies that wish to use cryptocurrencies for cross-border transactions.

Another challenge is scalability. While blockchain offers enhanced security and transparency, its ability to handle large volumes of transactions is still being tested. The Bitcoin blockchain is currently capable of processing about seven transactions per second, far fewer than traditional payment systems like Visa, which can handle over 24,000 transactions per second. Innovations such as Ethereum 2.0 and Layer 2 solutions aim to address these scalability issues, but widespread adoption will depend on the ability of blockchain systems to handle higher transaction volumes efficiently.

The Future of Blockchain and Digital Currencies in International Trade

Despite the challenges, the future of blockchain and digital currencies in international trade is promising. As regulatory frameworks evolve and blockchain technology matures, businesses are expected to adopt these technologies at an accelerating pace. The rise of Central Bank Digital Currencies (CBDCs), such as those being explored by China and the European Union, could provide greater stability and regulatory oversight for digital currency transactions, paving the way for broader adoption in international trade.

Additionally, blockchain’s ability to provide real-time tracking and fraud prevention is likely to make it an integral part of the global supply chain. As businesses continue to invest in blockchain-based platforms for trade finance, logistics, and payments, the efficiency and security of international trade will improve significantly, reducing costs and increasing trust among trading partners.

Blockchain technology and digital currencies are revolutionising the way businesses conduct international trade. By enhancing transparency, security, and efficiency, these technologies offer tremendous potential for improving the global flow of goods, services, and capital. However, challenges such as regulatory uncertainty and scalability must be addressed before they can be widely adopted. As blockchain technology evolves and global regulatory frameworks take shape, the future of international trade looks set to be more secure, transparent, and efficient than ever before.

References:

• Tapscott, D., & Tapscott, A. (2017). Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World. Penguin.
• Nakamoto, S. (2008). “Bitcoin: A Peer-to-Peer Electronic Cash System.” Bitcoin.org.
• IBM. (2019). “Blockchain for Global Trade and Shipping.” IBM Blockchain.
• Shiller, R. (2019). Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Princeton University Press.