Laszlo Peter | 24 July 2019
In today’s hyper-connected cross-border trading environment, most organizations lack a common language to describe and allocate assets traveling through the value chain. The standards that allow one organization’s assets to talk to another’s securely are often absent or poorly understood.
The foundation of a successful DLT ecosystem is based on the trust participants have in it.
Furthermore, the dynamics between organizations are shifting from a well understood ‘hub and spoke’ model where organizations are interconnected — and exchange information in a bilateral sense — to a more sophisticated distributed model, where organizations are participating in a collaboration-focused ecosystem in order to achieve their economic goals.
These economic communities, enabled by new and emerging technologies like distributed ledger technology (DLT), offer a new way to navigate the complexity of cross-border trade.
Executed well, DLT:
Until recently, the Financial Services sector was seen as the pioneer of DLT solutions but, increasingly, the technology used and the lessons learned are being applied to transform other industries. At the same time, governments around the world are starting to realize the benefits these ecosystems can deliver in enforcing trade and customs policies.
Several initiatives, such as one spearheaded by the traditional trading hubs of Singapore and Hong Kong, have been designed to reimagine more efficient cross-border trade. Through collaboration between governments and the organizations involved in these initiatives, fully transparent and accountable transactions will become mainstream in cross-border trade. Crucially, data — not paper — is the foundation of these new trade corridors.
How then should you prepare your organization for this distributed and highly connected world?
From our1 experience, there are five decision drivers that organizations need to consider in order to realize the benefits that emerging technologies like distributed ledgers can bring.
The first thing to understand about DLT in relation to cross-border transactions is that the technology is only as good as what you apply it to. So it is important to be clear about the problem you want the technology to solve. For example:
Only after answering these questions should you consider whether DLT is the most suitable technology.
A central promise of distributed technologies is that they build trust between ecosystem participants. However, a failure to clearly define shared objectives among multiple organizations can often cause these types of collaboration to falter. This can happen when one organization dominates the collaboration space (due to their economic power positions) or becomes the ‘sole collaborator’ (which undermines the value of distributed technologies). In either case, trust is further undermined.
Too often, organizations deploy distributed technologies for the sake of generating a good story to tell but don’t fully invest the necessary time or resources inside their organization to genuinely benefit from the investment.
Organizations that make a success of these technologies have the curiosity, the drive, and the necessary resources to apply the lessons of experimentation into business action. This is particularly true in cross-border trade where smaller-scale pilot projects can really demonstrate their value when applied on a global scale. Those that make blockchain a success tend to have champions in their organizations who have the necessary experience to recognize where the business case is strongest.
These organizations focus not only on establishing incentives between themselves and other organizations, but also apply well-established commercial models to measure or project the outcomes. A fundamental shift is the role clients play in distributed ecosystems where multiple organizations must collaborate (and find new commercial models) in order to deliver on ever increasing expectations.
However open or restricted the ecosystem might be, all participants must have trust that their preferred platform supports a required level of data security and privacy (as KPMG’s Guardians of Trust report explores in more detail).
Trust comes not just through technology but also through buy-in of participants, the design of the incentive system, and the level of visibility around the data privacy and legal constructs that protect businesses that join the ecosystem.
Again, financial services has been a leader in this space with the evolution of blockchain trade finance consortia. These global and regional networks allow banks, corporations and regulators to collaborate in a transparent way to achieve a common goal such as the smooth execution of working capital or coordinated ‘know your customer’ programs. That said, these ‘financial services heavy’ consortia sometimes fail to deliver the comprehensive end-to-end value chain solutions and objectives global trade participants are looking for.
Moving forward, effective governance and overall risk management of a collaborative ecosystem will be essential to establish and operate distributed, cross-border ecosystems. This requires shaping a long-term vision for the enablement of global trade that ultimately must include all businesses and government agencies to form a meaningful functioning and incentive-driven economic community.
We live in a world where organizations expect their suppliers and customers to be transparent in how they do business, not least because of the risk to their own reputation. New standards on ethical sourcing, sustainable trading, modern day slavery compliance and other regulatory or self-imposed standards are all hallmarks of the best business practices of the future. Operating in a distributed ecosystem allows asset producers (e.g. manufacturers) to ensure raw materials are sourced sustainably, products are built ethically and workers treated fairly. The sourcing process generates an immutable record for each part of the supply chain that can be viewed by all participants who are entitled to do so. Organizations that can deliver on these new standards will not only be very successful but will also establish themselves as the new benchmarks of global trade.
This enhanced transparency vastly improves current levels of third-party certification, which can be susceptible to corruption. In turn, this built-in trust mechanism can secure better credit and lower insurance costs for all participants in the ecosystem.
Consider the use of large industrial equipment. Their value to a business is based on their performance and reliability. When they need to be serviced, organizations need to prove that replacement parts originate from the genuine manufacturer or an authorized third party and are installed by certified engineers. Being able to document this process through trusted, traceable, immutable and transparent data points minimize inefficiencies and potential down time.
Consumers all over the world — emboldened by access to new markets and global coverage of product and services — are changing their purchasing behaviors. Increasingly, consumers place a premium on transparency especially around ethical sourcing and sustainability. They want to know how their products were made and who made them.
This is particularly true in the fast-growing economies of Asia where consumer standards and regulations may be less stringent than in other regions. Most organizations are finding it challenging to respond to these expectations while also meeting regulatory compliance, delivering on shareholder expectations and maintaining a product or service profit margin that allows them to continue to innovate and compete.
Distributed technologies are positioned to help organizations meet this growing consumer demand for transparency by providing the reassurance that products — be it a luxury leather belt, athletic footwear, prepared food or even a bottle of wine — can be fully accounted for at every point in the supply chain. These new trusted supply chains help solve critical issues like provenance, traceability, security and standardization that ultimately can lead to simplification and operational cost reduction.
Connecting trusted participants, standards and distributed governance models enables the creation of next generation global trade platforms. These integrated and distributed platforms can help to reimagine global trade and support the definition of technology enabled commercial diplomacy and free trade arrangements.
There are major competitive advantages — for countries and organizations — to being a part of these new distributed economic communities (and distributed trade platforms). Not only can they significantly reduced trade costs, but radically improve the performance of their supply chains, making them smoother and more dependable. That, in turn, can enhance confidence in an organization’s ability to meet new client expectations and create new products and services that were not possible, or were cost prohibitive, before. And, crucially, it can win the trust (through transparency) of trading partners, suppliers, regulators and society.
For more insight on data-related topics, please visit our data-driven technologies article series page.
1 Throughout this webpage, “we”, “KPMG”, “us” and “our” refer to the network of independent member firms operating under the KPMG name and affiliated with KPMG International or to one or more of these firms or to KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.