With its origins stemming from 2008 in the time of the financial crisis, Bitcoin and its blockchain technology concept has been likened to be as groundbreaking as the Internet. It is believed that it can do for financial transactions, what the internet has done for information. Despite this heralded conjecture, the implementation of such blockchain technology has received mixed reviews by governments internationally. Some have opted to become earlier adopters of such technology taking the initiative to support it with regulations; others seek to use regulations to prohibit it while some patiently wait to determine how things unfold.
The Commonwealth Bank of Australia and Wells Fargo & Co reported on Monday that a shipment of cotton to China from the United States is the first cross-border transaction between banks using multiple blockchain applications. The adoption of technology by key enterprises may require governments to take a closer look and sooner review the impact such an innovation may have and what benefits can be obtained. Furthermore, with the steps of many banks towards derisking many banking relationships are being brought to an end restricting the ability to readily obtain foreign exchange. As this serves as a crippling threat the economic growth and financial inclusion of many developing economies, alternative solutions may have to be speedily reviewed.
In analysing what is international trade, it is essentially the exchange of goods and services between countries. Over time, trade finance has been predominantly conducted in US currency. Although there have been attempts by China and Russia to introduce their currency as an alternative, the US dollar is used for 44.6 percent of all world payments, followed by the Euro at 28 percent and the British pound at nearly 8 percent. The large amounts cash needed for trade and more so the need for foreign exchange created a strong dependency on intermediary financial institutions. It is the woes that have been expressed internationally about the shortcomings of the traditional banking system that Bitcoin seeks to solve such as fluctuation between currency rates and high bank transfer fees at both ends of the deal.
Bitcoin is being promoted as a viable option as it is a purely peer to peer version of electronic cash, allowing online payments to be sent directly from one party to another without going through a financial institution. It seeks facilitate two willing parties to transact directly with each other eliminating the need for an intermediary.
How does it do so?
A unique platform was created to include both a currency and payment system which they indicated will be reliable, faster, efficient and cheaper than the traditional banking system.
To ensure trust and reliability, the system is built to record and timestamp transactions by hashing them into an ongoing chain in an electronic ledger recording since the first block was created. This makes it impractical to reverse and prevents undetected changes to the transaction. This ongoing chain of transactions is publicly declared but a level of anonymity is still granted as the disclosure of the transactions is somewhat similar to the level of information released by stock exchanges. The time and size of the trade or that someone is sending an amount to the other is disclosed but not who the parties are.
To some degree financial institutions and regulators are replaced by computer systems and nodes to race to solve any complicated issues applying a set of rules and cryptographic principles to give recognition to transactions. With financial institutions, the clearance of drafts, letters of credit and wire transfers relatively take some time. However Bitcoin facilitates instantaneous transactions providing that there is “zero-confirmation” where the merchant takes on the risk of accepting a transaction that has yet to be confirmed by the bitcoin blockchain while confirmation may take around 10 minutes by the blockchain. This speed may assist with the trade relations in different time zones.
As Bitcoin is independent from any government or country, its stability is promoted. It is deemed that it is very unlikely to be influenced by political matters or inflation as the Bitcoin system is built on a specific number of coins. This therefore makes it appears to be more efficient to use in trade as oppose to the traditional currencies.
Consequently with its speed, efficiency and technological reliability there will be less transaction and service fees when compared to traditional system making it appears to be the more cost effective and cheaper solution.
Although it appears that there are significant benefits of Bitcoin especially to developing countries potentially being able to increase access to finance in countries that may not have such access to credit or digital payments, there is still the need to consider matters such as financial literacy and ICT capabilities to facilitate a global adoption of the technology. Moreover, while the blockchain technology is heralded as a revolutionary system, there are many concerns especially as it relates to anonymity. In noting the circumstances of the offshore sector, another revolutionary financial system with similarly fears to its potential for money laundering, the need for greater regulation and oversight, it is clear that such concerns are not to be easily overlooked and can have a hampering effect of the future success of its adoption.
Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto
Major Banks Mark First-Ever International Trade Using Blockchain Tech by Byron Kaye
Money 3.0: How Bitcoins May Change the Global Economy
by Timothy Carmody
Sherise King LL.B. L.E.C
Public International Law, International Trade Law, Intellectual Property, Corporate Management, Business Development and Legal Research
Consulting Attorney, FRANHENDY ATTORNEYS