USING BLOCKCHAIN TECHNOLOGIES IN CUSTOMS

By IMBA-Exchange on The Capital

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Currently, there are quite active transformations in the digital sphere. The set intensive pace implies that the digital transformation of the economy as a whole will proceed gradually, based on the use of modern technologies. Today, the experience and practice of many countries demonstrate the inadequacy of measures taken by customs authorities and the need for more efficient technologies that ensure both the protection of national interests and the facilitation of international trade. This leads to the study of blockchain technology as the basis of customs regulation and the assessment of the possibilities for its application.

Of great importance for solving problems and tasks in the modern economy is blockchain technology, which is the foundation of Bitcoin and many other decentralized exchange systems and platforms for creating programs. The exchange tool is one of the many potential functions of this technology that has made it popular.

In September 2016, the World Economic Forum in its Technology Tipping Points and Societal Impact report predicted the development prospects of information technologies, namely blockchain technology. Interviewed experts believe that the final integration of the public sector and blockchain will happen by 2023, and the highest flowering of bitcoin and blockchain can be achieved by 2027.

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New technologies can seriously affect international trade for a number of reasons: firstly, many companies start accepting payments in bitcoin (and other virtual currencies) around the world; secondly, blockchain technologies can provide significant cost savings; thirdly, the possible use of blockchain in various fields will expand; fourthly, instead of paper contracts, some companies began to use smart contracts.

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Currently, the US Commercial Customs Operations Advisory Committee (COAC) is exploring the possibilities of using blockchain technology as part of its activities. According to the report, the Advisory Committee established a working group in September 2017 to address issues related to the promotion of existing technologies or the creation of new technologies that will positively affect trade. The working group plans to explore the use of blockchain technology for processing financial transactions. An event has already taken place, organized with the support of the Ministry of Homeland Security, which was dedicated to distributed registry technology and its use. The report contains the following information: “The group demonstrated 14 options for using the technology in the customs sphere. Among them, we can single out the collection and tracking of data from government partner agencies, such as licenses, permits, certificates of origin and free trade agreements, merchantability, customs licenses.”

In addition, the experience of using blockchain in the United States is known for using technology to control the movement of meat products. For example, in Arkansas, USA, farmers use distributed ledger technology to track poultry supplies. The end-user can check the quality of products through a QR code. This approach is planned to be used in other areas.

Also, the US Customs and Border Guard is actively involved in joint projects with other countries on the application of blockchain technology. Thus, the Danish shipping company Maersk completed the testing of its first blockchain project, the purpose of which was to simplify the algorithm for international cargo delivery. Director of Digital Technologies at Maersk Transport & Logistics said that the company would benefit from the use of blockchain technology in the supply chain management process, as well as exploring other options for its use: “Blockchain has great potential in the field of moving goods. However, it seems to us that so far this solution cannot completely replace traditional systems. Therefore, we are studying technology, launching pilot projects based on it in various fields in order to understand how it is best used.”

So, Maersk and the American company for the supply of hardware and software IBM announced a joint project to create a digital solution for global trade. The idea is to simplify the workflow process for container shipping by moving it to the Internet through the use of blockchain technology. The blockchain solution for the transport business was launched in 2017. It operates on the basis of the open platform Linux Foundation Hyperledger Fabric. At the same time, the customs authorities have the opportunity to see the goods online and have better information to assess risks and decide on additional customs control. Each participant in the supply chain sees the movement of goods at each stage and understands the location of the container at the moment. Participants in the process can also see the status of customs documents, bills of lading, and other data.

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At the beginning of 2016, the UK published the report “Distributed Ledger Technology: Beyond Blockchain” a study conducted by the Department of Science under the direction of Richard Kastelein, chief scientific adviser to the UK government. The report states that the main task of the state is to develop a specific concept of how blockchain technology can help improve business processes of state bodies and what forms of its use to provide services to citizens.

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UK Secretary of State for European Exit David Davis said a new customs system will be set up by 2019. Companies that rely on high-traffic routes at Irish border and canal ports, such as Dover, are worried that new bureaucratic measures will cost both time and money as they continue to work with EU member states. Blockchain technology offers the best way to record customs data so that it can be shared securely with multiple participants in the supply chain. The offshore supply chain has already shown that blockchain can significantly reduce associated administrative costs and time delays.

One of the most striking examples of the use of blockchain technology in the UK is the London-based company Everledger, which has created on the basis of the blockchain registry for certification of diamonds and the history of transactions associated with them. The company registers diamonds on the blockchain, recording all their data. After a gem is added to the database, all its characteristics and transaction history are available to Everledger users, which helps to combat counterfeit goods. The company’s goal is to use the blockchain to create a “fraud detection system” that allows diamond owners, law enforcement agencies, and insurance companies to track any stone. Everledger does not plan to specialize only in diamonds, their main goal is to create a platform for premium goods.

South Korea is currently planning to become a leader in blockchain technology. More recently, companies that do not know what a distributed registry is and what its purpose suddenly begins to pay a lot of attention to technology. Later, the central government also began to take a positive view of the blockchain, and funded startups began to be launched in the region. The biggest influence on the situation was made by the sudden interest in this industry from large corporations — Samsung, LG, and Hyundai. Samsung also previously worked on a blockchain-based payment system, which was supported by a local startup and a UK-based security company. Following a massive briefing for Samsung Group directors in 2016, SDS focused entirely on distributed ledger technology.

In May 2017, Samsung SDS, a division of Samsung Corporation, led the Korean blockchain consortium, which included logistics companies and government research centers in Korea. Among the members of the consortium created to study the use of blockchain in the field of logistics is the Korean Customs. In the course of logistics processes, blockchain technology can effectively manage the history of production, processing, storage, and transportation of goods, which prevents fraud associated with a change in the distribution period and false advertising. Thanks to the blockchain, you can also track in real-time the current position of the cargo. According to Korean customs officials, blockchain is able to simplify the customs clearance of companies and reduce logistics costs.

In addition, the Korean Customs Service plans to make efforts to investigate crimes related to money laundering with the help of cryptocurrencies, the smuggling of illegal goods such as drugs, and other similar operations. In Korea, according to the customs service, about 600 million dollars in foreign currencies were used in the activities of illegal exchanges, which provoked an untraceable outflow of capital through cryptocurrencies. This investigation is part of an extensive project by the South Korean government to study cryptocurrency-related activities. At the end of January 2018, South Korea finally banned anonymous cryptocurrency trading.

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Dubai was the first city in the world to support blockchain at the government level.

Dubai Customs will collaborate with the US company International Business Machines.

The volume of international trade excluding oil in Dubai in the first three quarters of 2016 amounted to about $ 259 billion, which makes the city a major trading hub that connects the markets of Asia, Africa, and Europe. It is planned that the blockchain will reduce the amount of customs documentation that still accompanies the transportation of goods, as well as allow their suppliers and recipients to monitor all processes in real-time.

The active development of the blockchain in China contributes to the use of new technology in international trade.

The first Chinese blockchain platform was launched by Dianrong in conjunction with iPhone maker Foxconn. New technology should provide continuous and rational supply chain financing. The buyer sends the list of approved shipments to the blockchain platform, then the supplier selects the ones that need to be financed. The credit organization finances the specified deliveries. The buyer sends funds to the bank to pay off debts on financed deliveries. This process is automated, therefore it eliminates any malfunctions and delays.

Another example is a publicly owned e-commerce company, Alibaba. The company through the use of blockchain technology solves the problem of China related to the supply of counterfeit food. Alibaba has announced the development, together with PricewaterhouseCoopers, Blackmores, and Australia Post, of a blockchain platform that allows you to control the entire supply chain of products from the manufacturer to the end consumer. Thus, it is supposed to exclude the possibility of substitution of counterfeit normal products.

In 2016, the Singapore government and the Indian state of Andhra Pradesh began to collaborate on the use of blockchain technology. In October 2016, the Central Bank and the Monetary Authority of the country signed a fintech cooperation agreement with the state government. The emphasis was on cooperation in the field of innovative projects and digital financial technologies and payments. Today, the blockchain is the basis of the interaction between the monetary authority of India and the government of Andhra Pradesh. In the city-state, more than 50 startups based on this technology are actively implementing. Successfully undergoing research into the possibilities for combining trade and customs activities in the blockchain format. Reducing the turnover of paper documentation and the transition to digital interaction in the field of trade are designed to significantly facilitate and accelerate the work of thousands of people in this area.

Thus, a study of foreign experience in the application of blockchain technology in foreign countries allows us to conclude that the above countries are introducing technology in various fields, including customs. Countries interact among themselves, organize joint projects for the implementation of technology at the state level. These examples show that blockchain technology has advantages and will continue to be introduced into the work of customs authorities. Studying international experience helps to understand the existing prospects for the development of blockchain technology in Russian customs authorities.

Much attention is paid to the possibilities of using blockchain technology on the part of state bodies of the Russian Federation. So, the possibilities of using distributed registry technology in the activities of customs authorities are described by A.I. Bubel: this is the creation of a book of accounting for customs declarations, registration of documents of participants of foreign economic activity, automatic calculation of the amount of customs payments, electronic document management. This list can be expanded with other perspectives.

  1. Possibilities of the automatic release of declarations for goods. Today, for the registration and issuance of an electronic declaration, the following requirements must be observed: the validity of the electronic signature, the fact of payment of customs payments, the presence of the necessary documents in the electronic registry of customs authorities. Verification of compliance with the electronic customs declaration does not allow the automatic release of goods that fall under the risk profile and require additional verification of paper documents. Blockchain technology allows you to completely abandon the verification of permits on paper when exporting goods. This requires the creation of a private decentralized database in which state regulatory authorities will participate, including customs services, as well as participants in foreign economic activity. If an authorization document is issued (for example, the issuance of a phytosanitary certificate for a participant in foreign economic activity), regulatory authorities carry out a transaction to the participant in foreign economic activity with a note on the issued document. Other participants in the database, who have the right to confirm transactions, confirm this transaction, as a result of which it becomes generally recognized. A participant in foreign economic activity, when submitting documents to customs in electronic form, makes a hash key of an authorization document. Then, the customs authority checks the full key against this hash key and, if there is a match, recognizes this document as authentic. In case of discrepancy, an additional check is carried out.
  2. Opportunities for a comprehensive analysis of the supply chain to improve the risk management system. It is necessary to create a decentralized database of customs authorities, which would be associated with QR codes of luxury goods. Compared with the current labeling system, information about the product will be possible to receive not in print but in electronic form. The QR code will act as an input to the electronic description of the goods containing information about its transportation, about persons associated with it, about the financial history of the goods. Here, referring to international experience, it is worth noting the previously described example of the London-based Everledger company specializing in the certification of diamonds. In this case, each product that is considered a luxury item will have its own analog of a passport on the blockchain, entries in which the EAEU customs authorities can trust. In such a passport it will be possible to trace the features of the movement of a particular product from the manufacturer to the consumer. The information obtained on contractors, on the specifics of contracts can be used in classifying a participant in foreign economic activity within the framework of a risk management system, for example, in determining the object of customs inspection during customs control after the release of goods.

When introducing such a technique, it is necessary to be guided by the following principles: legality, organizational integrity, material interest, effective use of technology, effective personnel management, and a systematic approach.

The principle of legality implies the need for separate planning of norm-setting activities, which is the legal foundation for the implementation of these measures.

In accordance with the principle of organizational integrity, the implementation of the above measures primarily requires diverse and integrated planning under the guidance of a single coordinating body with competence in this field.

The principle of material interest. One of the tasks of these measures is the optimization of the costs of customs services and the state as a whole. In this regard, when planning should be allocated and financial direction.

According to the principle of the effective use of technology, the goal of the blockchain is to increase the information and technical release of goods, so questions in this direction should be considered separately.

The principle of effective personnel management. The basis for the implementation of the proposed set of measures is qualified personnel who are employees of state regulatory bodies. For the effective operation of the technology, it is required that the personnel possess information in order to make management decisions and their implementation.

The principle of a systematic approach. In accordance with this principle, it is necessary to consider all of the above planning directions in a single information space.

3. Transfer of information on the supply chain of a participant in foreign economic activity to the customs service to any other regulatory authority through the blockchain, for example, for the tax service for tax control purposes. Blockchain-based solutions for identifying and verifying participants in foreign economic activity can be useful here: going through an online interview, generating a hash video, the received hash of which will be recorded on the blockchain. From this moment, the client’s identification data during the interview is considered saved. This video can be used in an investigation if an identified client is suspected of fraud.

4. Programming a product traceability system by analogy with smart contract technology.

The smart contract system is used in one of the blockchain systems — Ethereum. In the Ethereum blockchain, the programming basis is the Solidity programming language (identical in JavaScript syntax). Nevertheless, the language is at a relatively early stage of development.

Solidity is a statically typed programming language designed to develop self-executing contracts running on an Ethereum virtual machine (EVM).

Based on the experience gained by program developers and business structures, customs authorities could join in a specialized Ethereum together with interested participants in foreign economic activity, tax authorities, migration, veterinary and other services, not including this network in a closed network of customs authorities.

The Ethereum platform developed to date with the corresponding programming language will be embodied in Internet technologies, which must be considered simultaneously as an innovation in the field of customs. Products created on this platform allow you to implement coding processes, ensure high-quality information security, complete transactions, register them, maintain their integrity, conclude contracts, protect and protect the intellectual property of copyright holders. It also seems possible to ensure the functioning of this platform in an autonomous mode from a closed specialized customs Internet network. This platform can be the first step in the implementation and development of custom blockchain technology.

It is assumed that the capabilities of the customs blockchain will contribute to the creation, for example, of a distributed register of participants in foreign economic activity with relevant information for customs authorities, participants in foreign economic activity and their counterparties from financial credit organizations, insurance companies, commercial banks, stock exchanges, auctions, tax authorities, law enforcement organs. Along with this, protection of property rights, confirmation of authorship, the authenticity of the product, identification of the participant himself, his title documents, confirmation of the fact of purchasing goods online, the fact of payment of funds, other securities will be provided; finally, the implementation of money transfers using bitcoins containing digital information about the availability of funds and the fact of the transfer. The possibility of managing distributed registry data in the financial market, including ensuring security requirements and national regulators, is of great importance for authorities and other structures.

Thus, we can talk about the so-called customs blockchain, which is effective in obtaining information and processing it, more openness of the entire system of foreign economic activity. To do this, you need to create and expand your own custom blockchain server. The participants of the customs blockchain will be able to immediately feel the benefits of more efficient servicing of participants in foreign economic activity with the passage of preliminary virtual customs control of the submitted customs documents. A positive result can also be seen thanks to the selective approach to the implementation of customs technologies using the effects of predictability, scalability, and productivity, the rejection of routine operations.

Nevertheless, participants in foreign economic activity who will begin to use blockchain technology may encounter distrust of intermediaries from among business structures and IT structure operators, which becomes more relevant when payment methods have passed the phase of destuffation* and have lost a tangible medium in the form of metal, paper. This can provoke uncertainties and risks, as well as generate conflict situations that the current blockchain technology system and its subsystem, the customs blockchain, may well resolve.

*Money destuffation is the liquidation of tangible means of circulation and payment and their replacement by electronic means.

5. The possibilities of the blockchain in the field of customs payments.

Currently, accounting of customs transactions is based on personal statements, identification cards, and seals or signatures on documents. Paperwork has ceased to be effective, data storage is expensive, and the audit of such documents requires a lot of time and effort. The introduction of an electronic signature has greatly simplified most of the operations, but this mechanism is expensive and is at risk of theft of a key with a signature. In a large customs system, the processing of information on settlement transactions is centralized, which creates difficulties in the form of a high load, administration problems, and a complex security system. Creating a settlement system based on the blockchain can greatly simplify the mechanism and reduce the costs of its functioning. At the same time, it is necessary to determine the methods for identifying participants in the Network, processing, approving, and storing data on customs operations, as well as establishing a connection between the fact of payment of customs payments and the fact of passing customs control.

Based on blockchain technology, it is possible to create a book of accounting for customs declarations. Each user could register an account by physically verifying their identity with the relevant government agency. Registration would be one-time. User accounts on the Network would be endowed with the same properties as public keys on the Bitcoin network: each Network user would have unlimited access to the history of records at this address, but only a user with a private key could make changes.

Currently, many countries plan to create a blockchain network in customs, drawing on existing technologies described in various sources, such as Hyperledger from Walmart, IBM, or the British Everledger system. The first technology is used in the USA by state regulatory authorities to control the transportation of meat products, the second — for certification of diamonds and digitization of the data array for each gem.

The Department of Commodity Nomenclature, referring to international experience, proposes to use these technologies both to solve the problem of verifying certificates of origin of goods and to control the country of origin of goods in general, including to verify the accuracy of the declared information about the country of origin of goods in order to provide tariff preferences.

Already today, in international practice, electronic certification and verification systems for the origin of goods are used. These systems allow you to verify through the Internet that authorized bodies of foreign countries have issued certificates of origin of goods. According to some customs services, the blockchain should increase the level of transparency of data transmitted through such a system, prevent cases of loss or provision of an invalid certificate of origin.

Thus, blockchain technology is currently promising in many countries, but not sufficiently studied, especially in relation to the activities of state bodies, namely customs authorities. Therefore, in the process of studying the prospects for using blockchain technology by customs authorities, it is also necessary to assess the economic feasibility of introducing this technology, its adaptability, reliability, and security.

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