This winning entry in the 2018 ACSA International Cotton Institute essay contest, presented by Cotton Grower magazine, focuses on how blockchain technology might reshape cotton trade.
Blockchain – the technology that is disrupting many markets for better – is paving its path into our cotton market. Sooner or later, we would all have to adapt this technology, for it makes transactions much simpler, contracts less complex, and tracing more accurate.
But, there is still a lot of work to be done to align and standardize the procedures and legalities governing blockchain transactions at an international level. There is still the question of reliability, scalability and governance of this revolutionary technology to be answered before adopting it at a bigger scale.
In a groundbreaking move in October 2016, Wells Fargo and Commonwealth Bank of Australia used blockchain to process and execute a cotton shipment worth $35,000 from Texas to Qingdao, China. This innovative step is a proof of concept on which many future transactions could be based. This transaction – driven by smart contracts – eliminated a lot of paperwork which was otherwise needed to ensure that all the information is up-to-date and the same in both party’s records.
For international trade, adoption of blockchain technology will reduce physical documentation and save exponential time in receiving payments. It saves time for the merchant to receive payment from the banks for the sale transaction, as the bill of lading and other supporting documents need not to be mailed physically to the Letter of Credit (LC) opening bank by the seller. The availability of authenticated documents linked in blockchain technology will reduce the working capital cycle and the cost, which could be an advantage to all the parties to the trade.
The LC can be linked to the blockchain technology, where the description of goods in the LC can be used as a valid data check point to verify the goods shipped by the merchant, even before the actual receipt of goods with the updated and verified USDA records through the Permanent Bale Identification number. This ensures that the merchants do not ship unqualified goods and removes problems of quality claims.
The supply chain of cotton products is complex and involves many transactions across the world, which makes it difficult to trace the origin, especially in case of organic cotton and BCI cotton. This transformational technology will help us maintain and check the authenticity of the origin by tracing it from field using GPS technology to fabric and fabric to field.
Though there are many benefits of adopting this technology in the cotton market, there are still many concerns that need to be addressed too.
Who owns and maintains this technology is very unclear. The technology uses the decentralization concept, as every user has access to non-restricted data. Private information on a public platform requires a well-designed and secured platform to avoid it from being used for wrong purposes. This questions the reliability and the confidentiality of the information shared on this platform. It would be reliable and trustworthy if this technology is decentralized and yet maintained by an international regulatory, which sets the standards and legalities to ensure smooth functioning for transactions.
Deciding upon common currency to trade is a challenging task. Is the dollar going to be continued as currency to trade? At present, not all governments are in favor of transacting through bitcoins, which would be a considerable obstacle. This issue can only be solved by a global regulatory ensuring a smooth, efficient and transparent functioning of the payment transactions.
Blockchain technology is all about maintaining data and records. Data points could be used as valid information to identify problems in every area and solve them with proven solutions. The records will help provide reliable estimates every year for cotton for its opening stock, consumption and closing stock in every country. USDA could use this as a platform to source the data for cotton growth, consumption and ending stocks, allowing them to update the estimates based on current available information. This could help avoid unnecessary volatility in the market, and the market price would include all real market information which factors and defines the actual market data.
If crypto currency is used as a common currency to trade between the parties, the dollar currency would have a negative effect. The reliability on crypto currency to trade is a challenge to many parties, as the problem of hedging the currency arises. Volatility in the crypto currency could affect businesses and potentially bring a market crash in the cotton industry if it is not hedged at the right time.
The International Cotton Association needs to take active initiatives to promote this technology and start implementing at first with their members, as blockchain can only be effective when there are positive network effects.
The challenges of security and reliability need to be addressed for successful implementation in the market. The traceability of data and maintaining records would analyze the competency of the parties in the trade and bring transparency in availability of market data.
Nevertheless, blockchain technology is revolutionary, and the cotton market could benefit from its adoption. The future for blockchain seems promising!
Source: Cotton Grower