A Day in the Life of the Incoterms® Rules with Dorjee Sun
On this episode of A Day in the life of the Incoterms® rules, the International Chamber of Commerce (ICC) discusses the future of Incoterms® 2020 with Dorjee Sun, CEO and co-founder of Perlin.
Listen now on Spotify | Apple Podcasts
Below is a condensed transcription of ICC’s conversation with Dorjee Sun:
TC: What were you doing before you started Perlin and before you became involved in blockchain?
DS: I originally was a tech-entrepreneur. I started my first software company while I was still in University. But about twelve years ago, I became very passionate about climate change and carbon. I ended up raising a facility for rain forest conservation that also sold carbon credits. We ended up raising a US$400 million facility to protect rain forests around the world and we did some of the first carbon deals with clients, such as Rio Tinto and Bank of America Merrill Lynch.
What was fascinating then was when the governments were unable to reach a consensus around what would happen post Kyoto – that was when I started looking at non-governmental instruments things, like Bitcoin, blockchain, (and other) decentralized consensus mechanisms. So it was from a very centralised initiative such as carbon credits and intergovernmental agreements on climate change that then lead me into blockchain.
TC: What inspired you to start Perlin?
DS: Perlin is hoping to become what I believe is a requirement for the future regime. If you think about any type of governance, you need to have some sort of monitoring. The power of blockchains is that it uses mathematics and technology and it allows humanity to reach a consensus on a piece of data, without having a central authority dictate to it.
So if you think about land registry, you need a government to approve that the land you are purchasing is owned by you. If, for example, governments change, there is potentially a conflict of interest, where you could have some of the weaker governances resulting in conflicts over who owns what land. That’s you’re seeing in a lot of countries. What’s fascinating about blockchain is that you can’t have these double spin attacks, you can’t have people reissue things, unless it has come to a consensus with a majority of the nodes on the network.
What truly inspired me was looking at what arguably was peak centralisation – before the GFC – you really had a lot of consensuses. Then, after the GFC, you have a very fragmented world, a lot of trade disputes and a lot of conflicts – exiting and brexiting – all of these different types of shifts to soverign states. What blockchain embodies and what I hope for Perlin is that we can create an immutable ledger that records data that then can be seen as the single source of truth. If you are looking for evidence-based policy, you can have this ledger that actually is able to be immutable, that captures scientific readings, and that then can attest to whether something is authentic or not.
As a specific example of why we are working with ICC and working on the Incoterms® rules is if you think about trade, now having millions if not billions of sensors, you can actually see if there has been an execution of a trade. Whether or not the goods have been shipped, or whether or not the goods have been frozen or overheated – as you can have sensors that monitor temperature. We are able to use technology where there was previously a lot of guesswork and uncertainty.
That’s where the blockchain technology comes in. You are able to transcribe that information onto a blockchain – and because it’s public – people know it’s never been tampered with or that it’s not the private database of a company that may have a vested interest to not necessarily have an immutable source of truth.
TC: You mentioned ICC’s and Perlin’s partnership, can you tell me more about this new project and how you think blockchain can help enable the future of Incoterms® rules?
DS: ICC’s role in trade has really blown my mind, and it’s been such privilege to work with the organization. For those out there who don’t know, over the last hundred years ICC has been helping to standardise trade. You don’t really realise that until you look at conflicts that happened and fortunately in our lifetime global conflict has not happened.
If you think about the Incoterms® rules, in 1936 ICC got together and helped standardise at what point was a good when shipped under a Incoterm® rule, or term of contract, was the obligation passed to the buyer and the seller. If you think about these transactions before, I wonder how they coordinated when someone no longer had responsibility over a good. Was it when the shipment was on the dock? You suddenly realise the complexity of this. Coming back, the great privilege that we have is that ICC is rebooting the Incoterms® rules. ICC will often tweak an update for global consensus. Incoterms® 2020, which comes out later this year and will become the regime for which trade contracts will be updated in the future.
The question we started discussing is what is relevant in 2020 and can we bring it in? Given blockchain, sensor technology, remote sensing possible with satellites and drones, surely there is a way we can start reducing the paper load. Some crazy stats showed that a majority of trade documentation would have at least one error in it and I’ve actually seen internal documentation from some of the big trade companies showing literally tens of thousands of emails being traded just to coordinate. If we could digitalise, we could improve this process and make it more efficient.
On top of it, just imagine as the cost curve comes down, you are going to have thousands of sensors for a dollar – like sub one cent sensors. These sensors are going to be able to detect not only GPS location, time, temperature, moisture, so just think about it, if you can have all of these sensors transcribing to whether or not a shipment has been transported in the condition contracted.
Now, that brings in smart contracts. A smart contract is like a contract, but with software that is self-executing. You know, a couple of weeks ago I got food poisoning by having a rogue oyster, and during my daze, I started thinking about smart contracts and ledgers. I thought, what if you could see the journey of the oysters you buy, where they came from, when they were caught, their moisture level, if the temperature was right, when were they vacuum-sealed, do the sensors detect the compression or not?
These are the types of questions that should be determined in the near future, if you could be assured that any good you are buying has been transported under the conditions you have contracted and if not, you could seamlessly self-execute based under which Incoterm® rule you have signed, based on the sensors and immutable ledger. That would then trigger a settlement. You would get paid not needing a letter of credit. What if you could tie into some form of currency or cryptocurrency for payment and settlement. That is the essence of the supply chain becoming intelligent, becoming on blockchain, and having the Incoterms® rules as smart contracts with cryptocurrency settlement.
TC: Another important fact would be the affordability of blockchain technology. Is this technology expensive and could micro, small and medium enterprises afford this technology one day?
DS: Not someday…today. I was talking about how this kind of technology would hopefully make trade much more accessible in the future. During the World Chamber Congress in Rio, the Minister explained that 99% of Brasil’s economy is small- to medium-sized businesses, yet only 1% of export belonged to small- to medium-sized businesses.
If you look at centralised systems, the fact that you have sub 10 % banked in many developing economies. For example, in India 50% have mobile broadband. Why is the banking rate sub 10? – simply because of the overarching burden of centralised systems. You can now create a decentralised wallet with decentralised financial tools. I believe we’ll make it no longer that there is a gatekeeper that has to have Basel IV requirements on capital ratios.
I actually think the trend for centralised banking is only going to get more severe in terms of regulations, governance and disclosures. It will be harder and harder for people to bank centrally. Why as a bank would I continue taking risks on tiny loans or small accounts for small- to medium-sized businesses? If you can create a blockchain that is cheaper to execute or parametric insurance that automatically pays out. For example, if there is smoke pollution from the haze in Singapore, from the rain forests in Indonesia, then what if the company – let’s say it’s an al fresco café – it knows its business is going to be affected, it automatically gets paid out.
This means that it does not have to apply for claims, fill out forms…the information is simply grabbed from the government-owned sensors, if the pollution level goes above a certain PSI then they get paid out.
There are all these ways to automate and reduce cost, which is going to make things much more accessible. If you had digital sensors on various forms of the logistics chain, if you also had smart contracts and a web-enabled mobile app, you could do a sells agreement with a smart Incoterm® rule. Let’s say Facebook’s Libra coin suddenly becomes actionable.
Then you could theoretically do international trade and settlement through Facebook’s Messenger without having to touch all of the traditional systems which are currently a little prohibitive. Coming back, this is an absolute boon for democratising and access, especially for small- to medium-sized businesses, blockchain and decentralised systems allow for peer to peer approval rather than having a potentially overburdened, overregulated central authority.
TC: You just mentioned Facebook’s Libra coin, there are lots of other companies involved in this space at the moment, what separates Perlin from the pack? How is Perlin different from other emerging blockchain companies or platforms?
DJ: Every single project gets to choose on which area of the decentralised economy they focus on. From our perspective, we are just really fascinated by trade. We are based in Singapore, the world’s second-biggest trader. Singapore will most likely become the first in the next years, it facilitates over a trillion dollars of global trade, global trade is around 11 trillion – this is a very substantial amount.
We have been fortunate to work with some of the biggest commodity and trading houses, the government and customs, and we are working with all kind of agencies and organisations on our blockchain initiative.
We also have a consensus mechanism, and we are far more decentralised in terms of the ability for people to rely on our consensus mechanism not being delegated proof of stake like some of the more centralised systems. Bitcoin was conceived in 2008, then there were multiple waves on innovation, and now in 2019 we are building on the shoulders of earlier innovations, at this point we are cutting edge, and we hope to be for the foreseeable future. From a business and trade perspective, through our ICC partnership we also signed with Dubai and the United Arab Emirates, which is another forward-looking economy, we are working closely with a number of others, and hopefully, we’ll be up to bring more trusted nods into the network. Singapore is one of those bases for global reach – particularly for something like a network – blockchain is a fantastic base to be positioned in, especially with strategic support from the government.
TC: Considering the strategic location of Singapore, could you tell me about this new ICC and Perlin initiative to establish the Centre for Future Trade there? What are your goals for this project?
DS: We co-founded the ICC Centre for Future Trade, and we are collaboratively building it. If you think about the way in which the current industry is evolving, there is a bit of fragmentation, for example, a consortium of banks have created a product for letters of credit, and a competing consortium of banks is creating another letter credit product. So it’s a bit fragmented and contrary to the wider thought of what’s needed for connectivity and network effects, and so the main purpose of the Centre for Future Trade is to unify different fragmented consortiums.
From Singapore’s perspective, ICC is the perfect partner to both globalise and push out standards, and Perlin is very fast-moving, developed, focused and also very agnostic. We’re taking all of these tools, stitching them together and creating a platform.
The Centre will be focused on interoperable pilots, and try onboard a network effect of parties that can interoperate, we are operating on a synchronised application level. We also do research, for example how to put a price on the shift from paper to digital? How do you price a hybrid version of that? What would the world look like if we did have a coin such as Facebook’s Libra?
There are all these different emerging areas, and we see Singapore as a very strategic hub to look at this because a lot of the digital adoption is tremendously strong in Asia – we have a very advanced regional community.
TC: Thank you Dorjee, I really appreciated you taking the time to discuss blockchain and the Incoterms® rules, if you would like to give a final point, the floor is yours.
DS: What is really inspiring about working in the trade space with ICC, even though right now we have trade wars, Brexit, all of these changes in terms of geopolitics, especially in 2020 after the level of Trump politics, what is exciting is that this gives away lots of opportunities, today more than ever we need ICC to standardise.
I am most proud of my environmental work, but what I am really concerned about is how governments have become so sovereign and commercial that there is no multilateral leadership in terms of SDGs and environmental climate change issues and this is where ICC, with the Chambers Climate Coalition and all the work we are doing on supply chain traceability.
If you imagine a world in 10 years time with sensors, nanosatellites, drones, with all forms of data collection and that date to be in the blockchain, so it’s immutable, then the future should be continuous multidimensional data, using AI and algorithms you can know wheatear something is certified or not and we have real monitoring for evidence-based policy from governments and we’ll fix this environmental crisis that’s going to lead us to conflict.
The main mission is to think about how do we bring some form of truth and realistic planning and how do we use trade as becoming the anchor point for a sustainable world.
Find out more about ICC and Perlin’s partnership.
Discover the latest updates on Incoterms® 2020, including training sessions and the digital app.