In response to the Australian Government’s National Blockchain Roadmap the Blockchain Excise Platform digitises and tracks a taxable commodity (in this case pure litres of alcohol). It connects producers and regulator with real-time access to new data, generating productivity benefits and reducing illicit activity. A first of its kind blockchain ecosystem connecting the regulator to industry to more effectively control the movement, transfer and payment of liabilities for an excise commodity.
Alcohol excise duty in Australia is worth an estimated $A6.5 billion in revenue to the federal government each year. However, the Australian Taxation Office (ATO) estimates at least 9% of this - $A582 million (in 2018-19)- can’t be collected. Part of this lost revenue is due to illicit activity. Rogue operators use various methods to deliberately avoid paying excise. That not only cheats Australian taxpayers but undercuts legitimate producers who are paying their way.
Convergence.Tech worked closely with the ATO, distillers and industry associations to create the pilot Blockchain Excise Platform, powered by C.T’s platform tech that enables tracking of excisable goods such as spirits from initial production through the supply chain to their eventual sale. The Platform’s benefits flow from several key features:
- A direct connection with the distiller’s own inventory management systems reduces administrative work and guarantees the quality and trustworthiness of the data.
- A digital registry representing the authorized identities of the supply chain participants (“Trusted Distillers”).
- Using a private permissioned blockchain means sensitive financial data is both highly secure as well as readily accessible to the regulator.
- Once on the blockchain, excise data can be used as the centre of a powerful ecosystem of automated, fully traceable smart transactions to automate or remove administrative tasks.
- A rich dataset of alcohol production and supply - down to the level of an individual bottle - allows the regulator to greatly improve its ability to target compliance activities efficiently at-scale. This data also empowers the Industry Associations by providing new benchmarks to provide guidance to individual distillers as to how to improve their performance across key operational metrics.
- Combined with new barcode technology, the Platform would allow real-time crowdsourcing of excise compliance by consumers, retailers and regulators.
- The result is an end-to-end view of alcohol production and supply across the country, allowing the regulator an accurate real-time view of excise liability for any and all participants.
The BEP would also create new revenue streams. Once digitised, the distillers’ inventory can be the basis for a number of financial instruments. We integrated the BEP with ANZ Bank’s Australian Dollar stablecoin (A$DC), the first stablecoin managed by a major Australian financial institution. This provides financial liquidity to digital assets and enables the movement of alcohol to automatically trigger remittance of the excise duty liability to the regulator.
What Makes Your Project Innovative?
Excise duty collection hasn’t changed much in its 100-year history. As the regulator lacks visibility over the creation, storage and movement of spirit, it must impose stringent administrative requirements to ensure compliance. Without trusted data the regulator needs strict rules to ensure dishonest businesses aren’t competing unfairly, in the process creating an administrative burden for honest operators.
The BEP generates this data via a real-time ledger, digitising and tracking the excisable commodity across production and distribution. Whilst the Pilot focused on alcohol, it is extensible to other excisable commodities (e.g. beer, fuel, tobacco, hydrogen), delivering significant benefits for regulators, industry and taxpayers.
The foundational infrastructure provides digital identities for a list of “Trusted Distillers” registered with the government, enabling digitization of verifiable certifications, licenses, and documents to further reduce administrative burden and paper.
What is the current status of your innovation?
At the date of this submission (Sep 2022) the pilot has been formally completed. The ATO and Spirits Industry bodies are supportive of an implementation, however this is contingent on new funding from the Federal Government. This will not occur until the May 2023 Budget (the October 2022 Budget is an out of cycle budget with the incoming Government focused on funding their pre-election commitments). Convergence.Tech are also in discussions with other jurisdictions about the applicability of the BEP for alcohol and tobacco.
Collaborations & Partnerships
Convergence.Tech primed the Pilot, funded by the Department of Industry. The ATO were the regulatory stakeholder involved in solution design and validation of use cases. The Spirits Industry bodies (ADA and Spirits and Cocktails Australia) provided access to producers for participation in the pilot. KPMG provided sector and excise advisory services. The BEP was integrated with ANZ Bank’s Australian Dollar Stablecoin. Mills Oakley provided legal and regulatory impact advice.
Users, Stakeholders & Beneficiaries
Excise Regulator (Revenue Agency) - increased assurance on excise liabilities being tracked and paid correctly, the solution provides granular level data on production, storage and distribution across the supply chain which provides greater visibility and insight. Ultimately it increases revenue and improves productivity of audit teams. Industry - streamlined excise administration, reduce counterfeit product and parallel importation risks and provide confidence excise obligations are accurate.
Results, Outcomes & Impacts
The expected benefits from a full roll-out were estimated by KPMG Australia, for government:
- Generate an additional $45m in tax revenue p.a. by reducing illicit activity
- Improve detection of non-compliance by access to granular commodity production and supply chain data
- Automate and reduce manual compliance activities to enable more efficient use of resources through data-driven insights and industry transparency
- Improved traceability enhances provenance, brand protection, and levels the competitive playing field by reducing the ability for bad actors to evade paying excise
- Removal & automation of compliance processes reduces red tape
- The digitisation of assets on the blockchain creates new revenue opportunities
Fiat currency stablecoin integration enables the movement of a commodity to trigger remittance of the excise duty liability to the regulator. Injecting financial liquidity to digital assets opens up new revenue streams and collateral for industry.
Challenges and Failures
A major challenge was that Border Force (customs) withdrew from the Pilot at the commencement, this meant imports were taken out of scope, the focus therefore was on domestic production and distribution. The capacity of the ATO’s technology team was also a significant and enduring challenge, this has meant the window for implementation has moved to the second half of 2023 as opposed to a continuation in late 2022. This delay may risk the continuity of sponsors and key personnel involved in the pilot from the government agencies, industry bodies and Convergence.Tech.
Conditions for Success
The key to the success of the pilot was having buy-in and active engagement from senior Regulator and Industry stakeholders. The stakeholders provided access to subject matter experts who consulted with the pilot team to work through scenarios, challenges and potential solutions.
While this particular pilot focused on spirits, the capability can be extended and applied to other excisable commodities (such as beer, fuel, tobacco) and trackable inventories (including hydrogen or real estate), delivering significant benefits for regulators, industry and taxpayers.
Reducing red tape, improving the efficiency of regulation, opening up new revenue streams, and protecting brand integrity are key benefits of the Blockchain Excise Platform but it’s all in service of a larger goal - fairness for distillers, wholesalers and consumers alike.
“By making sure there is compliance it means we won’t have rogue operators, creating a level playing field for everyone,” says Paul McLeay, CEO of The Australian Distillers Association. “And that’s probably the most exciting thing – the transparency and dynamism of the technology."
The Discovery Phase was critical to understanding the key priorities and current constraints for the regulator and individual producers. Taking a human-centric design to the solution by engaging with subject matter experts meant the BEP was designed to benefit both the regulator and industry. Involvement of government technologists would have been beneficial during the pilot as this may have mitigated/avoided the capacity delay now encountered. The grant funding, whilst welcomed, did not provide an “on-ramp” for continuation to an implementation phase, meaning momentum and continuity of key sponsors and development resources is at risk of not being available for delivery (due to the gap of approx. 12 months between end of pilot and potential start of implementation due to new funding vehicles and processes being identified and completed).
A national blockchain could be interlinked with those of other countries, creating a global network of Trusted Distiller benefits, underpinned by rich data for regulators to lower the costs and administrative burden of exports and imports. In summary, it’s about fairness. For too long bad actors have competed unfairly by exploiting the gaps in compliance monitoring. By helping to close these gaps, a blockchain-powered solution levels the playing field, ensuring a fairer world for producers, wholesalers and consumers alike.
- Developing Proposals - turning ideas into business cases that can be assessed and acted on
- Implementation - making the innovation happen
- Diffusing Lessons - using what was learnt to inform other projects and understanding how the innovation can be applied in other ways
- Convergence.Tech - Beyond Excise - The National Blockchain Pilot Report lo Final Report to Government
24 January 2023