A century-old tax and a stablecoin walk into a bar…

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 per cent of this - $A582 million in 2018-19 - can’t be collected.

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Pic: Barrels of NED Whisky Source: Convergence.Tech

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.

"This type of technology is that it allows us to focus our efforts, have a differentiated approach and hopefully reduce compliance costs for the legitimate operators.” – Anthony Barnard, ATO

Excise duty collection has changed very little in its 100-year history. Critically, because the regulator lacks visibility over the creation, storage and movement of spirit, it must impose stringent administrative requirements to ensure compliance.

That’s expensive. 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.

A particular worry for the ATO is spirits. Bottled spirits and pre-mixed ready-to-drink products generated $A3.6 billion in excise revenue in 2018-19 and have the highest alcohol excise rate - and so are a common target for illicit activity.

Tracking alcohol on the blockchain

As part of the National Blockchain Roadmap, the Department of Industry, Science, Energy and Resources’ Pilot Grants Program asked Convergence.Tech to lead a consortium to explore how blockchain technology could be used to reduce the regulatory compliance burden for business.

Convergence.Tech worked closely with the ATO, distillers and industry associations to create the pilot Blockchain Excise Platform, capable of tracking excisable goods such as spirits from initial production through the supply chain to their eventual sale. The platform uses a private permissioned blockchain to allow industry to share data directly with the regulator, providing a real-time ledger of alcohol transactions.

KPMG estimates the Blockchain Excise Platform could potentially recover at least $A45 million of lost excise revenue per year.

“The prospect of being able to trace goods through the supply chain is very exciting for the ATO,” says Anthony Barnard, Director of the ATO’s Excise Centre. “We’re finding goods in the marketplace where it’s difficult for us to establish whether the excise has been paid. The opportunity for this type of technology is that it allows us to focus our efforts, have a differentiated approach and hopefully reduce compliance costs for the legitimate operators.”

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The many benefits of shared data

The Platform’s benefits flow from several key features:

  1. A direct connection with the distiller’s own inventory management systems reduces administrative work and guarantees the quality and trustworthiness of the data.
  2. Using a private permissioned blockchain means sensitive financial data is both highly secure as well as readily accessible to the regulator.
  3. 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.
  4. A rich dataset of alcohol production and supply - potentially down to the level of an individual bottle - allows the regulator to greatly improve its ability to target compliance activities efficiently at-scale.
  5. 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.

Trust is a revolutionary force

The Blockchain Excise Platform could also be used to underpin a “Trusted Distiller” program - similar to the Australian Border Force’s “Australian Trusted Trader” used to streamline trade for accredited businesses. The regulator could give additional privileges to platform participants because their relevant data is available on demand. National blockchains could be interlinked with those of other countries, creating a global network of Trusted Distiller benefits.

My colleague Chami Akmeemana, CEO of Convergence.Tech, describes trust as a “revolutionary force”.

“Where trust exists you can improve systems for everyone, whether they be a start-up, a global business or a regulator,” he says.

Distillers would see other benefits too. According to William Edwards, Founder of Archie Rose Distilling Co: “The Blockchain Excise Platform has the potential to streamline excise administration, reduce counterfeit product and parallel importation risks… and simply provide confidence to producers, as well as their investors, customers, and other stakeholders, that their excise obligations are 100 per cent accurate, compliant and up-to-date.”

So too the industry body. Paul McLeay, Chief Executive Officer of the Australian Distillers Association, sees benefits for exports: “The distinctly Australian flavours that distillers capture in their spirits is what sets them apart on the global stage. If you’re capturing the excise transaction data on these products, there’s an opportunity to tell the story of Australian provenance as well.”

A$DC opens opportunities

The Blockchain Excise Platform would also create new revenue streams. Once digitised on to the blockchain, inventory can be the basis of a number of financial instruments, including in the emerging space of decentralised finance - DeFi.

However, key to the utility of such instruments is their relationship with real-world hard currency.

For this reason, Convergence.Tech worked closely with ANZ to directly integrate the platform with ANZ’s Australian Dollar stablecoin (A$DC), the first stablecoin managed by a major Australian financial institution. This provides financial liquidity to digital assets and, in this use case, enables the movement of alcohol to automatically trigger remittance of the excise duty liability to the regulator.

ANZ can also supply custodian services for distiller and wholesalers’ valuable digitised inventory, enabling immediate transfers, remittance and refunds through secure digital wallets.

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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 McLeay. “And that’s probably the most exciting thing – the transparency and dynamism of the technology.”

Doug Campbell is General Manager for Australia at Convergence.Tech

To read the full "To Excise and Beyond" report click here

Convergence.Tech is a consulting and technology company whose stated goal is to “work with purpose and seek out projects that help people and planet. We only use technology that does the same. We build communities around issues and seek change.” The firm has offices in Toronto and Melbourne and works across digital transformation, identity & credentials and traceability. Clients include government, development, health, education, environment, agriculture, corporate & professional associations.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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