What trade-oriented blockchains can enable

by Dana Critchlow via StockSnap
by Dana Critchlow via StockSnap

More thoughts on blockchain and trade:

Continuing from yesterday’s post, one aspect I find particularly intriguing about the potential role of the blockchain in international trade is the possibility of linking up the different parts, and what that implies for the future of commerce.

In the shipping trial mentioned yesterday, goods from Schneider Electric were transported on a Maersk Line container vessel from the Port of Rotterdam to the Port of Newark. The Customs Administration of the Netherlands, the US Department of Homeland Security and the US Customs and Border Protection also participated.

And that’s just scratching the surface. Maersk discovered in 2014 that a simple shipment of refrigerated goods from East Africa to Europe can go through 30 different stages, involving more than 200 separate interactions and ‘messages’.

Even if not all of the 30 participants are distinct entities (maybe some work for the same organization but in different departments), that’s a lot of different systems interacting. Setting up a database for all to share is possible on a programming level, but virtually impossible on a governance level. Who decides the format and function? Who controls it? Do all the participants trust that entity?

With a blockchain-based platform, the trust issue becomes less relevant, as all participants will be able to see the information they need and verify that it has not been altered. While the system will need to trust that the data entered is correct (for instance, that the amount in the container coincides with what’s in the document), checks at each stage will pick up errors or attempts at fraud.

Beyond the trust issue, a system that allows verified sharing of information can significantly reduce redundancies. The shipment process consists largely of a sequence of documents, each relying on part of what was in the previous one, and adding new information. This implies a lot of duplicated data. Convert that data into bits and parse it into a shareable format, and duplication – if necessary – is no longer a time-consuming burden.

However, it’s not the added efficiency that most intrigues me.

This is about more than streamlining. It is the beginning of a rethinking of business structures.

We are accustomed to a vertical business world. Enterprises have vertical structures, with parent company at the top and subsidiaries underneath. And each are governed by a combination of rules from the parent domicile and the local jurisdiction.

A blockchain-based system for commerce, on the other hand, is horizontal. It unites not only different participants in different geographical locations, but also in different sectors. There needs to be someone deciding who gets to participate (after all, we are talking about ‘permissioned’ blockchains), but beyond that, it creates a new ‘entity’ with its own set of rules.

This ‘entity’ has a new type of boundary – not corporate, not sectorial, not geographical, and as such, difficult to regulate.

What we are witnessing could be the beginning of a new type of commercial structure, accompanied by a rethinking of legislation.

The result could be a reinforcement of the underlying principles of global commerce: the fair exchange of goods for mutual benefit. With horizontal structures and a changing attitude towards cooperation, emphasis could start to shift from “exchange” to “fair”.

Blockchains, shipping and messages

Bloomberg’s Matt Levine published an interesting take today on the Maersk shipping blockchain trial. Ever the blockchain sceptic (insightfully so, in my opinion), he does see value in the application for the shipping industry, and by correlation, supply chain management.

Some background: Danish shipping giant Maersk has built a blockchain platform, in partnership with IBM, to streamline the management of shipments. A trial was run on a live shipment from Rotterdam to Newark, with the relevant documentation registered on the platform, and the participating parties given access to the parts that they needed to see.

Here’s why Matt finds this interesting:

“Whereas finance already has trusted central intermediaries, shipping doesn’t. Maersk has no trouble keeping track of who owns its containers. The problem that blockchain is solving here is not so much a database problem, as it is a messaging problem. The question is not “how do we keep a list of who owns what,” but “how do we communicate all our approvals efficiently and in the same format?””

I disagree.

The problem that blockchain is solving is a database problem. Even if the only advantage were improved handling of documents, various databases would be involved. Shipping documents are more than just messages. They are, in effect, contracts. And each carries specific information related to the material shipment.

Managing the process involves not only lots of documents, but lots of different databases. What the blockchain can do is bring all those databases together.

You can’t do that without the blockchain, because who would control the new, merged source of information? Even if that answer was obvious, why should the parties trust the central authority? They would end up keeping separate databases anyway, just in case.

He also points out that the teddy bears could be swapped for cocaine and the blockchain wouldn’t know.

“The blockchain is about taming all of the virtual attributes of the container, all of the paperwork that accompanies it. But the boundary between the physical and virtual worlds will always be a bit more lawless.”

Again, I disagree.

Perhaps the Maersk/IBM platform is not content-sensitive, but that’s by design rather than necessity. Other trials have shown that sensors can connect with the blockchain. And sensors can detect changes in content, temperature, humidity, etc. So, theoretically, a DLT supply chain platform could detect fraud and theft.

While I normally applaud blockchain scepticism (the sector needs it), in this case it’s missing the opportunity by focusing on a narrow application. And while Matt Levine has the advantage of deep well of financial sector knowledge as well as a compelling writing style, it has been fun disagreeing with him, just this once.