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.

 

Blockchain and supply chain examples

A couple of weeks ago we looked at the potential impact of the blockchain on supply chain management, but we didn’t go into detail about actual examples and current trials in this bigger-than-you-probably-expect sector. Even leaving aside the physical logistics sector, which is enormous, the size of the supply chain software industry has grown in recent years to over $10bn, according to research from Gartner. Research and Markets predicts 11% annual growth in this sector at least until 2020. Add in the $18bn of the trade finance market, and you have a considerable slice of the world economy, and not just in terms of strategic importance. Below are some of the startups and projects that are hoping to take a good chunk of that market away from the traditional suppliers such as SAP and Oracle, while re-thinking processes and introducing new efficiencies.

by Erwan Hesry for Unsplash - supply chains
by Erwan Hesry for Unsplash

The startup with the most VC funding in the sector is US-based Fluent, with $2.5 million in seed investment from firms such as ff Venture Capital, Draper Associates, 500 Startups, Digital Currency Group, SixThirty and many more. Founded in 2014, its aim is to streamline supply chain finance with a custom-built blockchain based on bitcoin’s architecture. Invoices can be tokenized once a buyer approves them, avoiding duplicate and fraudulent invoices across the network. Companies can send and receive payments on the Fluent network. The platform also includes a peer-to-peer working capital marketplace which can provide financing for invoices, whole or partial.

California-based SkuChain has also received seed funding from Digital Currency Group among others, although of an undisclosed amount. It wants to open up trade finance to small- and medium-sized businesses by removing the need for Letters of Credit (payment guarantees issued by a bank). This could have a positive impact on exports from developing countries, while reducing the global economy’s dependence on banks and large freight companies. Using the bitcoin network as well as SkuChain’s own technology, the platform hopes to enhance transparency for all participants in the supply chain, while at the same time improving access and broadening the base of its participants.

Wave, based in Tel Aviv, was one of the first startups in the supply chain sector to sign a deal with a big bank. After graduating from Barclays’ fintech accelerator last October, the startup has focussed on developing a platform to help the banks’ clients reduce their supply chain financing costs by substituting physical bills of lading with blockchain-registered digital versions that streamline the shipping process.

London-based Provenance is working on a chain-of-custody solution on both the Bitcoin and the Ethereum blockchains. Founded in 2013, it focuses on not only the verification of origin, but also the authenticity of the data. One of their more interesting projects involves the tracking of fish from the boats in Indonesia to the high-end sushi restaurants in Japan. If this pilot works as expected, we should soon be able to confirm that the steak we ordered at the restaurant did, in fact, come from the plains of Argentina, and that the olive oil that we purchased at the supermarket was, in fact, pressed from arbequina olives in Spain.

Everledger, also based in London, is building a system to track the movement of diamonds from the mine to the jewellery store, creating a provable provenance as well as facilitating diamond trade. This should significantly increase not only the security of the gem supply chain (which still relies largely on paper documents which can be amended or forged), but also the insurance costs.

Australia-based Blockfreight, launched in April of this year, is developing “an open network for global freight” that combines blockchain apps with smart contracts and RFID sensors. Clients will be able to access the platform with the Blockfreight token, launched last month and run on the Counterparty rails, which can be purchased from the company and eventually from licensed agents (I couldn’t find any active exchanges that deal in this token, but it’s early days still), for $1 each as of a few days ago.

CargoChain, still at development stage, won the Shanghai Blockchain hackathon in January 2016 with their chain of custody innovation that records the Bill of Lading on the blockchain, providing a transparent and traceable record, and uses RFID sensors to track the physical shipment. Built on Ethereum, it also plans to offer a smart contract escrow system, which removes the need for the parties of a trade to either rely on a bank to facilitate the transaction, or to know and trust each other. Other planned functions include automatic payment release upon document receipt, and built-in penalties for delays.

While Barcelona-based Consentio will also use the blockchain to digitize and store the documentation, its main focus is on the financial side. Working with regulated payment platforms, it will use smart contracts to offer financial services such as proof of deposit, deposit release and payment upon delivery.

It’s not just startups that are pushing the innovation boundaries in the supply chain field. The Finnish city of Kuovola has received €2.4 million of European funding to develop a project called SmartLog that applies the blockchain and smart contracts to shipping containers. The city is a hub for trade between the EU, Russia and Asia, and its region is host to around 700 logistics companies.

A few weeks ago Toyota Motor Corp. announced that it was joining R3 CEV’s blockchain consortium to test applications for its supply chains. And big boy IBM just last week launched a supply chain service on its enterprise blockchain, which allows companies to experiment with new forms of document storage for their trade processes (one of the first to sign up was Everledger, mentioned above).

Pressing problems yet to solve are the Know Your Client (KYC) requirements that 80% of sector participants cite as the main barrier to sector growth. Since this requirement is tied to the thorny problem of identity, especially difficult in online, automated processes, it would be optimistic to expect mass migration to blockchain-based supply chain solutions. But the potential economic savings and increased transparency and efficiency make the end goal worth the pursuit. And with a wide assortment of business models and technologies working on this potentially very lucrative objective, it certainly will be an interesting space to watch.

(This article was originally published on LinkedIn.)