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”.

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.)