With myriad complex processes, rules and regulations, trade has long remained highly paper-based, with manual processes that often seem resistant to change. Can distributed ledger technology (DLT) and blockchain ever become the industry standard – or are the barriers simply insurmountable?
It goes without saying that many multinational companies have incredibly complex global supply chains. From the start of a trade transaction to its completion, each and every trade transaction must be verified, recorded and co-ordinated – often via intermediaries.
But what if these transactions could be verified autonomously? It would certainly remove a whole layer of complexity from this vast sector. This is the promise that DLT and blockchain have presented – but widespread adoption of this technology is likely to take considerable time and effort.
Recently, the Singapore branch of CIMB Bank Berhad completed a trade financing transaction for dairy imports using internet of things (IoT) cargo sensors and iTrust’s DLT platform. Meanwhile, promising initiatives have brought a wide range of benefits, from streamlining cargo checks to tracking the provenance of food. So is this the shape of things to come?
DLT vs blockchain
Before exploring the topic, it’s worth exploring the differences between DLT and blockchain. At their heart, DLT and blockchain share a conceptual origin: they are both decentralised and digitised logbooks of records.
However, given the wealth of information out there about blockchain and DLT, these terms are too often used interchangeably. In fact, blockchain is a specific type of DLT, in much the same way that an Audi is a specific type of car.
The term DLT refers to the technological infrastructure and protocols in place that allow various participants to access and manage records of data inside a decentralised database, or ledger. Think of it as a spreadsheet that develops through time.
As there is no central authority that acts as arbitrator or monitor, each participant can initiate, confirm and update information contained within the ledger. These records are only ever stored when all parties come to a consensus.
In comparison, blockchain is one form of DLT. Because of this it can exist without the need for a centralised authority or a server managing it – rather it is managed by peer-to-peer networks. Data on the blockchain is grouped together and organised in highly-encrypted ‘blocks’, which are linked together and secured with a cryptographic signature called a ‘hash’. The quality of the data therefore cannot be manipulated.
Shipping – competition or co-operation?
On the opening day of the Lloyd’s List Transparency in Shipping Forum last September, Peter McBurney, Head of Technology Consulting at Norton Rose Fulbright, compared the impact the internet had on businesses 30 years ago to the potential that blockchain has today. “If you lived and worked through that era, you will understand what an upheaval the internet was for businesses,” he said. “Blockchain is revolutionary technology and will transform industries across every sector.”
One such industry is in shipping – a notoriously competitive one which involves many parties with conflicting interests. Recent figures from the International Chamber of Shipping state that there are currently over 50,000 merchant ships operating across the globe at any one time.
Indeed, the international shipping trade has changed comparatively little since American businessman, Malcolm McClean, invented the intermodal sea container in 1956. Prior to this, the loading and unloading of freight was an expensive and often time-consuming task. With the advent of McClean’s sea container model, however, it became significantly cheaper and much more efficient to transport goods across the globe.
Unfortunately, what McClean’s revolutionary new container model did not solve was the cumbersome and bureaucratic processes that come with the transport of goods, including extensive paperwork. In 2017, research by IBM and Maersk found that the cost of handling documentation is so high that it can exceed the cost of transporting shipping containers. Indeed, the research found that a single container moving from Africa to Europe requires nearly 200 communications and the verification and approval of more than 30 organisations involved in customs, tax, and health-related matters.
Setting a new course
These exchanges of information can take many forms, such as sales contracts, charter party agreements, bills of lading, port documents, letters of credit and more. And the documents involved can range from electronic files to hand-written delivery notes. Speaking at the Lloyd’s List Transparency in Shipping Forum, Sally-Ann Underhill, Partner at Reed Smith, backed up the findings of IBM and Maersk’s research. “The container side of the industry is seriously looking at blockchain,” she said.
This is because blockchain has the ability to make things so much cheaper. “In the container industry, savings of US$300 per container are not unheard of by using blockchain technology,” Underhill claims. “If a business has really reduced and low margins, these savings can make the difference between having a successful end of year or a really bad one.”
These potential savings simply back up the fact that, as the international trading model has become even more bureaucratic with the introduction of new rules and regulations, aspects of the shipping industry are in desperate need of a solution. This is particularly pertinent while geopolitical tensions, economic concerns and political uncertainty continue to cast a shadow over international trade.
For champions of blockchain and DLT, this technology has the potential to reduce not only the bureaucracy involved in global shipping, but also the amount of paper used – and, more importantly, the associated cost. Last year, a consortium including AB InBev, Accenture and Kuehne + Nagel successfully tested an ocean shipping blockchain solution and found that it reduced data entry requirements by up to 80%. Furthermore, the solution simplified data amendments, streamlined the checks required for cargo and reduced the burdens and risk of penalties associated with custom compliance.
But can the benefits of DLT and blockchain extend further than just reducing paperwork, costs and compliance? The retail sector has shown they can.
Savvy shoppers, savvier retailers?
The high street is dying, or so they say. Earlier this year, research by PricewaterhouseCoopers (PwC), compiled by The Local Data Company, found that Britain’s top 500 high streets saw net closures of 2,481 in 2018. The report attributed this in part to the high costs and risks of operating on the high street, compounded by advances in online retail.
If this trend continues, many more retailers will need to adapt their online systems and processes to cater for this shift in behaviour. But can blockchain provide the answer?
According to UK Finance, the collective voice for the banking and finance industry, retail losses due to online fraud totalled £265.1m in 2018, a rise of 29% on the previous year. For Ciaran McGowan, General Manager of trading platform we.trade, the solution is smart contracts on a blockchain network.
“The ideal scenario is a solution for all parties to be connected together,” says McGowan. “By using a blockchain smart contract, a trade is created where there is effectively a contract between the buyer, the seller, the buyer’s bank and the seller’s bank – so effectively, when all the conditions of the contract are met, then a payment is triggered.”
For retail it is this ability to track products across the supply chain that is a boon to the sector. But not only does blockchain have the potential to reduce fraud, it can also verify the provenance and origin of a product, eliminate the risk of counterfeits (particularly in luxury goods) – and it has already proven itself to have benefits when it comes to food safety.
Last year, Walmart teamed up with IBM to produce a food safety blockchain solution, built using open source DLT Hyperledger Fabric and running on IBM Cloud. Prior to launch, it took Walmart approximately seven days to trace the source of produce. With the new blockchain solution this was reduced to 2.2 seconds – making it much less likely that infected food will reach the consumer.
How do you get the right number of players onto the network to actually make it viable? I think that’s the biggest challenge rather than the technology itself.
Sarah Hazzledine, Managing Director, Accenture
“Our customers deserve a more transparent supply chain,” said Frank Yiannas, Vice President of food safety for Walmart in a statement. “We felt the one-step-up and one-step-back model of food traceability was outdated for the 21st century. This is a smart, technology-supported move that will greatly benefit our customers and transform the food system, benefitting all stakeholders.”
Indeed, corporate social responsibility (CSR) and sustainability is growing in importance for today’s retailers and customers alike. Last year, the French supermarket chain Carrefour also launched Europe’s first ever food blockchain. Starting with free range chickens, each product label now features a unique QR code which consumers can scan with their smartphone. Not only does this provide them with information about the product, it also shows the journey the chicken has taken – from farm to store. In addition, the code gives the name of the farmer, what feed was used and whether the animal has been treated with antibiotics, for example.
The state of play
Regardless of the potential for the global trade industry, blockchain is far from maturity, and there are many challenges that must be overcome before it can be successfully applied across the board.
Perhaps the greatest challenge for the trade industry is the need to gain universal adoption. There is no doubt that the ability to exchange information accurately and safely across any supply chain is a boon to stakeholders. After all, the more stakeholders take up the technology, the more viable and practical it becomes, and this should lead to it becoming the industry standard. However, organisations are at varying levels of digital readiness, and not all recognise the benefits of DLT and blockchain collaboration.
This is a point made by Sarah Hazzledine, Managing Director at Accenture: “This is a question that desperately needs an answer, as adoption is all about getting the network effect. How do you get the right number of players onto the network to actually make it viable? I think that’s the biggest challenge rather than the technology itself.”
Hazzledine notes that across several consortiums in the industry, adoption has been tentative due to ambiguity around how competitors can collaborate on blockchain initiatives. “Those that have been successful to date consider the needs of all parties,” she says. “Players in the shipping space don’t want to join a network that is seen as owned and driven by an industry giant.”
It is a point endorsed by Lloyd’s List’s Managing Editor Richard Meade: “Maersk and IBM are currently the shipping equivalent of Uber, so unless the industry embraces blockchain and comes up with their own solutions, they will simply become Uber drivers – and that’s not quite as profitable I would say.”
Other critics of blockchain argue that inherent problems with blockchain technology itself will need to be ironed out before it can be applied on such a large scale. The first is latency. Some implementations of the technology have not scaled up significantly enough to cope with the huge demand in processing transactions, and as a result performance has suffered.
In addition, with so many transactions happening across the globe, there are serious issues with the amount of energy required to power the network. For treasury, this weighs heavily on its organisation’s sustainability agenda. Although the amount of paper used will be reduced dramatically, it could be at the expense of increasing CO2 emissions.
However, Hazzledine points out that this is not a concern for private networks. “Public blockchains such as Bitcoin are resource intensive due to the amount of energy required for data miners to do proof of work – but this is not indicative of what is going on in private networks where proof of work is not required.”
The journey ahead
Another problem for global trade is the increasing regulation in different industries. For example, standards and governance in the shipping industry differ greatly from the road haulage industry. As such there will likely be a number of different networks established at different times, all serving different goals.
This is highlighted in a recent research paper on blockchain’s potential by Christine McDaniel, economist and trade expert from the Mercatus Centre at George Mason University. “Integrating blockchain technology in the customs process will require technological updates and the cooperation of customs officials, governments, shippers, and suppliers,” the report claims. “This cooperation may be harder to achieve in industries where particular businesses work to manipulate public policy or economic conditions as a strategy to increase profits.”
Therefore a collaborative mindset across each industry is needed, and a culture of embracing new opportunities from this new technology should be nurtured. This can be achieved if IT departments gain the knowledge and practical first-hand experience required to implement it across the board.
Enno-Burghard Weitzel, Head of Product Management Trade Services at Commerzbank echoes this sentiment: “In the future, it will be possible to completely integrate all corporate enterprise resource planning systems, including all supply chain stakeholders on DLT based platforms,” he says. “This will lead to an increased level of transparency on the whole supply chain and enable end-to-end data flows. Furthermore, in the not-too-distant future we will be able to create digital twins, thereby linking the real world and the digital world.”
While certain issues will need to be ironed out, there remains hope that they can be solved within the next two to five years. Indeed, McGowan is very positive for the future, as he believes that there will be a revolution with the emergence of the IoT, artificial intelligence (AI) and blockchain.
“I expect blockchain will be more than just ‘farm-to-fork’ scenarios across the global trade industry as suppliers and customers will soon be able to track the correct weight of the cargo and even its current temperature,” he says. “Should the goods be damaged on delivery or be of poor quality, AI will be able to calculate the right amount of discount applied.”
Regardless of the thoughts of supporters or critics of blockchain, the benefits are so significant that it seems likely the technology will have a major role to play in shaping the future of global trade. After all, Rome wasn’t built in a day, but its empire changed the world.
