Blockchain for the Supply Chain (revisited)

1.             Introduction

1.1          This is an update to the article "Blockchain for the Supply Chain" published in December 2017. 

1.2          In light of the great potential of blockchain within the logistics sector, the previous article presented several features and applications showing that used effectively, blockchain has the capacity to eliminate many of the market frictions that impede international commerce. Despite its clear potential however, its adoption presents new problems for industry participants and therefore the article examined the legal challenges posed by blockchain.

1.3          This update considers how the potential of blockchain has been harnessed by the logistics sector and looks at examples of how blockchain is being used across the supply chain. These examples show how blockchain platforms are able to provide traceability and improve efficiency ultimately resulting in cost savings for its users. 

1.4          Given the complexity of the supply chain, many initiatives remain in the development phase, although the current drive for digitalisation is likely to focus the attention of both industry participants and regulators on blockchain. 

2.             What is Blockchain?

2.1          Put simply, blockchain is a shared, distributed ledger that facilitates the process of recording transactions and tracking assets in a business network. 

2.2          Blockchain has been described as "an incorruptible ledger of economic transactions that can be programmed to record not just financial transactions but virtually anything of value". In essence, a blockchain network has the following key characteristics:

(a)           Consensus: for a transaction to be valid, all participants must agree on its validity.

(b)           Provenance: participants know where the asset came from and how its ownership has changed over time.

(c)            Immutability: no participant can tamper with a transaction after it has been recorded in the ledger. If a transaction is in error, a new transaction must be used to reverse the error, and both transactions are then visible.

(d)           Finality: a single, shared ledger provides one place to determine the ownership of an asset or the completion of a transaction.

2.3          The appeal of blockchain lies in its economy – it eliminates duplication of effort and reduces the need for intermediaries. Moreover, blockchain is highly secure by design, transparent and has the capacity to eliminate many of the market frictions that impede international commerce. As such, it has immense potential to add value within the logistics sector.

3.             Blockchain in the Logistics Industry

3.1          It is clear that several features and applications of blockchainhave the potential to add significant value to the processes that underpin international trade. Blockchain platforms can provide benefits such as:

(a)           Traceability: tracking the origin and movement of goods across a supply chain;

(b)           Smart Contracts: 'electronic' contracts based on automated actions that are triggered through pre-defined events; and

(c)            Safe Transactions: validating data, enabling users to follow and track the 'journey' of data, including a valid timestamp.

3.2          Blockchain technology can be used across the supply chain to take advantage of these benefits. The examples below provide some insight into how the potential of blockchain has been harnessed:

(a)           Food & Beverage: officially launched in October 2018, IBM's Food Trust provides an ecosystem for industry participants to create a "smarter, safer, more sustainable food system for all". Its launching partners include Nestlé, Unilever and Walmart. The platform captures and shares data amongst participants in the food sector, from growers to retailers, which means that it is able to minimise waste, improve consumer trust and track food contamination, which is especially important when recalls are required. IBM has stated that its members have benefited from 30% less product loss and lower costs. Carrefour, also a member, has stated that blockchain has boosted sales of products due to increased shopper trust as they are reassured by the quality of products they can trace.

(b)           Pharmaceuticals: earlier this year, several pharmaceutical companies including Pfizer Inc and GlaxoSmithKline Plc developed the MediLedger Network, a system based on blockchain in order to track prescription drugs and tackle counterfeit medicines in the U.S. supply chain. The platform is able to validate the authenticity of drug identifiers without sharing the pharmaceutical companies' intellectual data. The blockchain platform can ensure that the supply chain is safe and efficient. The World Health Organisation estimates that around 73 billion euros worth of counterfeit medicine is traded annually and that blockchain technology can look to quash this. 

(c)            Container Logistics:

(i)             TradeLens

In October 2018, A.P. Moller-Maersk and IBM launched their jointly developed platform TradeLens underpinned by blockchain in order to improve collaboration across supply chains, increase innovation and reduce trade friction. 

The platform offers a global supply chain ecosystem for all industry participants including ports, shippers, shipping lines and freight forwarders whereby data is shared securely to provide improved efficiency and visibility. It also aims to replace paper based documents with blockchain enabled digital equivalents. A blockchain platform however goes beyond simple digitisation of documents as it enables its members to view data in respect of assets from the same perspective and therefore jointly trust in the asset's traceability.

TradeLens suggests that paper-based trade and manual document-handling slow logistics and facilitation, thereby reducing the potential of the approximately USD12 trillion containerised freight industry by up to 15%. The appeal of time saving and cost cutting has been successful as TradeLens has already grown to cover more than half of the world's ocean container cargo with five of the world's six largest carriers. The benefits of the blockchain based data sharing are also being identified by other players in the supply chain. In March this year, Standard Chartered Bank became the first financial institution to join the platform and by using the vast amount of live data, it will be able to immediately validate the authenticity of shipments.   

There is however progress still to be made. Vincent Clerc, Maersk's chief commercial officer stated that although more than 200 entities had signed up to TradeLens, the platform was yet to reach a "critical mass" whereby it could make a significant impact. In May this year, when port operator DP World had completed the initial phase of integration to the platform, Reuters reported that the participation of key companies "is seen as crucial for cutting costs in an industry that has seen little innovation since the container was invented in the 1950s".

(ii)            Other initiatives

Only last month Cosco Shipping, Alibaba Group and its FinTech affiliate Ant Financial Services announced that they would jointly explore Ant Group's blockchain technology to support the digitalisation of the shipping industry. Cosco is collaborating with other industry participants in the Global Shipping Business Network (GSBN), another blockchain based platform aimed at making shipping transactions more efficient. Alibaba also joined the International Port Community Systems Association’s Blockchain Bill of Lading initiative in June this year.

In June, Gulftainer launched the "Future of Ports Startup Challenge 2020" in partnership with innovation platform Global Silicon Valley labs which is a competition seeking to identify entrepreneurs and startups with the ambition to transform the shipping and logistics industries in Gulftainer's areas of focus which includes blockchain.

3.3          It is important to note that whilst these examples show how blockchain is being used in the logistics sector, many of these companies or initiatives do not use blockchain in isolation, but rather use it alongside other technologies such as the Internet of Things and Artificial Intelligence.

4.             Legal Challenges for Blockchain

4.1          The previous article discussed important issues including jurisdiction, liability, intellectual property and data privacy. These remain key legal challenges.

4.2          Another issue to consider is competition law. Many of these blockchain platforms are not created by single companies but are instead constituted by many member companies. There is the possibility that such membership could limit competition as it could act as a barrier to entering the market or impede competition within the market unless they remain open and transparent. Furthermore, blockchain platforms involve the sharing of data. This immediately raises concerns as competitors must not share market sensitive information. As such, blockchain platforms must be aware of these risks and be designed so as to avoid anti-competitive practices.

4.3          As the use of blockchain increases, it is expected that regulation of blockchain will also increase. It will be important for stakeholders in the logistics industry to ensure that they keep up-to-date with any developments in legislation and that they participate in alliances on the development of industry standards:

(a)           The Blockchain in Transport Alliance (BiTA) founded in 2017 has become the largest commercial blockchain alliance in the world. It seeks to develop common industry standards and drive the adoption of the technology; 

(b)           The Global Legal Blockchain Consortium (GLBC) aligns global legal industry stakeholders to develop standards to govern the use of blockchain technology in the business of law; and

(c)            The Digital Container Shipping Association (DCSA) founded in 2019 intends to drive technology standards in the container shipping industry. The DSCA sees blockchain as a potential solution for the switch to electronic bills of lading which it estimates will save USD 4 million if adopted by 50% of the industry.

4.4          It is possible that given the transparency and traceability that blockchain provides, blockchain could be used by industry participants to prove compliance with regulations in general.

5.             Future of Blockchain

5.1          It has been suggested that 80% of supply chain blockchain initiatives will remain in a pilot stage until 2022. Whilst initiatives in the finance industry for example have been successful, this has often been where assets are only digital, whereas supply chain initiatives are more complex due to the need to record data and events in respect of physical assets and transportation. 

5.2          To reach the full potential of blockchain, a universally accepted platform used by industry participants has been recommended. In this lies another level of complexity for supply chain initiatives in the logistics industry, as the sector is both fragmented and competitive. This means that the notion of information sharing on a common platform in itself presents certain hurdles. The examples of blockchain listed above show however that these hurdles can be overcome in the logistics industry. A universal platform should also involve the participation of smaller industry players who should be encouraged by the benefits of blockchain.

5.3          There are suggestions that COVID-19 has encouraged the drive towards digitalisation and it is possible that many more industry participants will consequently focus their energy on blockchain initiatives. 

With thanks to @Eleanor Duprez for research and drafting.