Talking it out: how will tokens and smart contracts bring blockchain to supply chains?

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The agenda on day 2 at the Digital Chamber of Commerce’s Blockchain Summit in Washington looked at issues that ranged as far and wide as blockchain and the opioid crisis. That means that it can be challenging to pick out the day’s highlights and how they might impact the trucking industry, as well as how the meeting’s discussion had changed since this reporter attended last year’s event. But some themes relevant to how blockchain might be introduced into supply chain issues were a frequent topic over the day.

Tokens for all: It was a week in which the market for Initial Coin Offerings has been dealing with subpoenas reportedly issued–but not confirmed–by the Securities and Exchange Commission to the promoters of several ICOs. Those subpoenas reportedly have been a reason why the price of bitcoin and other cryptocurrencies have fallen sharply.

Still, even in the face of that, the whole idea of “bitcoin no, blockchain yes” was pretty thoroughly mocked more than once at the conference. That theory is the idea that you can build a distributed ledger to host a smart contract that serves a supply chain, but transactions can take place in dollars, euros, etc. Even if speakers at the conference didn’t criticize that view directly, their remarks made it clear that they believe fully capitalizing on the technology can only come about if friction with the banking system and trying to use multiple currencies is going to slow distributed ledgers so much that only a token can fix it.

At the 2017 meeting, the theme was that the time for blockchain hype was done, and that it was time to get down to work. Now with a lot of that work well underway, the theme for 2018, if there was one, is that the smooth running of multiple distributed ledgers serving one industry, or different ledgers serving industries that need to do business with other industries, is probably going to require a token.

Fiat currency is still a term that gets sort of a snort that is silent but obvious nonetheless. On day 1, it was noted by one speaker that a distributed ledger for an industry that doesn’t use a token is like a toll booth for a bridge between two countries that needs to take in multiple currencies and as a result finds itself with lengthy delays to cross.

Arun Ghosh, life sciences blockchain lead for KPMG, said that given the recent subpoenas, a push into tokens for a supply chain is “something that I wouldn’t recommend yet.” But he noted that there are still entrepreneurs in the blockchain ecosystem “who are taking leaps of faith and creating tokenizable assets that becoming trading mechanisms.”

The key word heard often was “utility token.” If it can be proven that a token has been developed strictly for the purpose of allowing it to be used on a blockchain protocol to achieve a certain purpose, like payment or use of an application, then it might be able to avoid being classified as a security, which brings it under heavier SEC regulation. The discussion also was taking place against a backdrop of Wyoming moving toward adoption of regulations that would make it easier for a token to be classified as a utility token and avoid some regulations that impact tokens marketed more as investments or stores of value.

Smart contracts: In a session to discuss the legal aspects of smart contracts, two attorneys from Perkins Coie’s blockchain group observed that while federal rules on the legality of smart contracts were scarce, states are stepping up  to fill the void.

Dax Hansen, a partner at Perkins Coie, said states have taken actions that have been “truly inspirational and supportive” on recognizing the acceptability of smart contracts, even as the federal government has done little. However, he did say that existing federal law on e-signatures is adequate, and he suggested that governments just let the current legislation stand without taking further steps that might prove to be confusing.

“The law says an electronic signature can suffice,” Hansen said. “It does not say it needs to apply to a specific protocol or technology.”

That issue, however, seems relatively minor compared to the larger issue of putting together a smart contract that can power a distributed ledger solution to the inefficiencies of a supply chain.

“If you try to slap blockchain on top of an existing supply chain, it will not work,” Sam Ganga, the supply chain blockchain lead at KPMG, said in his company’s session on supply chains. But figuring out how they will work will remain a key challenge. “There are always pressures on supply chain leaders,” he said. “Now they have the additional need to have to delight their customers, and you have to figure out how to leapfrog your competitors, and you have to create a view of the supply chain that is real-time or real near-time.”

Why blockchain?: In the session that featured KPMG blockchain consultants, a question was asked why a blockchain is better for a supply chain than a central database. It’s a question that is the starting point in any consideration of whether a company should undertake the necessary work to introduce a distributed ledger solution to a process.

Ganga focused on the immutability of entries on the ledger. “Immutability is a significant value proposition,” he said. “If we just look at the automotive industry, I will know where my part came from, I know that not only do I now have the ability to say not only do I know where the part came from but maybe I know what lot it came from. Any industries you can think of, automotive, airlines, these are the conversations we’re having.”

How long? A blockchain solution—or distributed ledger, whatever you want to call it—for a business or a group of businesses is called an enterprise blockchain, and it was clearly more of a focus this year than in 2017. They can be built in multiple ways, but smart contracts to displace now inefficient processes are at their heart.

They also can be built to talk to other blockchains, a feature known as interoperability.  But there will always be a question of just how many ledgers a company will need to be a part of to get their tasks completed more efficiently. As Ganga said, you can control your own business, and you can try to have your smart contract dominate a sector with a “big stick.” “But if you carry a big stick and he does, and she does, how many blockchains are you going to join?” he said. Interoperability between however many ledgers shake out in the end is going to be required.

Laurie Rosini of Perkins Coie, in an otherwise optimistic outlook for smart contracts, gave a sobering outlook on when this might become reality. Smart contracts for supply chains “are very complex, and I don’t think we’re going to see any practical examples of it in place soon due to that complexity,” she said. “But they’re definitely in development.”

Standards: The ledgers that will be adopted will need standards, but Ganga said the ecosystem is not at a point yet “where we can define what standards mean in this movement.” But Eamonn Maguire, the global blockchain lead of KPMG, said in the financial services industry, “certain trade associations are coming together to establish the sets of standards that will be captured in smart contract language, so there will be a common language.” (Note: The Freightwaves-affiliated Blockchain in Transport Alliance is undertaking a similar effort in the transport industry).

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.