Real-time payments, paperwork reductions among potential benefits
With promises to reduce paperwork, provide improved tracking and visibility, accelerate cash flow and eliminate fraud and financial reporting errors, what’s not to like about blockchain technology?
For those involved in the shipment of goods – from brokers, carriers and shippers to everyone else involved in the supply chain – the blockchain represents a financial revolution.
Regardless of industry, financial transactions are the backbone of business. They ensure bills are paid on time and that you receive proper payment for your goods or services. But, in organizations that are far-reaching with offices in multiple locations, or in the case of trucking with vehicles in many states, keeping track of all these records, not to mention vehicle repair paperwork, warranty information and more, can be both time-consuming and difficult.
But what if it didn’t have to be? That is where the potential of blockchain could create significant savings for organizations. To be sure, blockchains would never replace a human, explains Joseph Ciccolo, founder of BitAML, which provides compliance services to bitcoin companies.
Using the example of bitcoins, Ciccolo says that those transactions, including the transfer of bitcoins to dollars, still must be monitored by humans called “miners.” For financial transactions within companies, a blockchain could speed the process and help keep information correctly filed, but humans would still need to be involved.
“There is no shortage of ideas,” he says. “There are no shortage of practical applications, but I think we’ve still got a ways to go. I think in a couple of years, you will see a few big success stories.”
Blockchain does not need to be about currency transfer, though. One of the areas being looked at is regulatory and governmental compliance, including taxes and SEC filings. A blockchain could potentially help when an auditor or Dept. of Transportation inspector comes calling as well, says Jeremy Kirshbaum, research manager with the Institute for the Future.
“If you have the information an auditor wants and it is stored on a chain, you could provide that access directly [and quickly],” Kirshbaum notes. “It could provide trustworthy information of an asset being transferred, for example, if both parties trust the chain.”
It also can easily pull together diverse financial records that may be stored in multiple locations to create a single financial record with tamper-proof qualities.
“At the end of the day, the cost of regulations and compliance are rising for everybody,” Brigid McDermott, vice president of Blockchain Business Development for IBM, says. “But the value for compliance is the same; you’re spending more money on compliance to make everything safe. It’s easier for companies to do the right thing and it’s easier to communicate that information to regulators.”
Everything in a blockchain is handled electronically and in near real time, so time spent on paperwork is decreased. This includes time spent on bills of lading, proof of delivery documents and Customs paperwork. It could also potentially lead to a quicker settlement process for shippers and carriers by using what is called “smart contracts.”
“Because blockchains are distributed, you can create smart contracts that execute automatically under certain conditions that don’t need a third-party to manage them,” Kirshbaum says. This is called ethereum blockchain.
According to the Ethereum Project, which is developing just this sort of possibility, an ethereum is a “decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”
The apps run on a custom blockchain and enable “developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.”
Payments in real time
In the supply chain, such a situation may occur in the following example: A shipper contracts with a broker to move its freight. The broker hires a trucking company to pick up and deliver the freight. The trucking company, however, knows this particular broker has a history of delaying payment. Wanting to secure capacity, though, the trucking company inserts a stipulation into the blockchain that requires the broker to make either partial or full payment upon pickup by the driver. That stipulation is triggered by a driver’s signature and once that signature is recorded, a financial transaction is initiated.
Kirshbaum says that any kind of payment like that would mostly be conducted in a cryptocurrency due to the complexity and the number of other parties (banks) that would need to be involved otherwise, but that it is a feasible option in the future.
“I think it will have a financial impact,” adds Ciccolo. “Where that will be, I don’t know. When you talk about things like bitcoin, it’s the ability to transfer currency quickly. There are a lot of questions that need to be answered, including whether you need a blockchain and is there a business case for it.”
Blockchain also could lower transaction costs for smaller organizations, Kirschbaum adds. That would be in part because of paperwork reductions.
Companies could also simplify their fuel tax reporting with a blockchain, perhaps even setting up a blockchain for each of its trucks. Every movement that truck makes or task it performs can be recorded. And that includes tracking vehicle maintenance and individual component performance which would reduce paperwork and streamline the tracking of repairs.
Trading & rate transparency on the blockchain
IBM, commodities trading group Trafigura and investment bank Natixis last week announced a new use for blockchain – trading oil contracts.
By having the buyer, seller and their respective banks all on the same ledger, all parties can simultaneously view and share data on the status of a transaction, from the time a new trade is confirmed and validated, to when the crude oil is inspected, to its final delivery and cancellation of the letter of credit, IBM said.
Benefits noted include reduced cash cycle times, improved efficiency via lower overhead costs and fewer cost intermediaries, increased transaction visibility to help reduce the threat of tampering, fraud and cyber-crime, and the creation of transparent transactions by using shared processes and recordkeeping.
That means the potential is close at hand for the use of blockchain in daily trading markets such as the futures markets, where participants can trade everything from electricity, to natural gas, to crops, and soon freight futures from a company called TransFX. The ability to speed those processes and create transparency of those processes combined with quicker cash cycle times might open futures trading up to more industry participants hoping to manage their cash flow and risk better.
Price transparency is another beneficial use of a blockchain since all the data surrounding price and that shipment’s movements is recorded in the blockchain. In cases where trucking companies and/or shippers differ on the particulars of a shipment – the blockchain provides a trusted record of that transaction. This includes ensuring that the rates being charged are the current or contracted rates. It also could potentially minimize or eliminate the role of unscrupulous brokers as all transactions would now be on a blockchain trusted by all parties.
Distributed, which is a publication devoted to blockchain technology, recently noted several examples of how the technology could impact insurance markets, including automation of the insurance process using smart contracts.
The publication quoted an example using crops from a report produced by Long Finance.
“Crop insurance is often quoted as an example of [a] hedging mechanism against adverse consequences of bad weather on a farmer’s harvest, which could be automated through a smart contract hosted on a blockchain protocol and using an oracle, in this case a trusted weather data feed.”
The smart contract, Distributed writes, would include protocols to trigger insurance coverage. The article goes on to note that identity protection could be a possible use of blockchains due to their nature of requiring a unique key to access the chain.
For the supply chain, movement of goods that require additional insurance or special permits such as oversized loads, could be part of a blockchain. No longer would a carrier have to spend time securing the insurance or waiting on government to issue permits; triggers within the blockchain would automatically activate these protocols – including any payments or fees – once a shipping contract is entered into.
These are just a few of the possible financial impacts of using blockchain technology. At the minimum, blockchain serves as a trusted, tamper-proof ledger for all accounts. At the most, it may serve as a true cost-cutter for financial departments, saving potentially tens of thousands a dollars a year.