The success of a blockchain, which is essentially a specific type of database where time-stamped and authenticated digital records are compiled, is based on two foundational concepts: data immutability and the distributed nature of how data is assembled.
In mid-October, a buzzword that has been circling the financial world for years finally came into clear view in the world of supply chain.
That’s when news came that Maersk Line, the world’s largest container shipping operator, was pilot testing a blockchain-backed bill of lading.
The news was significant for those who rely upon the movement of freight across borders, as it hints at a future when companies might be able to eliminate the stacks of paper documents that have long served as the foundation of global trade. That includes everything from bills of lading to shipping instructions, customs documentation, even letters of credit for suppliers in foreign countries.
The last example is actually the area where blockchain, as a concept, has gained the most traction. Technologists have been pushing for broader use of blockchain in the banking world as a way to enhance transaction efficiency and reduce the risk associated with multi-party transactions.
But blockchain can theoretically be applied to any transaction. The question, from a supply chain perspective, is where its application would result in the greatest benefits.
Before we get too far ahead of ourselves, let’s explain exactly what blockchain is. A blockchain is essentially a specific type of database where time-stamped and authenticated digital records are compiled.
The success of a blockchain is based on two foundational concepts: data immutability and the distributed nature of how the data is assembled. In other words, the data added to a blockchain by a party cannot be changed by any other party, and data compiled in the blockchain is added and verified by multiple parties.
This last bit is particularly important. It’s the reason why blockchain technology is also sometimes referred to as a “distributed ledger.”
Say, for example, there are 10 parties involved in an international shipment. In a blockchain scenario, each of those parties would add the data elements for which they are responsible to the database and each would only be able to alter the data they provided, not the pieces submitted by the other parties. What’s more, the accuracy of the data provided is theoretically ensured by the distributed nature of the data submission and by something called “computational trust,” or cryptographic technologies.
It’s easy to get deep in the weeds on the technological structure of how blockchain works. But the value of blockchain in a supply chain setting is much less difficult to see. Modern supply chains typically involve dozens of individual parties, each responsible for contributing critical pieces of data associated with a single shipment.
Those data contributions sometimes occur via digital means – through manual or automated data entry into a system or web portal – but often they are still submitted via actual paper documents.
Roman Beck, a professor at the University of Copenhagen, told the International Business Times that the shipment tied to Maersk’s blockchain bill of lading project generated a pile of paper nearly 10 inches high.
“This is an impressive pile,” he said.
Bitcoin’s Relevance. Most people are probably more familiar with the cryptocurrency bitcoin than they are the term blockchain. Bitcoin is a form of unregulated currency than is enabled by blockchain. At its core, bitcoin serves as a distributed ledger of all transactions between parties designed to circumvent central banking institutions.
The broader idea was to eliminate the impact that these institutions have on currency through policy decisions over which currency users have little impact.
The rationale and structure of bitcoin has often been misunderstood, in part because in the developed world, a currency that evades the grasp of central banks isn’t so important. As the bitcoin advocate Andreas Antonopoulos puts it, when the value of a currency is stable, there’s little motivation for people to seek out a currency that lies outside the control of state-run banks.
But that proposition changes in countries where the government and its currency valuation is less stable. If a country’s currency was devalued by 70 percent in a month, it would be easy to understand why someone in that country would not only search out a more stable form of currency, but also a form that was less controlled by a government.
Bitcoin is only one manifestation of blockchain technology, but its advantages are somewhat transferrable to supply chain.
Think of an importer wanting to ship goods from a supplier in an unstable nation on a distant continent. A blockchain could support the bill of lading and customs documentation attached to that shipment, alleviating concerns about the paper documentation from the supplier, customs clearance in that country, and the quality of goods the supplier produced.
It should be noted, as various skeptics have pointed out, that blockchain doesn’t replace the relationships between parties. An importer in an advanced economy won’t inherently trust an unknown supplier in an unstable foreign country simply because of the existence of a blockchain.
But in a situation where that importer has doubts about the ecosystem around a vetted supplier, the blockchain can provide an efficient way to collate documentation, payment guarantees, and customs clearances that might otherwise hold up the movement of the physical goods.
Test Case. Over the summer, IBM released a Youtube video that explains how a blockchain might be established to include the letter of credit, bill of lading, and phyto-sanitary clearance for a shipment of flowers from Malaysia to Germany.
The video describes how four parties – the ocean carrier, a bank, and the origin and destination port authorities – are designated as “authentication nodes,” while a number of other parties – the exporter, importer, ancillary banks, and customs authorities – are only granted “authorship or viewership of the data.”
The process starts with the bank that has authentication authority (in this case, the importer’s fictitious bank) initiating a letter of credit through a so-called “smart” contract. A letter of credit typically guarantees a foreign supplier it will be paid for producing a good. Before being added to the blockchain, the four authentication nodes digitally validate the letter of credit. When the letter of credit is received by the flower grower in Malaysia, a receipt notification is automatically generated on the blockchain.
Next up, the flowers are ready to be shipped, but the shipment needs phyto-sanitary clearance from Malaysian customs to be accepted in Germany. The customs agency, which has authority to author data, registers the certification on the blockchain.
The video notes that the Malaysian grower can only see that the letter of credit has been issued and that the goods have been cleared by Malaysian customs. It does not have a view into the importer’s letter of credit details, as that is a confidential transaction between the importer and its bank.
The next step is the creation of the bill of lading by the ocean carrier. In an ideal scenario, the bill of lading would have been created automatically, combining data collected from the carrier’s back-end systems with data already housed in the blockchain.
Once the containers are trucked from the grower to the origin port in Malaysia, the port authority there confirms the shipment on the blockchain, as does the receiving port in Germany when the containers arrive. The ports only see the data that pertains to them “and nothing else,” according to the video. German customs inspects the containers and clears them on the blockchain, with the associated customs fees ready to be paid as soon as the boxes are cleared.
When the containers arrive at the importer’s facility, that event is also recorded on the blockchain, signaling that the funds are to be transferred to the exporter, either directly from the importer or from the importer’s bank.
The video describes a shipment with simple characteristics, eschewing the impact of drayage at both ends, the role (if any) a freight forwarder plays, and other key customs documentation steps in the process. There are even more ancillary activities, such as raw materials to the production facility, product quality certifications at origin, and final mile delivery at destination that could be added as well.
All of those parties could participate in the blockchain, since the goal is to reduce the complexity and the cost of international payments and documentation.
But the fact that they all don’t participate in the IBM example is also sort of the point, blockchain advocates say. The use of blockchain doesn’t have to encompass all the parties attached to a shipment to be valuable.
“If only two points in the chain participate, there’s still value,” Srinavasan Sriram, founder of the blockchain technology provider Skuchain, told American Shipper. “Every other point that joins adds value to the [whole].”
Pace Of Adoption. Sriram said this gets at the real barrier to blockchain acceptance in the supply chain: the pace of adoption. He said parties in an international shipment need to see how this technology can benefit them in the real world, and that adoption will likely happen gradually.
For instance, this fall Skuchain pilot tested its own blockchain platform, called Brackets, with a shipment of cotton bales from Houston to China aboard a CMA CGM vessel. The project, which involved the trading firm Brighann Cotton, the U.S.-based bank Wells Fargo and the Australia-based Commonwealth Bank, used blockchain and smart contracts to allow shipment events to trigger change of ownership of the goods and the release of payment from the buyer to the seller.
Sriram has been in discussion with technology providers to bring the value of blockchain to the container shipping industry. “You’re not going to get rid of people in the next few years,” he said. “There are lots of actors, and it’s highly fragmented. But you can effectively have a blockchain with a paper bill of lading accompanying it.”
In other words, he believes that if the industry sees how a bill of lading works within a blockchain framework, while the actual physical bill of lading is still in existence, people would be more willing to put their trust in the digital version.
Several technology providers in the shipping and logistics space have signaled to American Shipper they are closely tracking the blockchain concept, but weren’t ready to discuss specific plans or applications of the technology.
The need for increased efficiency is already there. For example, when a physical bill of lading is produced, and an error is found, it often needs to be reproduced and resent by courier. In a blockchain scenario, those changes would be handled and authenticated digitally, saving money and, more importantly, time.
Fancy Database. One key piece of this puzzle is security. A distributed ledger implies that everyone on the blockchain might have access to all information, but that’s not how these instruments are meant to be constructed.
The encrypted nature of a blockchain allows parties to keep certain data or documents private from other entities. For instance, a forwarder might want to shield its rates from the ocean carrier involved in a shipment, or a distributor might want to withhold the name of its supplier to a retail customer. The same encryption technology that allows the blockchain as a whole to be secured also allows parties access to only the information they should have access to.
Sriram said blockchain allows companies to work collaboratively to lower costs and increase visibility.
“Most logistics players have good systems once they receive the goods,” he said. “But it’s the pick up and hand off where the problems arise, and the ability to track across the supply chain.”
In some ways, blockchain is actually a simple concept with sophisticated technology underlying it. Blockchain clarifies chain of custody through democratized ownership of data accuracy. And it speeds payment between trading partners where layers of intermediaries generally exist.
But essentially it’s just a fancy database.
“The thing about databases is they’re siloed and they’re generally centralized, and they’re owned and managed by someone who has unilateral editorial rights,” Blythe Masters, chief executive of the blockchain technology company Digital Asset Holdings, told the Wall Street Journal in June.
“So when multiple parties to a common transaction interact, they are inclined to keep their own separate records of their respective piece of a joint transaction, and that leads to tremendous inefficiencies. An enormous amount of time, particularly but not limited to financial services, is spent reconciling the differences between records kept in distinct databases that ultimately refer to the same transaction between two parties.
“Blockchain technology, or distributed ledger technology, is just a way of using the modern sciences of encryption to enable entities to share a common infrastructure for database retention.”
There are certainly some roadblocks to widespread use of blockchain in supply chain. For one, many of the entities involved, including key ones like carriers, port authorities and forwarders, lack the proper back-end systems to feed into a modern blockchain framework. That issue could well be mitigated by blockchain technology providers offering systems that would pull data from legacy systems and translate them into a blockchain-ready format.
There’s also the issue of motivation. It will take more than one entity in a supply chain to understand the value in using blockchain regularly, either through increased data accuracy, faster payment to suppliers, better visibility into supply chain milestones for the importer, or something else entirely.
But if the financial world is any indicator, blockchain is coming. The financial services consultant Greenwich Associates estimates banks have budgeted $1 billion globally for blockchain initiatives this year, according to a Bloomberg report in October.
PwC in October released a report detailing future technologies in logistics and singled out blockchain as one likely to impact the industry.
“Logistics solutions based on blockchain technology are developed by start-ups and gain momentum in areas such as digitized trade documents, chain of custody, customs clearance, and trade finance,” the report said.
It seems like only a matter of time before shipment management software companies, especially those that provide solutions for both global transportation and customs processes, start to provide blockchain-based products.