Of Blockchains and Supply Chains

The cryptocurrency crashes during 2018 caused some observers to predict their imminent demise. However, Fidelity Investments’ recent creation of a cryptocurrency custody unit certainly reflects credible interest in digital assets among at least some pension funds and traditional asset managers. With apologies to Mark Twain, then, the report of crypto’s death was "an exaggeration."

If digital currencies have proved somewhat resilient, how much greater reason to believe in the longevity and latent power of the underlying set of technologies: blockchain. 

In the realms of social and corporate governance, two of the most powerful applications of blockchain are those of supply chain management and so-called smart contracts. As the technology evolves, it can become a kind of digital duct tape—binding organizational records into an extraordinarily secure, precise, and effective vehicle of system protection and stakeholder transparency.

Blockchain facilitates information-sharing between and among users on a network through a communal list of sequential records called blocks. Each block contains a validated record/date, plus a link to any previous blocks—hence, a "blockchain." The crowd-sourced and crowd-verified character of such regimes vastly enhances their accuracy and, properly administered, also can make them virtually tamper-proof.

Running on top of, or alongside, the blockchain network, smart contracts are computer protocols that allow for the engineering of transactions when a set of pre-determined conditions are met. These electronic contracts are self-executing, with no need for third-party verifications. In toto, this accounting infrastructure lets companies track the permanent history of the products they produce, from sourcing to manufacture to sale. The security and visibility afforded by this automation can save significant time and money.

The developments promise to solve a host of problems. Under the status quo, large multinational organizations suffer from labyrinthine supply chain structures that are made opaque by the difficulty and expense of tracking each records. This results in counterparty uncertainty and mistrust. Not to mention tedium: By some estimates, shipping goods or inputs internationally can require approvals from 30 separate individuals and organizations, clotting the process with delays and inefficiencies.

Here, blockchain offers the ailing patient a quintuple bypass. Beyond a reduction in errors and the increased traceability to ensure that corporate standards are met, the technologies offer other consequential benefits:

• Creation of an immutable record, making it easier for companies to share data with manufacturers, suppliers, and vendors.
• Lower risk, generally, and greater protection against counterfeiting and gray-market trading, specifically.
• Elastic scale for expansion of networks.
• Reduction in paperwork and administrative costs.
• Enhanced corporate reputation among various stakeholders.

Real world examples already exist. One is the successful start-up Everledger, which has uploaded unique identifying data on more than one million individual diamonds to a blockchain ledger system. The result greater protection against crime and insurance fraud. Another outcome is easier, more dependable compliance with regulatory prohibitions against so-called "blood diamond" products.

In July, the Commonwealth Bank of Australia (CBA) announced that it had used blockchain to successfully track 17 tons of almonds sent from Victoria, Australia to Hamburg, Germany. Partners could follow the shipment’s locations and conditions (think: temperature and humidity) in real time. According to CBA, the fortified supply chain allows partners to upload and access documents—such as bills of lading, certificates of origin, and other documents required by customs—which has measurably streamlined their process. Earlier, in 2016, CBA and Wells Fargo announced that they used blockchain to track a shipment of 88 bales of cotton from Texas to China. (That entailed a letter of credit being executed through a digital smart contract stored on a private distributed ledger.)

In August, IBM and Maersk launched a global blockchain-powered shipping tracker that was able to chronicle critical data (think: weights and temperatures) about each shipment in a supply chain, again generating a distributed, immutable record in real time. Participants include 20 ports and terminal operators worldwide, in addition to customs authorities. The companies reported that the solution could reduce the transit time of a shipment of packaging materials to a production line in the United States by 40 percent.

To be clear, as these technological solutions evolve, multifarious challenges arise. From a practical standpoint, the capital and operating expenditures needed to cover system development and implementation can be prodigious. Plus, few organizations will be starting with a clean slate—they will be integrating into a built environment of systems and existing frameworks of risk management. Finding and nurturing the requisite talent to make this happen will also prove daunting for many.

On the purely technological end, cybersecurity remains more than slightly problematic. Less fearsome, but sometimes just as complicated, systems acquisition and licensing can create an enormous time suck. The replacement of legacy systems mentioned above will also require addressing interoperability with internal and external users. And data storage requirements will also need careful attention.

Last, but not least, comes the long arm of the law. Inhouse legal departments will need to cast a gimlet eye on the intricate standards and requirements for hardening cybersecurity. They will likewise need to carefully assess newly decentralized liability, questions of possession and ownership, and the aggregate jurisprudential uncertainty that attends this infant dynamic.

On balance blockchain’s promise is almost blindingly bright. Just make sure you have the proper eyewear.

Reprinted with permission from the December 3, 2018 issue of Corporate Counsel. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.