Blockchain can make global supply chains more efficient and secure

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by: Christopher Tang

There are two sides of a bitcoin: a cryptocurrency that enables anonymous individuals to facilitate transactions using a decentralized digital currency without a middleman (such as a bank or credit card company). One side is labelled risks because bitcoin has involved in money laundering activities, ransom collections (e.g., victims of the WannaCry ransomware attack in 2017 paid their ransoms in bitcoins), illegal transactions on the dark web, etc.

The flip side is labelled opportunities not because of bitcoin but its underlying “blockchain” process. After the development of bitcoin invented by Satoshi Nakamoto in 2009, computer scientists, software industry, and the banking industry were intrigued by the potential applications of bitcoin’s underlying “blockchain” process. Essentially, blockchain is a shared database that enables different users can append new data, authenticate user’s new data with strong cryptography, and provides incentives for other strangers to manage and secure updates. In 2014, Vitalik Buterin and his team developed a public, open-source blockchain-based computing platform that is known as Ethereum. This public blockchain enables users to store and execute smart contracts.

Unfortunately, someone siphoned US$60 million in ethers (Ethereum’s version of bitcoin) from an autonomous version of a venture capital fund project (the Distributed Autonomous Organization) in 2016. This incident really calls the security of public blockchains into question. In 2017, more firms are working together to experiment the viability and the benefit of “private” blockchains known as “permissioned blockchains”. Unlike public blockchains that lack visibility of user identity and lack of governance, all users are known to each other in a private blockchain. Also, all rules of engagements are established in advance including which users have what rights to append new data to the end of the chain as a block (i.e., blockchain), and all updates are monitored and verified by other users.

The notion of private blockchains has sparked interest in the financial service industry. Currently, Depository Trust and Clearing Corporation (DTCC) is leading different projects with banks (e.g., Wells Fargo, Bank of America), investment banks (e.g., J.P. Morgan), credit card companies (e.g., Visa, MasterCard) to launch different blockchain networks in late 2018, handling over US$ 11 trillion worth of credit-default swaps.

Besides the financial service industry, startups such as Axoni and Chains are developing industry-friendly codes that can enable customers to execute smart contracts in a private blockchain. At the same time, Microsoft is developing a middleware that provides digital keys to authenticate and authorize certain users to append new data.

IBM is developing new services using private blockchains that are based on Hyperledger Fabric, a distributed ledger with smart contracts. Knowing the ocean freight industry is very inefficient because a simple shipment from one country to another country can involve over 30 companies (exporters, freight forwarders, shippers, ocean carriers, banks, insurance companies, security inspection companies, customs authorities, importers, port operators, ground transportation logistics companies) and few hundreds of interactions and communications to facilitate notification, verification, approvals, and financial transactions. In the ocean freight industry, many steps are conducted manually with lots of paper work.

By noting that the ocean freight process usually involves many users that are known to each other and these users interact with each other in a fairly routine manner, IBM and Maersk formed a partnership in March 2017 to develop a private blockchain solution to digitize, manage, and track shipping transactions. This blockchain solution is intended to help manage and track the paper trail of tens of millions of shipping containers globally by digitizing the supply chain process from end to end with enhanced transparency and security (in terms of information sharing among trading partners). Also, the private blockchain solution is designed to help reduce fraud and errors, reduce the time products spend in the transit and shipping process, improve inventory management and ultimately reduce waste and cost.

Besides the potential of saving billions of dollars, the private blockchain solution can improve workflow and better visibility and security. Specifically, the private blockchain enables each user in the supply chain to track the progress of goods through the supply chain, locate a container is in transit, observe the status of customs documents, view bills of lading and other data in real time. Also, the private blockchain is secure because it does not allow any user to modify, delete or even append any record without the consensus of all other users in the supply chain. This level of transparency helps reduce fraud and errors, reduce the time products spend in the transit and shipping process, improve inventory management and ultimately reduce waste and cost. Ultimately, the visibility and verifiability of private blockchain among trading partners can make global trade more accessible to a much larger number of players from both emerging and developed countries.

The actual value of bitcoin as a decentralized digital currency without a central repository or single administrator remains unknown, but the value of private blockchains appears to be promising!

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