Kristen Michaud, Managing Director of InBlock at LiquidX, was a guest speaker at a webinar on May 27, 2021, on the use of blockchain in supply chains. The webinar was hosted by the Boston Blockchain Association and additionally featured Leanne Kemp, CEO and Founder of Everledger, Anndy Lian, Author of “Blockchain Revolution 2030,” and moderator Andrea Frosinini from the Canadian Blockchain Supply Chain Association. Ms. Michaud shared her expertise in the application of blockchain from a banking and corporate perspective, to trace and confirm the validity of an asset such as an invoice. Ms. Kemp provided insight from her experience using blockchain and other technologies to provide full visibility into origination and authentication in the diamond and gemstone industry. Mr. Lian contributed wider market insights from his role as a consultant to governments on blockchain and cryptocurrency.

Key Value in Traceability

The key application of blockchain in supply chains is to provide traceability and tracking of two main layers: physical goods and their associated documentation. In the diamond industry, since diamonds are unique like snowflakes, it is possible to create digital twins of diamonds and place them on a blockchain. A focus area for governments is tracking of goods in their economies, such as confirming the origins of medical supplies and tracking vaccine expiration dates.

The other layer relates to the trade documents themselves, such as purchase orders, invoices, bills of lading, etc., which represent parts and inventory in the working capital process. These documents are key financial assets for a company and are often monetized via banks or other financial institutions for funding operations. There is a risk associated with ensuring that the document represents legitimate transactions and real underlying goods, which often reside in a warehouse controlled by a third party. Connecting all relevant parties through blockchain helps diminish risk, particularly fraud, and gives lenders and insurers a source of comfort. The value provided by blockchain traceability even has the potential for supporting new financial markets by transforming traditionally non-liquid assets such as purchase orders into liquid assets, putting them into a form that can be more readily bought and sold.

Benefits for ESG and the Circular Economy

The panelists noted that blockchain can play an important role in Environmental, Social and Governance (ESG) and Circular Economy initiatives toward sustainability, waste reduction, and ethical manufacturing. More and more consumers are asking, “where did this product come from?” and “where does it go when it leaves me?” Blockchain helps companies record their product journeys more accurately. An obvious application – conflict diamonds – is already being addressed by Everledger. Newer applications are appearing that support sustainability in infrastructure, such as stored energy such as batteries for electric vehicles.

On the financial side, several banks have launched programs to provide financial support or lower rates to companies that meet ESG criteria. Large corporates have likewise established programs to support their suppliers’ sustainability efforts. Blockchain can provide the visibility and validation needed for these endeavors. Looking farther out, one vision is to tokenize even elemental components such as water or the environment to bring traceability and responsibility into supply chains.

Challenges to Consider

All panelist agreed that blockchain is not a magic bullet, standalone solution. A “symphony of technologies” must come together for full visibility of supply chains. For example, in the case of diamonds, scanning and other forensic technologies are needed to create the digital twin of a diamond that resides on the blockchain. For financial documents, digitization is an enormous amount of work for banks and corporates, but the resulting traceability is worth the effort. Artificial intelligence and “big data” are necessary to integrate to make blockchains smarter and optimize their true value.

The panelists noted that one misconception about blockchain is the assumption it can track and authenticate anything. Organizations must have a clear reason to implement blockchain and strong standard operating procedures (SOP) to realize the value of blockchain. To use blockchain, according to Ms. Michaud, “you have to digitize and automate a process, and you don’t want to automate a bad process.” Much care must go into properly capturing the history of an asset, because it has ripple effects throughout the system. Ms. Michaud cited the practice of factoring, where a company sells invoices that are payable in the future to a lender to receive cash faster. The purchasing bank needs certainty that the invoice is legitimate and was not previously sold to another bank. This validation is even more important since the bank may sell the invoice in a secondary market, and a valid invoice is easier to sell. Connecting counterparties on a blockchain builds trust across a financial supply chain.

The situation is more difficult for physical goods. One challenge is originating the data necessary for tracing at the object level. For diamonds, this requires recording carbon footprints to distinguish between natural and synthetic diamonds. In manufacturing, LED-certified factories that can measure their output are still a rarity. Sophisticated data ingestion for tokenization needs to be further developed before it can be widely utilized at speeds necessary to support consumer-level applications.

Today blockchain is penetrating high value industries such as luxury goods and gemstones, or economies with a sophisticated manufacturing infrastructure such as Germany. For example, a fashion house might tokenize its designs and garments, with royalties to be paid over time. Clearly this level of authenticity is not yet feasible in other supply chains such as perishables or fast-moving consumer goods. But it could be developed as blockchain applications mature.

SOP for Blockchain

One obvious and necessary challenge for the nascent blockchain industry is interoperability between private and public blockchains. Multi-chain protocols must continue to be established. Further, more education is needed on the roles and capabilities of both private and public blockchains, including which duties happen off-chain. The panelist noted several misconceptions about public blockchains, for example assumptions that they lack security, and “everyone” could read or write on the ledger. Properly executed, public blockchains have layers of security and privacy granted through permissioning and authentication.

Even though it is early stage for blockchain, its benefit for optimizing both physical and financial supply chains is obvious, and practical applications have already emerged. As one panelist noted, “A sheet of paper and a promise to pay only go so far these days.”