Blockchain in the Supply Chain: Building Trust Block by Block
From Malta to Brazil the technology reshapes the world we live in.
Blockchain has become a buzz word and companies from all around the world have started looking at ways to leverage from it. However, a lot is unknown about how the technology can help day-to-day life. The European Commission is funding projects that are supposed to answer many of the question and countries like Malta are on the front line with new legislation. How Blockchain can improve the food supply chain and what is Malta doing to gain the upper hand are questions that two experts from the field try to answer.
A front runner in Blockchain is Malta. The small country has created a comprehensive rule book thus opening its doors for companies from all around the world who are interested in exploring the Blockchain realm.
One of the key features, brought by The Virtual Financial Assets Act (VFA Act) in Malta is the creation of a middleman called VFA agent whose role it to serve as a guiding hand and a gatekeeper. In order to launch an Initial Coin Offering (ICO) from Malta companies will need to contact a registered VFA agent that will guide them and evaluate their proposals and projects. The evaluation process has multiple steps and future Blockchain operators need to prove they are genuine and that their projects answer all requirements. The agent acts as an intermediator between applicants and the Malta Financial Service Authority (MFSA). ‘They guide and provide an ongoing reporting to the MFSA,’ says Paul Caruana Turner, expert from Grant Thornton, Malta.
What companies like Grant Thornton do is to guide prospective applicants through the entire process. Firstly, they ensure that the all persons seeking to apply for registration or licensing satisfy the fitness and properness assessment. They then help their clients to put in place effective corporate governance structures and assist them in compiling their application. In the case of an ICO the VFA Agent also has an ongoing function to ensure that all applications deliver what they have set out in their white papers. The white paper is an important step which paves the way to all major milestones applicants are looking to achieve. Agents keep track on how well milestones are being met and report to the authorities. In case there are problems they will also provide advice how they can be overcome. Advice is given on how to improve the situation as well as how to keep investors informed and up to date.
A different view
But in London Dr Manoj Dora, Director of Collaborative Project and Outreach at the Brunel University, is looking at how the technology can transform the food supply chain. Dr Dora has worked on a couple of projects and is currently exploring the improve transparency food supply chain in Brazil. A major meat scandal in 2016-17 brought the Brazilian beef industry to its knees. The results were a sharp drop of GDP and lost of trust that affected one of the largest sectors in the economy.
Food fraud is not just limited to Brazil, according to the WHO almost one in ten people become ill every year from eating contaminated food, with 420,000 dying as a result. Global food supply chain has many blind spots which is difficult to guarantee the provenance of their products and adulteration of its ingredients. Public policy exists to protect consumers, but ill-designed regulations and weak enforcement can lead to market failures. The current food safety & quality management systems are not sophisticated enough to prevent fraud.
‘We thought of exploring a different kind of mechanism which is more transparent and audits the whole sector,’ Dr Dora says.
What can be done to bring trust back into our food system? ‘We need to move from an institutional centric to a distributed decentralised approval system of trust based on the deployment of Blockchain technology’ Dr Dora explains. Blockchain is a decentralised digital ledger which records transactions and stores this information on a global network in a manner which prevents it being changed. This can ensure transparency and traceability of the food supply chains, hence prevention of potential fraud.
Dr Dora believes that the way to restore trust is by utilising Blockchain. ‘We thought of exploring a different kind of mechanism which is more transparent and audits the whole sector,’ he says. His ideas are echoed by Turner in Malta too.
The technology sounds good on paper but there are practical problems that need to be considered.
Firstly the team will connect with all interested stakeholders in Brazil and will try to deliver the message why Blockchain can improve the transparency in the food supply chain. Dr Dora wants to make sure that all parties are involved and understand the positive changes that can happen. He admits that the technology sounds good on paper but there are practical problems that need to be considered. How do you implement it in a way that private companies and the government are happy? The way will be to listen to what small and large farmers and organisations in Brazil have to say. The role of the authorities will also be of great importance. A good example for that is Malta, where the government is working to support the industry but also do much more.
Regulating the Wild West
Turner says that when Malta announced it will regulate Blockchain there were many who thought this would give rise to some form of a ‘Wild West’. However, he believes Malta has managed to create a secure environment and people were surprised to find out how meticulous checks are. The country requires not only those who will work with Blockchain to provide information about themselves but also looks at who the investors are and if they are genuine. ‘When the regulation came out everyone looked at It and appreciated how robust and thorough it was,’ explains Turner.
Malta has managed to create a secure environment...
Dr Dora thinks that the corner stone of the technology is trust. ‘The information cannot be manipulated and altered and it is accessible in real time by everybody. It is more democratic which builds trust’, he says. But apart from that there is also the convenience. As everything is stored digitally and it is easier to track changes than on paper the experts are sure the technology is gaining momentum. One of the problems in Brazil is what the government agency, responsible for the audit of the system, will do after Blockchain is implemented. So far it is too early to say.
The world of Blockchain is built around cryptocurrency which is a complex topic and it is no wonder people find it hard to understand. It has many components. A key one is the smart contract which underlies the token. ‘This allows anyone to create a dematerialised contract which has certain rights imbued within it,’ explains Turner, ‘and we have seen a plethora of examples.’ The token can provide different rights like the one to receive profits, to receive a service in the future or the right to receive fixed interest payments, or the right to vote for the direction of the company. It is a contract containing these rights for the holder in respect of the issuing entity which is then executed according to those terms. The rights in the smart contract that can be inserted aren’t fixed as they will depend on the issuer and what they are trying to achieve and what they need to see their project to success. Tokens usually also have an element of transferability which gives them the element of an asset.
Dr Dora is working in Blockchain to prove that it can be used positively outside the cryptocurrency. He thinks that people should try and separate both worlds and see what could be achieved in different industries. ‘One of the big advantages of Blockchain is that it is enforcing trust. It will have a dramatic effect on the administrative procedures, data management, and all the physical files that will be transferred inside the digital system,’ he insists. Blockchain is not that different from any other technology. It might have gained popularity due to the crypto world but the innovation has many possibilities elsewhere.
What Malta tried to create is a system that doesn’t only target Blockchain and is focused on being technologically agnostic.
‘Blockchain isn’t for every product or service...'
The country has created the Malta Digital Innovation Authority charged with regulating what they have termed Innovative Technology Arrangements a term wide enough to incorporate blockchain, DLT and other technologies yet to be invented. According to Turner the legislation is flexible enough to ensure that alternative technologies can also be catered for. The legislation tackles innovative technology arrangements which includes Blockchain. The idea is that as new technologies emerge the legislation will be there and it won’t have to be changed and it won’t get outdated too quickly.
Big or small
The question many companies have is about how they can use Blockchain and is it just for large organisations. Both Dr Dora and Paul Turner say it is not for everyone and there are certain parts of the economy that can benefit better than others. Because there are serious problems in the food supply chain consumers will see the improvements but they wouldn’t necessarily be the ones to use it. ‘It is not about small or big companies,’ explains Dr Dora. In Malta Turner agrees: ‘Blockchain isn’t for every product or service and it is not there for everyone but at the same time I think it could be used across a wide range of sectors in different ways.’ Both experts are sure that the supply chain and logistics sectors can harvest some of these possibilities. Companies should use a good and reliable technology that can improve operations and create a trusted zone. So far it seems that Blockchain is a tool that can do just that.