A Chip Off The Old Blockchain

James Veale

Blockchain, blockchain, blockchain. It seems like blockchain has come up in every meeting I have had in the last three months across Asia-Pacific and Japan (APJ). I’m not going to use this blog post to explain how the distributed ledger works (lots of explanations out there like this one by Zach Church of MIT Sloan), but if all my customers and network are so aware of the benefits of blockchain when applied to digital agriculture problems, how come the takeup of blockchain transactions in the agri space is still so low? For example, in last year’s Australian grain harvest, only five percent was sold using a form of blockchain ledger to record some aspect of the transaction, while the other 95% went through traditional supply chain transactions.

This got me thinking. Do blockchain ledgers bring any benefits to the agri supply chain or are they just a passing fad?

The most significant implementation of a distributed blockchain ledger has been the cryptocurrency Bitcoin. So do growers and originators want to use blockchain to transact in Bitcoin? Talking to my network, the answer is a resounding maybe, but other blockchain applications are a lot more interesting. Global trade payment mechanisms are well established and, while it can be argued that Bitcoin and other cryptocurrencies can lower the cost of direct payments to smallholders in Southeast Asia (who may not have access to bank accounts and pay up to 10% of a transaction in finance costs), this isn’t the blockchain application that’s getting my network excited.

There are, however, two killer apps that folks are talking about, and one aspect of the payment process is getting people excited – the ability to provide cheaper and quicker letters of credit (LOC), and hence remove the counterpart credit default risk from any transaction.

LOC transactions typically involve a complicated paper trail that requires international courier services, is vulnerable to document fraud, and can take as long as a month to complete.

Does blockchain LOC work in the real world? Barclays reported the first blockchain-based trade-finance deal in September 2016. The transaction guaranteed the trade of almost $100,000 worth of cheese and butter between Irish agricultural food cooperative Ornua and the Seychelles Trading Company. The process – from issuing to LOC approval, which usually takes between seven and 10 days – was reduced to less than four hours. In this transaction, both parties were able to transfer the shipping, insurance, and other original documents that had been cryptographically sealed via the blockchain – saving time and money, increasing the security of the deal, and opening up new trading partners without the established high costs of raising paper LOCs.

Secondly, Caveat emptor is especially true for agri commodities – for example, how do I know that this tin contains dried milk powder from a New Zealand farm? Food fraud is rife; this article from Bloomberg in August 2017 suggests that “very close to 100%” of Chinese produced food is adulterated in some way for profit, and following the 2008 baby milk powder scandal in China, an Austrailia and New Zealand (ANZ) sourced tin of baby powder now sells in mainland China at a 60% premium to the same tin in the ANZ market.

The value of blockchain here is its ability to make the supply chain entirely transparent and rich with immutable provenance data from farm to table. In other words, blockchain tracks information about your food, and participants along the supply chain cannot tamper with this information. Ultimately, this technology enables farmers, manufacturers, and retailers to justify premiums for certain products and gives consumers confidence about where their food comes from and how it was produced. The concerned mother in Shanghai could simply scan the barcode on the product tin to trace the supply chain of the milk powder right back to the farm in Taranaki.

As for when blockchain will be common and widespread in our lives, this article by Marco Iansiti and Karim Lakhani from the Harvard Business Review likens blockchain rollout to the TCP/IP technology adoption that created the Internet and allowed email, e-shopping, streaming media, and a whole host of technologies that have digitally transformed our everyday lives. And what year was TCP/IP created? A rather sobering 1972! So will it take 30+ years to transform the agri supply chain to blockchain? Possibly, but evidence suggests that awareness among CIOs of how blockchain can transform their enterprises is in excess of 80%, with over 50% currently involved in some sort of proof of concept blockchain trial, meaning 2018 could just be the year that blockchain takes off.

The week of 12th March, I will be in Melbourne attending the 2nd annual APAC Blockchain Conference, where I am meeting ANZ agri blockchain startups such as AgriDigital.io and TBSx3.com. With such a groundswell in this area and the signs of mass adoption about to happen, then it is certainly a case of a “chip off the old blockchain.”

With the right blend of blockchain and other emerging technologies, your supply chain can become a competitive advantage. Read our reserach report on The Blockchain Solution.

James Veale

About James Veale

James Veale is the Digital Leader for Agriculture industries at SAP Asia-Pacific and Japan. He leads the industry through value management, customer co-innovation, digital transformation, and business process performance improvement programs by developing road maps, reimagining business models, and reducing costs with digital technologies.