How could cryptocurrency impact global supply chains?

16/07/2018

Bitcoin and hourglass on a beach

Bitcoin and hourglass on a beach

After a surge of initial excitement, the mania surrounding cryptocurrencies has somewhat subsided since December 2017. Cryptocurrency prices might be in the gutter right now, but some of the brightest minds in tech still have their noses to the grindstone trying to drive crypto projects forwards.

The question is: are these tech pioneers are flogging a dead horse, or is there something behind the claims that the technology behind cryptocurrency is one of the most important fintech advancements in history?

“It’s bigger than the Iron Age, the Renaissance. It’s bigger than the Industrial Revolution.”  – Tim Draper – US Venture Capitalist.

Globalization has spawned a complex network of international trade and business. For cryptocurrency to live up to the promises made by commentators like Tim Draper, it is clear that it must disrupt and create value in international business. Only then will cryptocurrency enact true change on a global scale.

Current trade barriers come at a high cost to businesses

It’s no secret that international business is a logistical challenge. Global trade is dominated by multinational companies that have a global approach to operations, production and markets. This means supply chains commonly span multiple nation states.

Even relatively simple business functions, such as payments and product component shipments, can cause logistical issues. That’s not even accounting for added barriers such as the different importation and exportation regulations that multinational companies have to comply with across their global supply chains.

Right now, international business is being held back by the following factors:

  • high banking fees
  • terrible currency conversion rates
  • human errors in documentation
  • improper document storage
  • slow payments and document transfers

All these factors require multinational corporations to expand payroll to deal with them and keep their global supply chains running smoothly. Needless to say, this added cost places a burden on international business and erodes profit margins.

According to the World Economic Forum’s report on Enabling Trade: Valuing Growth Opportunities, reducing the barriers faced by global supply chains could increase global trade by up to 15% and increase overall GDP by 5%. This equates to around a $3 trillion uplift in global economic output per year.

To put it another way, companies with global supply chains are collectively losing $3 trillion per year to these challenges.

How can cryptocurrency help offset supply chain costs?

Cryptocurrency has given us two main technologies to streamline supply chains. These are:

Blockchain: This is a digital public ledger that records information securely, publicly and with an indisputable time stamp. The problem with traditional means of storing data is that there is usually a single point of failure. History has shown that even multinationals are not immune from having their data estates compromised and having to deal with increasing regulatory pressure or penalties. Bitcoin, since its inception in 2008, has never had its ledger compromised. Indeed, the Bitcoin ledger secures over $100 billion dollars of value right now.

Smart Contracts: This type of contract allows for the distribution and collection of digital or digitalized assets. There is no need for a middleman at all. The easy way to think about smart contracts is that they are similar to vending machines. If a certain condition is met, then a predetermined outcome is executed. With a vending machine, if you put $1 into the machine you then get a can of coke. Smart contracts act in a similar way and can be customized to meet business needs. Theoretically, anything of value can be traded via a smart contract.

Transaction inefficiencies in global supply chains

The truth is that there have been no major updates in transaction infrastructure for decades. Global payments can take days to be validated, expensive currency exchange is often required to settle operational expenses across the global supply chain, and banking fees can be extortionate.

The key point is that the current global infrastructure to transfer value has significant room for improvement. This is something cryptocurrencies can help with. In June 2018, the popular cryptocurrency, Litecoin, was used to transfer $99 million worth of value. How long did this take and how much did it cost? Well, the transaction took a few minutes to validate and the sender was charged $0.44 in fees. We challenge you to find a traditional method of transacting value that can achieve the same results at a cheaper price.

Fast and cheap payment validation not only means the pace of business can be faster, but it gives corporations a significantly cheaper payment alternative to keep their supply chains running smoothly.

Supply chain automation

From a business perspective, the main issues with supply chain management are human error in documentation, the number of people required to keep the supply chain running smoothly, and the cost of import/export compliance in different countries.

Smart contracts give companies the opportunity to automate their whole supply chain. How would this work? Let’s imagine we run the ‘Awesome Car Company’ and have a supply chain that requires shipments and payments to a dozen different countries. We must be aware that many of these countries have different importation and exportation regulations for us to comply with.

The UK distributor of the ‘Awesome Car Company’ has sold some units. Their inventory is now down to 9 units and has triggered the smart contract low stock rule (the smart contract executes when inventory is below 10 units). This means the rest of the smart contract deploys and automatically issues contracts for car parts from each supplier in our supply chain, which are securely stored on the blockchain.

Issuing contracts for each supplier is not enough to get our new car units. Suppliers need to be paid. Smart contracts can also be used to automate payments to all our suppliers in cryptocurrency. Automated cryptocurrency payments can be processed from the distributor in the UK to the head company and then to all the suppliers in our supply chain.

Shipping and customs documentation from the suppliers can be instantly generated, with each country’s regulations taken into account. These documents can then be sent securely to the UK distributor of the Awesome Car Company. In essence, our whole supply chain is automated through smart contracts and the UK distributor of the Awesome Car Company can just sit back and wait for his new car units to arrive. The CEO of the UK distributor can now significantly reduce payroll and increase their margin on each car unit sold.

Blockchain can help solve global counterfeiting issues

According to the International Chamber of Commerce, counterfeiting could cost the global economy $1.9 trillion a year by 2022. This just shows the scale of the counterfeiting problem for international businesses and the drain it imposes on the global economy.

The good news is that there are cryptocurrency projects focusing on securing global supply chains from counterfeiters. One such project is China-based Wabi. Wabi provides a solution to track products through every step of the supply chain, from the manufacturer to the shop shelf.

When the product is manufactured, it is secured by an RFID label. These have been specifically developed to resist accidentally breaking in transit or tampering. These labels are then scanned at every stage of the product’s journey through the supply chain. Data such as the product’s geographic location is stored on the blockchain.

Data stored on the blockchain cannot be altered or edited, meaning that records stored cannot be altered by nefarious actors.

Wabi also has a consumer app. When a customer is in a shop and they come across a Wabi protected product, they scan the RFID label in the app and all the supply chain data can be viewed. If the product’s physical location on the store shelf does not reconcile with the information on the blockchain, then the customer will be alerted that the product has likely been tampered with. In short, the product is not where it should be, meaning that the supply chain has been compromised.

This technology gives customers assurance that what they are buying is the genuine product from the manufacturer. It’s not just about saving corporations money. In 2004 and 2008, the Chinese baby milk supply chain was compromised and counterfeit products hit the shelves of shops. This resulted in:

  • 2004: 63 infant deaths
  • 2008: 6 infant deaths and 300,000 hospitalizations

The impact of global counterfeiting is not just an economic problem. It is a problem that costs lives, and that is why adoption of blockchain technology can add very real value to securing global supply chains.

The full potential of cryptocurrency is still to be seen

Before we get too excited, we must remember that cryptocurrency is still far away from being widely adopted at a merchant and institutional level. Indeed, cryptocurrency as a store and transfer of value may have no place at all in international business.

However, Tim Draper’s comments that cryptocurrency is bigger than the Industrial Revolution could be spot on when it comes to the potential impact that blockchain and smart contract technology can have on international business.

The potential to create a new economy is certainly there. Some may think similar things were said in the dotcom bubble and other bubbles of the past. But consider what you are using to read this article. Maybe the supporters of online business during the dotcom bubble got something right after all?

Technological advancements and adoption take time. But if cryptocurrency can actually bring wide sweeping changes to international business, I believe that it will be blockchain and smart contract technology that will change everything and usher in a new global economy.

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Tom Alford

Author: Tom Alford

Tom is a cryptocurrency investor from Edinburgh, United Kingdom. He believes in long-term projects rather than any short term gains, and is a strong advocate of the future application of blockchain technology.

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