The practical realities and opportunities of blockchain

Start small and run proof of concept projects in parallel with traditional processes

By: Ken Cottrill
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Photo: Caleb Holder / Shutterstock.com
   The use of smart contracts to automate trade documentation is moving closer to reality as proof-of-concept (POC) projects demonstrate the benefits of the technology. Companies planning to test the waters with their own POC should heed an important lesson from these projects – keep it simple.
   A smart contract is basically computer code housed on a blockchain that defines and executes the terms of an agreement between parties. Digitizing trade documents in this way could speed up trade transactions and made them more secure.
   For example, in October 2016, 88 bales of cotton were shipped from Houston, Texas to Qingdao, China. The participants were Commonwealth Bank of Australia, Wells Fargo Bank, and Brighann Cotton.
   The trade involved an open account transaction (i.e. where the goods are shipped and delivered before payment is due), mirroring a Letter of Credit, executed through a collaborative workflow on a private, distributed ledger between the seller (Brighann Cotton U.S.,), the buyer (Brighann Cotton Marketing Australia), and their respective banks (Wells Fargo and Commonwealth Bank of Australia). The blockchain-based technology was developed by the vendor Skuchain.
   Since this was a POC, the actual transaction was carried out using traditional documentation; the blockchain-based transaction ran alongside it, using a letter of credit that was codified in a smart contract.
   A GPS sensor on the shipment tracked the location of the cotton in real-time, and transmitted a confirmation when the goods arrived in China. This notification was relayed to the smart contract, triggering the release of a payment.
   Commonwealth Bank of Australia confirmed that the digitized transaction was much faster than its traditional counterpart. By creating greater transparency between buyer and seller and eliminating manual processes, it also provided a higher level of security.
   The bank points to the potential for lowering supply chain risk. The availability of real-time tracking data on the shipment improved supply chain visibility, and made the transaction more “predictable,” said Michael Eidel, executive general manager of Commonwealth Bank’s cash flow and transaction services.
   “I see different layers of cost benefits,” Eidel added.
   For instance, coupling blockchain-based smart contracts with internet of things (IoT) technology might in the future “allow banks to put less capital against trade funds” because there is less transactional risk involved and the outcomes are more certain.
   Other companies are exploring trade applications of smart contracts. For example, IBM is working with two Dubai government agencies – Dubai Customs and Dubai Trade – as well as Banco Santander and Emirates NBD Bank, freight company Aramax and telecoms company Du on a POC involving supply chain tracking and trade finance related to shipping fruit from India, converting it to juice and delivering it to Spain.
   For companies, a POC can reveal much about the viability of a smart contract solution. But it’s important to keep the cost down by focusing on the basic robustness of digital documents.
   Consider, for example, the cotton POC described earlier. The confirmation from the GPS sensor mounted on the shipment did not automatically flow into the smart contract. A freight forwarder picked up the signal and relayed confirmation by email, and the smart contract subsequently triggered a payment. The participants did not want to invest in a direct interface between the sensor and the smart contract; the goal was to test the performance of a smart contract on a relatively modest budget.

The participants did not want to invest in a direct interface between the sensor and the smart contract; the goal was to test the performance of a smart contract on a relatively modest budget.

   Also, the two banks and the shipper involved chose to partner with a blockchain vendor to provide the blockchain. The blockchain vendor system is evolving rapidly, and the number of partnering opportunities is increasing.
   Even if the POC does not provide definitive proof of the benefits a smart contract can deliver, these projects take companies further along the learning curve.
   Eidel is optimistic that long established commercial agreements, such as bills of lading and letters of credit in trade transactions, will find smart contract applications over the next two years or so.
   “With commercial agreements such as bills of lading that are clear cut, the undisputed parts of these arrangements can easily be put onto smart contracts,” he said.

With commercial agreements such as bills of lading that are clear cut, the undisputed parts of these arrangements can easily be put onto smart contracts.

   But again, the emphasis is on relatively straightforward transactions. More ambitious smart contract applications with a global footprint are probably five to 10 years away, believes Eidel.
   For more information, a research brief from Chain Business Insights LLC, Smart Contracts in Supply Chain: Making Sense of a Potential Game Changer, looks at the pros and cons of smart contracts and how the concept was tested using an export shipment.

Ken Cottrill is Research Principal, Chain Business Insights LLC.