United States: Improving The Supply Chain Through Technology: From Trade Finance To Produce

Josias N Dewey is a Partner in Holland & Knight's Miami office

Jameson B Rice is an Associate in Holland & Knight's Tampa office

Three powerful technologies are being combined to drive a supply chain evolution: (1) blockchain and distributed ledger technology; (2) the Internet of Things ("IoT"); and (3) powerful machine learning capable cognitive tools (e.g., IBM's Watson) that are capable of analyzing vast amounts of data that humans simply can't do. The transformation occurring in supply chain management also impacts the trade finance that supports it. Approximately 80-90% of global trade is reliant on trade finance.

This transformation is not simply about converting from paper documents, such as letters of credit and bills of lading, to electronic documents. To the contrary, the changes that are occurring are about new ways that participants in supply chains can share information in a very granular and controlled manner, utilizing novel technology that allows economic participants to trust the outcome of transactions without any need to trust the actual counterparties to a transaction. Equally important is the ability of distributed ledgers to accomplish the foregoing without the need for a trusted third party to act as an intermediary for the transaction– disintermediation has become a key theme of distributed ledger technology, and supply chains and the trade financing vehicles that keep them operating are not exempt from this phenomenon.

The convergence of these three technologies will likely first impact the trade finance industry, which is estimated to be worth nearly $10 trillion a year.iv But the reach of these technologies extends to every facet of the supply chain and every industry, perhaps none more so than perishable food such as produce. The paper addresses both the near-term potential of these technologies with respect to trade finance, and the longer-term potential of these technologies with respect to the supply chain, and the produce industry in particular.

1. Emerging Technologies – Blockchain Technology

Blockchain technology is commonly defined as a decentralized peer-to-peer network that maintains a public, or private, ledger of transactions that utilizes cryptographic tools to maintain the integrity of transactions and some method of protocol-wide consensus to maintain the integrity of the ledger itself. The term "ledger" should be thought of in its most simple terms; imagine a simple database (like an Excel spreadsheet) that can store all sorts of information (e.g., someone's name, age, address, date of birth). As you can write an entire book on the topic of blockchain technology and the law (one of the authors of this paper did just that).

Blockchains tracking the transfer of virtual currency, such as Bitcoin, essentially maintain a ledger that tracks the transfer of Bitcoin from a transferor to a transferee. Perhaps most importantly, such ledgers are considered decentralized because transactions are stored on several thousand computers connected to a common network via the Internet. These computers are known as "nodes." Each node contains a complete history of every transaction completed on a blockchain beginning with the first transaction that was processed into the first block on that blockchain. This network of nodes is connected via the Internet, but in a completely decentralized manner (i.e., there is no single server to which all the nodes are connected). So, when we refer to the network, this describes all the peer-to-peer nodes operating under the same set of rules (commonly referred to as a "protocol"), which are embodied in computer code under which all participants in such blockchain operate. Thus, at the heart of every blockchain is an agreed upon protocol that ensures that only information upon which the network reaches consensus will be included in the blockchain. In other words, a network of computers, all running a common software application, must come to agreement upon whether a change to the blockchain (again, think "ledger") should be made, and if so, what that change should be.

As a proposed transaction propagates throughout this peer-to-peer network, there is still one last step left to consummate the transaction – the transaction needs to be memorialized into a block on the given blockchain ledger. "Blocks" are simply a convenient way of aggregating transactions into larger groups (or batches) for processing purposes. The perceived immutable nature of the ledger is rooted in the aggregation of time-stamped transactions into linear sequenced blocks. It is the aggregation into blocks that permits us to create links between transactions – the proverbial "chain" in the blockchain. Each block contains a reference to the block before it. This resulting relationship between all the blocks makes it exponentially more difficult to alter a prior entry in the ledger. Recently, certain protocols have been developed which have all the character of a blockchain, but without the block structures – hence the reason all blockchains are distributed ledgers while not all distributed ledgers are, or need to be, blockchains. For purposes of this paper, the terms distributed ledger technology and blockchain are generally used interchangeably. While Bitcoin was the first implementation of blockchain technology (and the only implementation for several years), with the advent of the Ethereum protocol and the subsequent "Blockchain 2.0" protocols, the capability of the technology skyrocketed – as did the potential use cases. The reference to "Blockchain 2.0" generally refers to the development of smart contracts, which is executable computer code that is broadcast to all of the nodes connected to a distributed ledger – the resulting computation being what determines any changes to the ledger. While the term "smart contract" does not necessarily refer to a legally binding contract (but rather any snippet of code), some smart contracts do constitute legally binding agreements. The advent of smart contracts is critically important to its adoption for trade finance – without it, we would not be able to model the functionality and provisions of a letter of credit or bill of lading.

Another recent development that was necessary for distributed ledgers to play an active role in trade finance was the ability for parties to include all the details of a trade in the transmission of a transaction to a distributed ledger – but limit who can see which details with very fine control. For example, if a seller of crops experiences a liquidity crisis and must sell a portion of his crop for below market prices, the seller will want neither his competitors nor other buyers in the market to know the price for those crops. In this example, it is possible to broadcast the transaction with only the buyer and seller seeing the price and needing to validate the terms to the contract. Any other consensus on the network will be limited to the existence of the transaction itself (and most likely a time stamp as well).

While there are no less than a dozen protocols in regular use today, the two most public blockchains are Bitcoin and Ethereum. Anyone is free to connect to either of those protocols. Unlike public blockchains, most financial institutions and other enterprise users are not comfortable using public blockchains because of data security and privacy concerns, among others reasons. Instead, these institutions have or intend to deploy permissioned and/or private distributed ledgers, where each member of the distributed ledger knows with whom it is transacting. Again, there are many more protocols that are listed herein, but some of the more popular permissioned protocols are: (1) R3CEV's Corda platform; (2) Hyperledger Fabric (also hosted on IBM's cloud as its native blockchain solution); (3) Monax (formerly known as Eris); and (4) Quorum (permissioned version of Ethereum, developed by JPMorgan).

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