Monday, October 30, 2017

Blockchain 101 – Part 2

This Part 2 of the article on blockchain (*1), “Blockchain 101”, and deals with the potential for use of blockchain platforms in the logistics and supply chain area. The blockchain protocol for a decentralized digital ledger may work very well in logistics and supply chain management (including insurance). The speed of verification of transactions and the security for transactions involving multiple parties in multiple jurisdictions lends itself to the use of blockchain.

The best-known pilot project in logistics is the Maersk program with IBM, Microsoft and other partners. The blockchain platform is built on Microsoft’s Azure global cloud technology and is slated to be implemented in 2018. The platform will connect clients, brokers, insurers, carriers and third parties to distributed common ledgers that capture data about identities, risk and exposure and integrate the information with insurance contracts. (*2)

The project was described in Fortune as follows(*3):

Maersk, the Danish shipping giant, recently completed a 20-week blockchain proof of concept trial for marine insurance this year, the company told Fortune. The company partnered with EY, Microsoft, Willis Towers Watson, and several insurance companies to try securely sharing shipping data on a blockchain.
Maersk used KSI, a blockchain developed by Guardtime, a startup whose technology underpins the tech-savvy nation Estonia, for the test. The platform was designed to make auditing aspects of a shipping supply chain easier, to improve the tamper-resistance and sharing of data in realtime, and to enable many different parties to settle upon the terms of premiums in a more timely fashion.

Accounting giant EY explained why the project in the shipping and insurance industry was appropriate for the blockchain platform (*4):

EY explained that its decision to secure marine insurance data with blockchain was due to a "complete inefficiency" in the sector.
"The reason we chose marine (insurance) as the starting point for this sort of market is mainly because of its complete inefficiency," Shaun Crawford, global insurance leader at EY, told CNBC via phone earlier this week ahead of the announcement.
Crawford said the industry was "over capacity" and that there was "a lot of cost to it."
He added: "It's facing high administrative burdens of managing and writing claims with a lot of paperwork. All contracts are signed multiple times. They go from ship to ship, port to port, through quite a journey."
Another project for container security is being developed by T-Mining. T-Mining is currently developing and testing blockchain-based applications for container logistics with the objective of giving secure clearance for personnel, such as truck drivers, to pick up the loads. It is a response to the relatively recent trend in logistics of fictitious pickups.  These occur when con artists show up at a shipper’s dock, provide fabricated documents and pick up the shipment. Presumably if all the parties in the transaction are on the blockchain platform, the driver would require a secure private key to pick up the goods. (*5)

Other blockchain projects in the logistics area have been described by Forbes writer Steve Banker as follows (*6):

On organization called Kouvala Innovation has an even more audacious vision.  Pallets with RFID tags would communicate their need to get from point A to point B by a certain date. Carrier “mining” applications would bid for the right to move that load. The RFID tag would award the business to the carrier that bests meets a shipper’s price and service needs. Then as the move progresses, the blockchain would continue to track the shipment.
It is also thought this technology could be effective in enhancing food and drug traceability and for reducing costs associated with factoring.  Provenance, a U.K. software startup, looks to use blockchain technology to establish the authenticity of food. Provenance is testing the technology to authenticate tuna caught in Indonesia delivered to Japanese restaurants. Provenance takes information from sensors or RFID tags and records it on the blockchain to track the fish from “hook to fork.” IBM is also interested in food traceability, and has announced a consortium with several major food producers and retailers.

Forbes argues that all these projects sound promising but may be slow to take beyond the beta testing stage due to a number of factors (*7):

1. The technological talent is scarce and expensive; much of it has been scooped up by fintech startup firms.
2. There are network effects associated with deriving value from blockchain in logistics. The more entities that participate, the more valuable the solution is. But this network effect makes things difficult at the start.
3. It is likely that to get to scale, large companies will need to require their supply chain partners to participate. But this could hinder the drive to create the necessary standards. Further, while several organizations are seeking to play the necessary role of standards body; none has yet achieved the necessary scale.
4. “Miners” are used to validate that the data added to a blockchain is valid. With Bitcoin, this process can take several minutes. There are supply chain processes where less latency would be very desirable.

The insurance industry can certainly use blockchain in the future. Insurance providers need an efficient way to process claims, verify that an insurable event (such as an accident) actually occurred, and provide customers with fair and timely payouts. With automated insurance claim processing, policy conditions are written into a smart contract stored on the blockchain and connected to publicly available data via the Internet. Whenever an insurable event occurs and is reported by a trusted source, the insurance policy is automatically triggered, the claim is processed according to the terms of the policy specified in the smart contract, and the customer is paid. (*8)

Industries using complex systems such as the aircraft industry may be able to benefit from a blockchain platform. When something goes wrong with a complex “system of systems,” such as an aircraft, it is important to know the provenance or origin, through supply chain management, of each component, down to the manufacturer, production date, batch, and even the manufacturing machine program. Blockchain holds complete provenance details of each component part, accessible by each manufacturer in the production process, the aircraft owners, maintainers, and government regulators.

Benefits in this category include(*9):

a)         Increased trust because no single authority “owns” the
b)         Increased efficiencies lead to reductions in time taken to diagnose and remedy a fault improving system utilization
c)         Specific recalls rather than cross fleet/generic

Without doubt, the implementation can be expensive and time intensive. Will the benefits exceed the return value?

Part 3 of this article will deal with the legal consequences arising from the implementation of blockchain platforms.


Endnotes
(*1) see September 2017 FHLLP newsletter for Part 1.
(*2) see “Maersk partners with Microsoft, EY on maritime insurance blockchain”
September 8, 2017, CanadianShipper.com
(*7) Ibid
(*8) Gupta, Manav “Blockchain for Dummies - IBM Edition”, 2017 John Wiley & Sons, Inc., page 27.

(*9) Ibid, at page 28.

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