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Today’s worldwide supply chains are not only important engines of the world economy; they are also marvelous examples of the power of globalization. Today it is a seemingly trivial matter for a US car manufacturer, for example, to acquire its rearview mirrors from a supplier in Germany that purchases glass and other parts from suppliers in Latin America and China that in turn source their raw materials from Indonesia and Africa.

Considering how well modern supply chains work, it can be surprising to discover that the supply chain management and finance industries have been among the most resistant to modernization and digitalization. The truth is that behind the scenes managing the flow of information and funds along today's global supply chains is often done using inefficient and outdated means. These include a fair amount of manual and even paper-based processes, as well as the services of numerous intermediaries to provide trust and security. All of this comes at a high cost.

While a lot of effort has gone into trying to address these issues, and progress has been made on several fronts, there is still no viable, end-to-end solution available to meet these challenges. That may be changing. With the rise of the blockchain, we believe we have a tool at hand that could address many of these issues in a very cost-effective, efficient and globally accessible way.

The long and winding chain

For those not yet familiar with it, the blockchain is a new technology that allows for the direct transfer of assets and value between parties without the use of an intermediary. It represents a completely new paradigm for the financial industry, one in which counterparties collectively manage a shared database – known as a distributed ledger – instead of relying on trusted agents to maintain, update and reconcile various proprietary databases.

How do distributed ledgers compare with today’s infrastructure?
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Thanks to their use of peer-to-peer networking, cryptography and reliable consensus mechanisms, distributed ledgers offer a high degree of security as well as transparency, while also protecting the privacy of the parties if so desired. All of these attributes could be very useful in supply chain finance.

As opposed to the situation today, in a blockchain-enabled system all members of a supply chain – the various sellers, buyers, shippers, insurers, inspectors, banks and even investors – could share the same ledger. This would all but eliminate the need to reconcile inconsistent records. Substituting large numbers of proprietary systems with one open-source, relatively simple protocol would also dramatically drive down infrastructure costs while making the system accessible to a far greater number of companies (thereby making it easier to eliminate paper-based processes).

Because blockchain transactions are direct and settle almost instantaneously, they are not only faster than current means, they virtually eliminate counterparty risk. This could free up a great amount of capital for other uses. Because they rely on cryptography as well as distributed computing, blockchain-based distributed ledgers are also secure and highly robust. This could add a great deal of confidence to the system. Finally, by adding programming capability to distributed ledgers through so-called “smart contracts,” it should be possible to automate large parts if not all of the process. When combined with the Internet of Things, this capability opens up even more intriguing possibilities.

In such a system our mirror manufacturer, for example, could package a shipment of mirrors, have an inspector verify the contents, seal the package with an electronic foil that sends a signal if it is tampered with and load the package onto a container fitted out with a sender that continuously broadcasts information about its whereabouts and the condition of its good to the network – all the way until the shipment is received and the buyer (automatically) releases the funds. This would not only greatly simplify matters, it would add a great deal of transparency and trust for all involved.

The chain of the future

The above is only one of any number of use cases for a future blockchain-enabled trade and supply chain finance system. And while all of this could in theory be accomplished without blockchain, we believe there is no technology available now that could potentially do it as well or as cheaply, while at the same time avoiding the pitfalls of proprietary systems.

We still have some way to go before any such system could become viable. But there is no doubt that blockchain seems extremely well suited to supply chain finance. With it, this important engine of the global economy may get a well-needed overhaul.