Facilitating trade and building inclusive agricultural supply chains with blockchain

October 5, 2018

Distributed ledger technologies (DLTs) and smart contracts can be a key component of trade facilitation, bringing greater transparency, accountability, efficiency, and traceability to the exchange of value and information in agricultural supply chains.

These technologies have the potential to simplify transactions in agricultural supply chains, enhance food safety, facilitate access to trade finance and other financial services, improve market transparency, and strengthen compliance with trade agreements.

Proactive engagement and cooperation among all stakeholders in the trade and agri-food ecosystem are necessary for an effective and smooth transition to new DLT-enabled practices that better facilitate international trade and build more inclusive and sustainable supply chains.

 

New solutions exist to simplify current trade facilitation practices. The process of organising and executing transactions in supply chains is inherently complex, time-consuming, and expensive – particularly in the case of international trade.

Transactions often rely on numerous intermediaries that use labour-intensive and paper-heavy settlement processes. For example, one cross-border trade transaction can include approximately 20 different entities, 100 pages of documentation, and 5,000 data field interactions. This complex process results in lengthy payment terms, ranging typically between two to four weeks. In addition, supply chains often lack sufficient transparency and product traceability. These complexities and formalities can have significant financial implications for all parties involved, thereby increasing the cost of doing business. For micro, small, and medium-sized enterprises (MSMEs) they can even represent barriers to entry.

Distributed ledger technologies (DLTs) – colloquially known as blockchain – introduce solutions to the way transactions are facilitated in supply chains.[1] DLTs and smart contracts provide a platform for immutable transactions, product-process traceability, digital documents, auto-executing contracts, and real-time payments, all of which can result in reduced transaction costs and greater transparency.

These technologies have the potential to reorganise practices and workflows in supply chains, affecting production, trade, and consumption. By reducing friction and intermediaries through a simplified, peer-to peer transaction network, DLTs and smart contracts can help improve efficiency, accountability, transparency, and traceability in agricultural supply chains.

DLTs enable higher quality transactions and enhanced traceability. The application of DLTs in supply chains provides a platform that can execute transactions while tracking and monitoring physical and digital assets. The technology can integrate and manage in real time each stage of a transaction throughout the agricultural supply chain.

Every transaction that is processed on a DLT can carry product details and specific attributes which can be added by supply chain users, such as production processes and quality specifications, transportation and storage conditions, sustainability information and certifications, export documentation, and other technical aspects. This data can be tracked through a cryptographic fingerprint attached to each transaction, while the movement of a physical product along a supply chain from farm to fork can be traced, for example, with QR codes on product packaging, radio-frequency identification (RFID) chips, facial recognition for livestock, or crypto anchors – tamper-proof digital fingerprints that are embedded into products to prove authenticity.

The ability of these technologies to trace a product’s provenance, carry detailed attributes in each transaction, and ensure its authenticity can help deliver huge improvements in relation to food safety. A consumer could scan, for example, an agricultural goods QR code to reveal production information and movement along the supply chain. Enhanced traceability also allows for easier regulatory control to detect fraudulent behaviour, improved monitoring and compliance with sanitary and phytosanitary (SPS) and sustainability standards and certifications, strengthened ability to respond quickly to disease outbreaks and contaminated agri-food products, and reduced friction at the border.

Figure 1. Agricultural supply chain on distributed ledger technology

Source: Tripoli and Schmidhuber (2018)

By reducing the intermediaries in agricultural supply chains, DLTs and smart contracts can cut transaction costs, reduce risks for sellers and banks, and bring greater efficiency gains to supply chains. DLTs and smart contracts allow for the digitisation of payments and contractual processes, and the auto-execution of contracts for a number of agricultural financial services such as trade finance, payment services, agricultural insurance, and agricultural derivatives.

DLTs provide a single ledger that stores all documentation (agreements, certifications, and contracts) needed to facilitate trade, and auto-executes the settlement of payments in real-time. This can reduce counterparty risk, increase cash flow, and free up working capital for producers and sellers that is usually tied up in complex settlement processes. Ultimately, greater efficiency in supply chains and financial services can lead to greater financial inclusion and stronger business development.

DLTs allow users to build digital identities with their recorded digital and physical assets. DLTs generate a vast amount of data from transactions in agricultural supply chains, which can provide actors with detailed records of their operations, financial service activities, and market information. This enables supply chain participants to incorporate better analytics in their operations in order to inform production and marketing decisions.

In addition, more accurate market information can strengthen the ability of governments and inter-governmental organisations to create enabling environments for agricultural supply chains through better-informed policies. Furthermore, DLTs provide a platform to build a track record for smallholder farmers and MSMEs from the data stored on their operations and market activity, which can be used to prove creditworthiness and access financial services.

Physical assets registered on the DLT, such as land titles, can be used as collateral. Indeed, DLTs are a secure, fast, and immutable method to register land titles, providing greater legal clarity to land tenure systems. The transaction history can help secure farmers and landowners against corruption and fraud, resolve any future dispute once the land is registered, and unlock capital.

DLTs also have the potential to improvethe implementation and monitoring of World Trade Organization (WTO) and other trade agreements. Smart contracts can automatically disburse tariffs upon acceptance of goods at customs, and DLTs can store accurate data on tariff rates. Enhanced traceability and transparency further improves the ability to certify compliance with the WTO SPS Agreement, enforce rules of origin to ensure appropriate tariffs are applied, and monitor intellectual property rights and geographic indications under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

In summary, DLTs and smart contracts provide a unique opportunity to enhance trade facilitation and build more inclusive agricultural supply chains. However, there are a number of technical, regulatory, institutional, infrastructural, and capacity-related challenges that need to be addressed in order to facilitate their widespread adoption and also ensure that these technologies reach their potential.

Some of the key challenges include agreeing on the appropriate level of data transparency in supply chains (distinct actors may desire different levels), merging current legal frameworks and legacy systems with DLTs and smart contracts, ensuring interoperability across DLTs and between legacy systems, improving digital infrastructure and skills (particularly in developing countries and rural areas), and improving the effectiveness and accessibility of the product-process links that connect the physical good to the DLT in order to ensure product authenticity. 

As DLTs continue to develop and spread, the international community has an important role to play in contributing to the creation of an enabling environment that ensures the productivity gains generated by DLTs are shared by all market participants.

Creating such an environment requires a proactive approach that promotes international cooperation between the public and private sectors to develop and implement inclusive DLTs, and builds the capacity of market participants to adopt the technology. Cooperation through public-private partnerships will likely be the fastest and most efficient way to develop DLTs and address many of the current challenges. Such partnerships can be an effective platform to drive research and development through technical dialogue and proof of concepts, create the appropriate regulatory environment, and transition from current legacy systems. They can also help scale-up outreach to improve digital infrastructure and skills. In addition, multistakeholder platforms can be useful outlets to provide policy guidance to the public sector on the use of DLTs in agricultural supply chains and rural development.

Proactive engagement and cooperation among all stakeholders in the trade and agri-food ecosystem are key to achieving an effective and smooth transition to new DLT-enabled practices and workflows that better facilitate international trade and build more inclusive and sustainable supply chains. Such an approach can help ensure that DLTs are designed to reach their full potential for global food and agricultural markets, and that all market participants benefit from the resultant productivity gains.

 

This post is derived from the paper Emerging Opportunities for the Application of Blockchain in the Agri-food Industry authored by Mischa Tripoli and Josef Schmidhuber and jointly published by ICTSD and the FAO.

Mischa Tripoli is an economist at the Trade and Markets Division of the UN Food and Agriculture Organization (FAO).

Topics: AGRICULTURE TRADE FACILITATION DEVELOPMENT TECHNOLOGY

Authors: MISCHA TRIPOLI

RTA

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