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Blockchain and Supply Chain (Series: Blockchain Basics)

Traceability of components of products - from food to fashion - is central to the promise of using blockchain to organize and operationalize data from the web of supply chains. How would traceability bring value? How do blockchain and smart contracts work? And how would these foster traceability? What has been done so far in this regard? What issues and tensions account affect adoption of traceability, whether by blockchain or other means? We have assembled for this discussion a builder of  blockchain-based traceability solutions, a traceability entrepreneur via blockchain and other means, and an intellectual property attorney (and former software engineer) who advises clients on technology-driven transactions.

To view the accompanying webinar, go to: https://www.financialpoise.com/financial-poise-webinars/blockchain-and-supply-chain-2020/

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Blockchain and Supply Chain (Series: Blockchain Basics)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. 3 Thank You To Our Sponsor
  4. 4. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 5
  5. 5. Meet the Faculty MODERATOR: Chris Cahill - L&G Law Group LLP PANELISTS: Rafael X. Zahralddin-Aravena - Elliott Greenleaf Michael Baumert - Barnes & Thornburg LLP Jennifer Hanania-Cohen - PricewaterhouseCoopers Advisory Services LLC 6
  6. 6. About This Webinar – Blockchain and Supply Chain Traceability of components of products - from food to fashion - is central to the promise of using blockchain to organize and operationalize data from the web of supply chains. How would traceability bring value? How do blockchain and smart contracts work? And how would these foster traceability? What has been done so far in this regard? What issues and tensions account affect adoption of traceability, whether by blockchain or other means? We have assembled for this discussion a builder of blockchain-based traceability solutions, a traceability entrepreneur via blockchain and other means, and an intellectual property attorney (and former software engineer) who advises clients on technology-driven transactions. 7
  7. 7. About This Series – Blockchain Basics In Dr. Strangelove, a party created a “doomsday machine” that would automatically destroy all life if the machine detected a nuclear attack on that party. There was no override, and, well, let’s just say that the film is hilarious but probably not a comedy in a conventional sense. There, if the “network” received certain information, the device would activate. Like a smart contract on a blockchain. The problem in Dr. Strangelove was that the party that created the doomsday machine activated it before telling its adversary (i.e., the other network participant). That “smart contract” was critically not smart. Blockchain smart contracts (with much smaller but still meaningful stakes) are computer code designed to adjust automatically the rights and obligations of network participants based upon the inputting of information to the network, with such information visible to all and inputted per means and procedures agreed upon by all before the contracts become effective. And thus paper-intensive, multi-step and multi-party transactions, like securities sales, supply chain coordination, and supply chain finance, might proceed with greater ease and security. Costs could be lowered, transactional speed quickened, and litigation simplified or evaded entirely. We will examine these areas of promise. Each Financial Poise Webinar is delivered in Plain English, understandable to investors, business owners, and executives without much background in these areas, yet is of primary value to attorneys, accountants, and other seasoned professionals. Each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 8
  8. 8. Episodes in this Series #1: Blockchain and Smart Contracts Premiere date: 7/23/20 #2: Blockchain and Supply Chain Premiere date: 8/20/20 #3: Evolution of Trade Finance Technology Premiere date: 9/17/20 9
  9. 9. Episode #2 Blockchain and Supply Chain 10
  10. 10. What is Blockchain? • A ledger • Not stored in any one place • Composed of a decentralized network of nodes • New data on the blockchain must be verified by a majority of nodes • Verification occurs by executing energy-intensive cryptographic calculations • Once validated, a block of data is added to the chain • Blocks may never be removed or edited 11
  11. 11. What is Blockchain? • Decentralized – data on the blockchain is not stored in any single place but distributed across many nodes • Immutable – once data is added to the blockchain, it cannot be removed, edited or backdated 12
  12. 12. Types of Blockchains • Public Blockchains (permission-less) • Private Blockchains (permissioned) 13
  13. 13. From Centralized Ledger to Decentralized • Blockchain establishes a decentralized ledger, by contrast to the familiar centralized ledger, with a custodian or administrator being trusted to process monetary transactions and manage the transfer of property • See the two diagram on the following pages, from David Sneyd, “Blockchain solutions to ESG problems” (BMO Global Asset Management, Oct. 2018) 14
  14. 14. 15 From Centralized Ledger to Decentralized
  15. 15. How Does Blockchain Establish a Decentralized Ledger? • Participant makes an entry, i.e., creates a new block • Proposed transaction is broadcast to each participant on the network • Validity of the new block is subject to pre-set criteria and a complex algorithm called “proof of work” • A majority of miners conclude that transaction is valid • New block is created and time-stamped • All are provided with an updated version of the ledger: 16
  16. 16. How Does Blockchain Establish a Decentralized Ledger? 17
  17. 17. Some Components of a Blockchain • Each block contains:  A “hash,” which is a digital fingerprint or unique identifier  Time-stamped batches of recent valid transactions  And the hash of the previous block • The previous block hash links the blocks together and prevents the past form being altered or rewritten • Each subsequent block strengthens the verification of previous blocks (and the entire blockchain) 18
  18. 18. Some Components of a Blockchain, 2 • Proof of work requires high computational capacity, provided by “miners” • Miners supply the network with computing power, to allow the updating of the database • A majority of mining power must be able to confirm the new blocks by decrypting the data • Once a “block” (a record of a purchases and sales created by miners by solving a mathematical puzzle that validates the transactions) is added to the network ledger of older transaction (the “chain”), such record on the blockchain can’t be changed or reversed (i.e., the transaction is immutable) • Thus a blockchain, to be non-falsifiable, must not have any operator holding at any time more than half of the computational power of the chain 19
  19. 19. According to Satoshi • A coin can be defined as a chain of digital signatures • The input to each transaction is the output of one or more other transactions • The balance in your Bitcoin wallet is the sum of your unspent transactions • The coins in your wallet can be traced all the way back to the miner that mined it 20
  20. 20. So What is Gained by Going from a Centralized to a Decentralized Ledger? • If a bank or credit card company keeping a centralized ledger is hacked, then other participants lose access to their data • With a decentralized ledger, all participants keep a copy of the data • With a decentralized ledger, there is no extra cost of (or litigation from) efforts to synchronize records kept by counterparties to a transaction 21
  21. 21. Smart Contracts • Smart contracts are “self-executing contracts with the terms of the agreement between [a] buyer and seller being directly written into lines of code. Once a smart contract has been created, computer transaction protocols will execute the terms of a contract automatically based on a set of conditions.” Rensel v. Centra Tech, Inc., 2018 WL 4410110 at *10 (S.D. Fla. June 14, 2018). The promise re smart contracts:  Self-executing  Additional parties not needed to monitor the transactions  Greater cost efficiency and faster transaction speed • To determine whether contractual conditions are met, smart contracts use “oracles,” which are agreed-upon real-time data providers which confirm triggering events 22
  22. 22. According to the CDC • Each year, 48 Million Americans are sickened by a Food Bourne Illness. • Globally, over 600 Million People are affected. • The problem causes $55 Billion to $90 Billion in economic loss Each year. 23
  23. 23. Blockchain Solution • Food Traceability is a series of inputs & outputs. • Blockchain stores data in terms of inputs and outputs. • Blockchain transfers assets across identities. • Blockchain nodes are public, protected, and easy to implement. 24
  24. 24. 25
  25. 25. A Proposed GS1 Numbering System that Works with Blockchain • PTI label is the GS1 formatted label that goes on around 60% of all produce sold in the US. GS1 is a worldwide organization: its website for the US is https://www.gs1us.org/  All companies that sell in a store are members of GS1: the UPC barcode is managed by GS1  The GTIN (Global Trade Identification Number) uniquely identifies items worldwide  Items can be identified on the blockchain by address, GTIN, and lot number  GLN is global location number representing each factory or shipping location  Companies that sell at retail and need UPC codes for their products must join GS1  Others on the supply chain join because a party requires it (adoption rate declines earlier in the supply chain) 26
  26. 26. Supply Chain, End to End • Hundreds of shipping links • Thousands of vendors, manufacturers, distributors, customers • Data validation, chain-of-custody reporting, supplier benchmarking, risk heat maps and alerts, emergency response • The above parties and factors interact dynamically • A dashboard display might be needed for “visibility” of a simple supply chain, with data shifting in real-time 27
  27. 27. Supply Chain Desiderata • Provenance of goods (quality, safety, compliance with norms and regulations re: environmental and labor and other factors) • More accurate forecasts and product adjustments • More efficient allocation of talent and capital assets • More accurate and efficient inputs for financing supply and insuring credit 28
  28. 28. Blockchain-Managed Supply Chain: A Few Key Components • Purchase Orders • Ocean Bill of Lading • Automated Manifest System (required to be field for goods entering the US) • Importer Security Filing (same) • Customs Clearance (same) 29
  29. 29. Blockchain-Managed Purchase Orders on Blockchain • Create indelible record of each step (block) • Execute encrypted actions (identification of parties, authentication of transaction, time- stamping blocks) • Digitization upon the ledger of aspects of the contractual agreements, i.e., smart contracts • Purchase Orders embed within them many business rules (cover price, currency, quantities, ship date, Incoterms Rules – which may change over the course of the movement of goods and components (e.g., production capacity of supplier, changes in raw material costs) • As each step in the process is verified, invoices can be triggered by smart contracts upon proof of delivery, the ID of goods can be verified (or not) Per “Blockchain for Supply Chain: Smart Contracts & Purchase Order Management” (Amber Road White Paper) 30
  30. 30. Smart Contract: Smart Invoices • Euler Hermes has provided trade credit insurance for over 100 years, and is looking at blockchain- based “smart invoices” (to help manage transaction for which it provides insurance) • It experimented with having companies upload their invoices onto the Ethereum “Smart Contract” blockchain • When a supplier’s invoice is uploaded, the smart contract “reads” it to learn payment due date, amount, and the purchaser’s identity • Smart contract then identifies the network of suppliers for that purchaser • If the supplier is not paid timely, the smart contract can “decide” (based upon rules coded into it), whether to send an alert (and what kind of alert) to the other suppliers in the network • PURPOSE: to forestall other payment defaults, lessen trading with insolvent purchaser, and lower risk of insurable events • Pierre Sein, “Invoices on Blockchain at EHDA” (Medium, July 27, 2017) at https://medium.com/@pierresein/invoices-on-blockchain-at-ehda-85d03a929062 (visited Aug. 21, 2019) 31
  31. 31. Blockchain 50: Billion Dollar Babies (Forbes, April 16, 2019) Note: the article includes links to “full profile” of each enterprise described • Bumble Bee Foods: transparency in the tuna supply chain form catch to grocery stores • Cargill: using Intel’s Hyperledger Sawtooth to track turkeys through its supply chain; worked with Intel and Bitwise to build Hyperledger Grid to sell to others • Foxconn: pilot projects to use blockchain to streamline supply chains and provide working capital to suppliers • Golden State Foods: participating in IBM’s Food Trust (consortium of companies seeking to track food across entire supply chain) and leading effort to track temperatures at which beef is kept • IBM: created “IBM Blockchain” and has filed for >100 patents 32
  32. 32. Blockchain 50: Billion Dollar Babies (Forbes, April 16, 2019) • Maersk: with IBM developed TradeLens platform, a global blockchain for shippers contra paperwork – 100+ organizations have signed up to use TradeLens • Nestle: testing use of IBM Food Trust to track provenance of food ingredients in baby food and other products • Seagate Technology: working with IBM on blockchain to track products through distribution and life, to ensure that fake hard drives are not returned to its warehouses (and re-sold by mistake) • Walmart: has filed for 50 blockchain patents for tracking shipments, operating drones, and other; focused on finding the culprit in food-safety scares; helped create the IBM Food Trust; plans to require all lettuce and spinach suppliers to log shipments on blockchain 33
  33. 33. About the Faculty 34
  34. 34. About The Faculty Chris Cahill - ccahill@lgcounsel.com Christopher Cahill is Head of the Bankruptcy and Restructuring Practice Group at Lowis & Gellen LLP, in Chicago. He advises businesses on relationships with vendors, customers, and lenders, to maximize market share, return, and liquidity. He also litigates on behalf of secured creditors, trade creditors, and in chapter 11 cases and advised more generally on corporate restructuring, including workouts, loan forbearance, assignments for the benefit of creditors, UCC Article 9 foreclosure sales, and avoidance litigation. Mr. Cahill also publishes and speaks frequently on commercial insolvency and commercial transaction issues. He is an Executive Editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2020), a comprehensive treatise that is updated annually and published by Thomson Reuters. In addition, Mr. Cahill is the host of Financial Poise Radio, a weekly interview and commentary podcast for investors and other market participants, with 100 episodes and counting. 35
  35. 35. About The Faculty Rafael Zahralddin-Aravena - rxza@elliottgreenleaf.com Rafael X. Zahralddin-Aravena is a Shareholder, Director, and Chair of his firm’s Commercial Bankruptcy and Restructuring Practice. He founded the Elliott Greenleaf Delaware office in 2007, which specializes in business law, as its first Managing Shareholder. He works as a litigator and advises businesses on issues of compliance, corporate formation, corporate governance, insolvency, distressed mergers and acquisition, commercial transactions, cyber law, and international and cross border issues. He has been lead counsel in several significant matters including serving as special litigation counsel in Washington Mutual, the largest bank insolvency in U.S. history. In the Nortel bankruptcies he successfully secured a settlement of more than $50 million for the permanently disabled former employees of the company. The firm and Mr. Zahralddin were named among the firms that received multiple awards in 2014, culminating in the Large Company Transaction of the Year Award from the Turnaround Management Association for their work in the AgFeed USA, Inc. bankruptcy, which involved the sale of the U.S. and China assets of a publicly traded company. 36
  36. 36. About The Faculty Michael Baumert - mbaumert@btlaw.com Michael Baumert is an associate in Barnes & Thornburg’s Chicago office. As a member of the Intellectual Property Department and Corporate Department, Michael focuses on technology- driven transactions, sourcing, cloud computing, and data privacy and security. Michael has earned a Certified Information Privacy Professional/United States (CIPP/US) certification offered by the International Association of Privacy Professionals (IAPP). Michael also counsels clients in technology and intellectual property transactions, and has developed a focus on blockchain and distributed ledger technologies, autonomous vehicles, machine learning, and other artificial intelligence-related concepts. Prior to becoming an attorney, he worked as a software engineer designing and developing business intelligence, warehousing, and customer relationship management software. 37
  37. 37. About The Faculty Jennifer Hanania-Cohen - jennifer.hanania@pwc.com Jennifer Hanania is a Manager in PwC’s New Services and Emerging Technology Practice. Jennifer is also responsible for cross-sector blockchain product management efforts and has spent over three years dedicated to supporting the set-up of PwC’s blockchain practice. Jennifer has delivered on a number of client engagements related to blockchain and digital transformation. These engagements include strategic assessments, product design, innovation workshops, program management, pricing strategy, prototype development, process implementation, and operating model development. Jennifer is skilled in agile delivery and frequently works with large, global technical teams. Jennifer also works frequently with PwC’s cloud alliance partners and joint business relationship partners and has driven a number of collaborative go-to-market strategies. 38
  38. 38. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 39
  39. 39. About Financial Poise 40 Financial Poise™ has one mission: to provide reliable plain English business, financial, and legal education to individual investors, entrepreneurs, business owners and executives. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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