What is blockchain suitable for - and what is it not?

If goods cross a customs border, they must be declared. Random checks are carried out to ensure that the information is correct. This is intended to

• ensure that the goods do not exceed certain import/export quotas - customs duties may then be levied;
• ensure that the goods comply with applicable standards and regulations - for example with regard to food safety;
• create an opportunity to identify smuggled goods or counterfeits.

A fast, automated process is needed to avoid delays at the border. Importers should therefore be able to submit customs declarations electronically before the shipment reaches the border. This allows customs officials to pre-select shipments for inspection and thus avoid delays at the border.

Waterproof data track for goods

All of these processes are already defined and established for goods that are imported into the European single market. If the UK regains its status as a non-EU country after Brexit, there will be a massive increase in cross-border shipments. As a result, the transportation of goods will be delayed. This means higher costs and, in many cases, a reduction in the quality of goods, such as fresh produce, as just-in-time supply chains are interrupted.

How can technologies such as blockchain change this? The most important thing in this respect is the ability to create a robust and watertight data trail for goods. If goods are properly labeled, it provides a complete history. Although this does not eliminate the need for customs declarations, it could, under certain conditions, reduce border controls. Random checks would then be shifted away from the border to the domestic market, for example in retail stores, where the goods could be checked using a portable label reader and compared with the blockchain records in the label.

The blockchain can provide information about the origin of the item. But what about the proverbial "fraudulent labeling"?

Preventing customs fraud

Sometimes a lot of money is at stake. The damage caused by cigarette smuggling and counterfeiting alone is estimated at 10 billion euros a year. This is why all tobacco products within the EU must bear a unique identifier and a security stamp by May 2019.

Among other things, Reply is working to protect particularly high-quality products against smuggling and fraud through innovative solutions. One example of this is the blockchain accelerator 4Retail, which tracks an item from the manufacturer to the distributor to the end consumer. Another possibility is to incorporate a unique identifier into the product itself - for example, by laser marking diamonds or processing the heel of expensive shoes accordingly. Many products could also be produced with their own unique identifier using 3D printing.

Another way is through a detailed description of each item. Everledger, a long-term inventory system for high-value goods, uses over 40 characteristics to create a diamond ID, including color and clarity. In addition to diamonds, high-value wines and other goods are also to be treated accordingly in future. This should make it much more difficult for criminals to do their job.

If criminals have access to methods such as etching and 3D printing, they may be able to create exact copies of labels and products that would survive a comparison with the blockchain. If duplicates are to be detected, blockchain must be used to create sufficient transparency in the supply chain.

In other words, it is not enough to keep records of the origin of an item. Information on all relevant transactions, including inspections, must also be available. This means using blockchain in every link of the supply chain. The industry association BIFA makes a general statement with regard to blockchain:

"This technology ... can only unfold its full benefits if all participants/members of the supply chain can use and access the technology."

The further processing of certain goods poses a particular challenge. For example, if an animal is cut up, the blockchain can be used to reconcile the weight of all the pieces with the original total weight. This requires every single piece to be tracked. In areas where sustainability is particularly relevant - such as animal-based foods or products made from natural materials - such measures seem all the more necessary.

Transformation points in the supply chain, for example the cutting or dividing of raw materials, also require special monitoring and certification, which in turn can be written into the blockchain.

Intelligent contracts for fast processes

As well as a robust and watertight data trail and improved supply chain visibility, blockchain also offers the triggering of pre-defined actions, events and transactions through the use of smart contracts, typically based on the Ethereum blockchain. This could include, for example, automated payments and automated updates to trade/tax databases once goods arrive in the UK.

In the future, there will also be more and more innovative processes, such as the guarantee of customs delays for insurance companies. This works in a similar way to the system currently being tested by the insurance company AXA with its "Fizzy" product for flight delays. Here, automatic compensation payments are triggered on the basis of specific parameters if certain defined conditions are met (hence the term "parametric insurance") - with "Fizzy" it is the actual landing time of an aircraft. This eliminates the need for time-consuming arguments about the cause of a delay and the small print in the relevant insurance policy. If the delay exceeds a certain tolerance threshold, as specified in the contract, payment is made immediately after landing.

A similar approach could be used for the transportation of fine wines or expensive foodstuffs. IoT sensors that feed their data into a corresponding "smart" blockchain contract can be used to track whether the item was transported at the correct temperature or humidity. If this is not the case, the contract can be declared null and void.

Instead of triggering a payment, such a delay could also trigger a differentiated service. Something like this: If the delivery of fresh produce is delayed, a faster - and more expensive - transportation service is used to deliver the products to the stores to compensate. A previously agreed formula defines the distribution of the costs of the more expensive transportation between the partners as well as the necessary insurance.

One of the key factors here is automation in the contracts - in other words, what makes them "intelligent". Manual processes and decisions are eliminated, meaning that no people are directly involved in the processes and the risk of exceeding time frames can be considered averted.

Blockchain as an indispensable tool for logistics

Which of these possibilities are already being used in industry today? Traditional sectors such as logistics have already embraced the topic. This can be seen very well in the example of the port of Rotterdam, where blockchain is already being used to track freight - a first start and an opportunity to learn to understand blockchain technology in this area. Reebok is embedding 3D printed labels in its shoes to prevent counterfeiting, while WalMart is testing blockchain in its supply chain to improve food safety. Maersk, on the other hand, is investing in maritime transportation insurance. Reply is following many of these examples worldwide and recording them in a special Blockchain Observatory book.

There are therefore many opportunities for using blockchain technology to support the supply chain for high-value or perishable products. However, only if certain conditions are met. Blockchain is not necessarily a universal solution, but works in combination with other innovations.

Whether it's a seamless supply chain, effective protection against counterfeiting or speeding up customs procedures: Despite the generally very rapid pace of development, it is unlikely that a sufficient number of innovative, blockchain-based systems will be operational in time for Brexit. A general scheme for all categories of goods is even less likely to be available, so there is still a lot of work to be done.