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Blockchain: A new frontier in supply chain management

The concept of human rights due diligence is at the heart of the UN Guiding Principles on Business and Human Rights (“UNGPs“) and is finding its way into a growing body of legislation around the world: see the French Duty of Vigilance Law, the supply chain transparency provisions of the UK Modern Slavery Act (and Australian counterpart), the California Supply Chain Transparency Act, the Dodd Frank Act, the EU Conflict Minerals Regulation and most recently in the draft UN treaty on business and human rights.

Under Principle 17 of the UNGPs, human rights due diligence should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed.  It should also (i) cover human rights impacts that a business may cause or contribute to through its own activities, or which may be directly linked to its operations, products or services by its business relationships, and (ii) be on-going.

For many businesses, particularly those with global operations or supply chains involving a multitude of “business relationships”, conducting adequate human rights due diligence can be very challenging. Blockchain technology can help businesses to meet this challenge.  In this blog we explore how.

What is blockchain?

Blockchain is a digital ledger that can be used to record transactions. It is decentralised, immutable and cryptographically secured. Information, once encrypted, cannot be modified. These qualities allow users of blockchain to share information or transact with one another without the use of an intermediary. Blockchain technology may originally have been synonymous with cryptocurrencies such as Bitcoin but its uses are wide-ranging and are being readily explored by users of new technology.

Because it is a shared rather than a copied database, everyone in the blockchain network can see and update its contents, providing potential benefits for supply chain management by increasing transparency. By using blockchain, it is possible for all participants in the supply chain to record information such as price, date, location, quality and certification, which can then be seen and monitored by other actors further down the chain. Any authorised participant can review entries, and users can amend or update information only if the network consensus algorithm validates it.

How can blockchain be used for due diligence?

The use of blockchain enables businesses to carry out more effective due diligence by helping them to identify potential adverse human rights impacts more quickly and cheaply.

How? Due diligence is only as good as the information it is based on. Blockchain offers the prospect of instantaneous and reliable recording of quality information throughout the life of a business’ supply chain, creating a transparent and immutably accurate trail of information that can then be easily audited.

A related development in the use of blockchain technology is the utilisation of the Internet of Things (“IoT“) in supply chains. IoT links the physical world to the digital world by collecting data from real-world objects/environments and turning that data into meaningful and useable information.  For example, a product – whether extracted, farmed or created – can be allocated a unique cryptographic identifying code at its point of origin. This code is evidence (which can be saved to the blockchain) that at a point in time the product contained certain specific properties. Any subsequent mutations or additions to that product’s properties as it works its way through the supply chain can then be tracked, recorded and permanently saved on the blockchain. That product sourcing information could be shared with the ultimate consumer by simply scanning a code on the final product.

Beyond the theory: some practical examples

Several industries have already begun to develop the use of blockchain technology to improve their supply chain management.  Facing significant pressure for increased traceability, the minerals extraction industry has been at the forefront of such initiatives.

  • Diamonds

Diamonds have long been the subject of controversy, notorious as they are for financing violence in conflict zones. Conflict diamonds, or so-called “blood diamonds” are defined by the United Nations as “diamonds that originate from areas controlled by forces or factions opposed to legitimate and internationally recognised governments, and are used to fund military action in opposition to those governments…”  Under a UN resolution, the Kimberley Process – an international certification scheme for rough diamonds – was set up in 2003 to halt the trading of blood diamonds. Although the scheme has been implemented to great effect, there is no specific international law on the trading of blood diamonds and not all countries are signed up to the Kimberley Process. As a result, companies are developing other initiatives to ensure that buyers and retailers alike can track the path of their diamonds.

Everledger, a start-up which uses emerging technology to eliminate fraud and other corporate risks, has been using blockchain to track the provenance of diamonds since 2015. In January 2018, De Beers, the world’s biggest diamond producer, unveiled Tracr, an industry-wide blockchain to track each time a diamond changes hands. By using blockchain, an un-hackable, digital database, to track the journey of a diamond from the moment it is sourced, any conflict diamonds can be identified and inform the purchasing decisions of jewellers or consumers.

  • Cobalt

Cobalt made its way into the headlines when concerns were highlighted over the compliance of companies with international due diligence standards in the supply of cobalt for mobile phone and car batteries. More than half of the world’s supplies of cobalt come from the Democratic Republic of Congo (DRC) where, according to Amnesty, children as young as seven are mining cobalt. A pilot scheme is expected to launch later this year, under which each sealed bag of cobalt produced by a vetted artisanal mine will be given a digital tag, which is then entered on to a blockchain using a smartphone, along with details of the weight, date and time. Each time the bag is bought and sold the details will be entered on a blockchain, creating an incorruptible record of the cobalt’s journey from mine to smelter. The idea is that downstream buyers will be able to track exactly where their cobalt has originated and (providing the mines are monitored and vetted) ensure that it is not the product of child labour. This increased transparency will enable companies to avoid human rights abuses in their supply chains and expand their human rights investigative practices.

  • Other industries

Other pioneers include the tuna fishing industry, where blockchain and IoT has been used to tag and track fish from “catch-to-customer” in order to combat and deter corruption, illegal trafficking and human slavery on tuna fishing boats. Additionally, Coca-Cola Co and the US State Department are launching a project using blockchain’s digital ledger technology to create a secure registry for workers that will help fight the use of forced labour worldwide, particularly in relation to sugarcane production. The registry serves to verify, in a secure way, the contracts of workers in large companies such as Coca-Cola. By improving the information available to companies, it is hoped blockchain will bring about a long-term change in working conditions.

Risks and Rewards

With blockchain, transactions and data are processed instantaneously and directly from peer to peer, removing the need for intermediaries.  There is a low barrier to participation, as blockchain can be accessed via smartphone, which facilitates the collection of data. The information is stored digitally and on an open-source platform that is designed to be resilient (if not immune) to corruption – the validation process inhibiting the unilateral entry of false information.  More direct interaction between participants in a supply chain may foster greater trust in the relationships, and in turn more opportunities for collaborative solutions to human rights issues that are so often structurally rooted.

In addition to promoting interaction between supply chain participants, blockchains are often, but do not have to be, publicly accessible. As consumers have increasing awareness and information about supply-chain issues, businesses can seek to gain a competitive advantage by increasing transparency and putting in place ethical and sustainable practices to manufacture and supply their products. In simple terms, blockchain technology can give consumers the ability to scan a unique code on an item, using their smartphone, and immediately have access to all information relating to that item, including its history and origins.

The use of blockchain for supply chain management is not without risk of course:

  • The accuracy of the blockchain is only as good as the information recorded at each point of entry, which will in many cases still rely on human input – and with it human error (or manipulation). Despite the possibility of a so-called “51% attack”, where a group of blockchain users control the majority of the network’s computing power and effectively determine the blockchain’s accuracy, the multi-party validation process does significantly mitigate that risk as no one user can unilaterally enter false information.
  • Finding the right balance between transparency and confidentiality may also be a challenge. Indeed, certain businesses will have legitimate concerns about disclosing strategically sensitive information about their supply chain.  But some would argue the full potential of blockchain (both in terms of accuracy and legitimacy) is only being realised when the network is public and open – as opposed to remaining privately administrated by one entity.  This is an area where industry-wide cooperation could enable progress to be made while maintaining a level-playing field.

The verdict?

It is still too early to herald blockchain as the cure to all due diligence headaches. For all the talk of its inviolability and resilience, the technology remains to be tested on a meaningful scale.  However, it is exciting to see technology develop which helps businesses discharge their responsibility to respect human rights – the first, and perhaps most important, step of which is to identify adverse human rights impacts.