How blockchain is moving from the lab to the production line

Paul R. Brody, EY Global Innovation Leader – Blockchain, agrees. The power of blockchain, he explains, is in its ability to digitally model real-world relationships across the face of any supply chain ecosystem. “You’ve got buyers and sellers, growers and builders, transportation and logistics [providers], wholesalers, distributors, retailers and end customers — there are just so many handoffs in moving goods from farm to table, mine to store, or across whatever [value chain] you want to consider,” he says.

As such, supply chains tend to feature a wide array of complex agreements and contractual obligations. Brody cites contract adjustments associated with changes in component prices, the completeness of orders shipped, the condition of goods received and the timing of deliveries as examples.

“Yet, the mechanisms that govern supply chains today are a complex mix of manual and digital processes, with orders being placed across multiple channels and participants themselves tracking transactions across enterprise resource planning (ERP) systems leading to data silos, workarounds, limited transparency and, in general, inefficiency across the whole,” Brody says. In practice, he adds, “companies today are spending inordinate amounts of time and money overseeing their supply chains — verifying what has and will be taking place according to agreed-to terms — efforts which can be greatly reduced using blockchain.”

Indeed, the complexity of supply chains actually plays to the strengths of blockchain. “The beauty of blockchain is that it introduces order, simplicity, trust, visibility and automation to what otherwise is a chaotic environment,” Brody says. It does so by elegantly converting supply chain relationships into digital tokens, contracts and wallets. Tokens represent the assets being exchanged; so-called smart contracts digitize the terms expressed within supply chain agreements; wallets are receptacles for various players’ tokens and contracts. “The blockchain becomes a remarkably efficient means of making the whole thing run more smoothly, securely, visibly and efficiently,” says Brody.

So far, the benefits of blockchain are being told from the perspective of businesses and consumers. But as EY Global Tax Innovation Leader Jeff Saviano explains: “There are equally compelling use cases for governments and global tax authorities. Government agencies are playing a lead role in blockchain platform development in an effort to promote their policies and improve the citizen experience.”

For example, blockchain can be used to boost the ability of tax authorities to prevent fraud. According to Post, the tax gap ­— the difference between actual tax revenues and those that should have been collected were it not for fraud — is estimated at around 5% of global GDP, or $3 trillion annually. “It’s a critical issue that so far has proven difficult to address,” says Post

Blockchain offers the potential to reduce this gap significantly by creating a nearly inescapably thorough audit trail across supply chains. Gijsbert Bulk, EY Global Indirect Tax Leader, cites the example of VAT or customs duties. “It becomes much more difficult to hide transactions or to create false invoices,” he says. “Tax authorities can see all activities along a [value chain], all the selling and buying and at which prices.”

Further, blockchain could improve efficiency and security when it comes to cross-border tax. This begins when dealing with raw materials, components or finished goods where customs declarations require detailed and accurate data to certify origin, composition and destination. This is the point where authorities not only collect duties, but also evaluate whether or not the products are legal or dangerous for import or are in compliance with trade agreements. Here, says EY Global Indirect Tax Knowledge Leader Ros Barr: “Blockchain could greatly streamline such processes while improving accuracy.”

Blockchain will also begin to have an impact — potentially profound — on broader corporate transfer pricing. Numerous nations are already moving toward digital tax compliance for VAT and customs. As more companies participate in such systems — increasingly blockchain-based — government officials will have access to even more detailed data relating not just to single companies but to entire value chains.

Armed with so much data, host nations will be able to scrutinize pricing and profitability as never before. As such, says Saviano, tax authorities will have the same data and the same AI and machine learning analytical tools available as will businesses. “Companies will need to pay very close attention to transfer pricing, always using the data at hand for modeling purposes and to be ready to respond to inquiries or challenges,” he adds.

The EY Advanced Technology Tax Lab, which launched in November 2018, plans to be at the heart of blockchain-related developments as part of a wider remit to solve complex tax issues through the application of advanced technologies. To help it make such breakthroughs, the lab is collaborating with the Massachusetts Institute of Technology and its renowned professor Alex “Sandy” Pentland to understand how machines can boost the effectiveness of tax professionals.

Blockchain is by no means a panacea, however. A key issue is that its response time can be slow; Ethereum, for example, can process sometimes as few as 15 transactions per second. Speed is being addressed in process design, notably by focusing on less cumbersome authentication. Another issue is that in order for a blockchain to become useful to a wide range of participants, a great deal of time must be spent developing standards acceptable to all who participate.

Nevertheless, 2019 is shaping up to be a breakthrough 12 months for the technology. Post says he expects “a large number” of POCs and trials to turn into production this year. “Adoption is widespread but limited in scope today — but will greatly expand and accelerate as companies gain experience,” he says.

Daren Campbell, EY Intelligent Automation leader concurs. “Blockchain’s popularity is expanding and gradually transforming our approach towards automation. Instead of leveraging technology to automate a section of the process, blockchain has the capability to not only automate the entire process, but also make it significantly more effective through reimagining the art of the possible with intelligent event data collection. The technology is rapidly maturing and delivering on numerous organizational benefits”

Kurt Neidhardt, EY Global Co-Leader for Tax Technology and Transformation adds, “Blockchain can be the giant leap that push tax functions towards achieving maximum value and efficiency - it delivers on the modern-day Tax department’s shift towards strategic analysis and almost instantly minimizes resource burden around transactional data capture and reporting.”

Indeed, C. John Langley, Jr., Clinical Professor of Supply Chain Management and Director of Development for the Center for Supply Chain Research at the Penn State University Smeal College of Business, says blockchain’s potential will grow exponentially once it begins to interact with other fast-evolving technologies.

Starting with the Internet of Things (IoT), Langley says: “Digitization and connectivity of sensors mean that we can see where things are and determine their condition along every step of the way. Is this shipment on time? Are foods, drugs — even wines — being transported or stored at the right temperatures? These can be critical considerations within product safety and quality… and blockchain assisted by IoT can track everything within an indelible record.”

The addition of artificial intelligence (AI) and machine learning could offer a further boost. “We are at the stage where the ability to analyze and respond to what the data can tell us is becoming one of the most disruptive tools available,” says Langley. “Again and again it is being proven, with the right data and the ability to analyze and respond to that data — companies can win. Blockchain combined with other technologies becomes an absolute game changer.”