How blockchain is moving from the lab to the production line

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15 minute read 28 Mar 2019
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EY Global

Multidisciplinary professional services organization

15 minute read 28 Mar 2019

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From wines to groceries, blockchain solutions are expanding beyond cryptocurrencies to disrupt the marketplace.

Just over a decade after it was invented, blockchain is set to revolutionize big business. What began as a public transaction ledger of the cryptocurrency bitcoin in 2008, is ready to unleash a wave of innovation across industrial supply chains in 2019.

Mark van Rijmenam, faculty member of the Blockchain Research Institute and co-author of Blockchain: Transforming Your Business and Our World, reels off a list of companies that demonstrate how the technology is moving beyond its financial roots.

Take cosmetics maker Beiersdorf, which has run a blockchain-based proof of concept (POC) with 24 of its partners, digitizing a wide range of formerly manual processes. Similarly, pharmaceuticals giant Bayer has completed a POC that accelerated its ability to locate products within three days, greatly enhancing efficiency and security.

“Blockchain is ideally suited for supply chains in that it dramatically streamlines paper-based processes [while at the same time] introducing greater security and visibility,” explains Rijmenam. Though he notes “most of what has been developed is still early stage” he is nevertheless convinced that we are fast approaching critical mass. “2019 will be the year when we begin seeing the results of all of this work; when we’ll finally begin to see a wide range of [concepts] move into [full] production,” he predicts. 

Blockchain is ideally suited for supply chains in that it dramatically streamlines paper-based processes…
Mark van Rijmenam
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Chapter 1

Tokens, contracts and wallets

How blockchain is taming supply chain complexity

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.

The beauty of blockchain is that it introduces order, simplicity, trust, visibility and automation to what otherwise is a chaotic environment.
Paul R. Brody
EY Global Blockchain Leader
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Chapter 2

From wines to wheels

How blockchain technology is being used to fight counterfeiting in the wine industry and beyond.

Dennis Post, responsible for the development of blockchain services for the EY Advanced Technology Tax Lab, within EY member firms, is keen to demonstrate how blockchain has already made the jump from lab to production line. “A big challenge for the wine industry is provenance — there’s a great deal of counterfeiting,” he says by way of example. Working with blockchain specialist EZ Lab, EY teams helped to develop a platform called The Wine Blockchain. Originally based on Ethereum, EZ Lab ended up developing their own blockchain platform called Certo for the project. “Farmers, vintners and retailers are able to register with an encrypted digital signature so that consumers are able to verify what they’re purchasing,” Post says. Since launching in 2017, the platform has processed over $200,000 worth of wine.

In Italy, multinational retailer Carrefour now boasts a full production blockchain platform tracking the veracity and condition of free-range chickens. Built on EY Ethereum-based Ops Chain, customers scan a QR code on the packaging using their smartphone to access information about the chicken’s birth right up to when it was placed on the shelf. Unveiled in June 2018, Carrefour plans to roll it out to eight more animal and vegetable product lines, including eggs, cheese, milk, oranges, tomatoes, salmon and ground beef steak, in a bid to guarantee what it describes as “complete product traceability”. 

In an even broader and more forward-looking example of the potential role of blockchain, look to Tesseract, a transportation industry-focused blockchain developed by EY to help further fractional vehicle ownership. Within Tesseract, users can track ownership, usage and applicable payments across any combination of individual vehicles or fleets. Vehicles and trips are digitally logged on the blockchain and transactions are automatically settled between owners, operators and third-party service providers through a single-source, usage-based payment system. Ownership of the assets is flexible and can be on a full or fractional share basis. As transportation assets are a critical element within any physical supply chain, blockchain can help to usher in a new era of mobility.

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Chapter 3

Taxation within industrial and public blockchains

Governments are discovering how to use blockchain technology to improve tax collection both for themselves and for taxpayers

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.

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Chapter 4

Widespread adoption but limited scope

For all its potential, industrial blockchain faces obstacles including slow transaction speeds. But that will change as more businesses gain experience with the technology

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.”

Government agencies are playing a lead role in blockchain platform development in an effort to promote their policies and improve the citizen experience.
Jeff Saviano
(Chapter breaker)
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Chapter 5

Key actions

Consider making these moves to take advantage of blockchain technology and understand the tax implications

  • Organizations need to ensure they have people who understand both blockchain and the full range of digital technologies including artificial intelligence and advanced analytics.
  • Join – or form – then actively participate in industry groups to explore and guide blockchain developmen
  • Larger players -- those with a transformative vision -- should seek to engage customers, suppliers, partners and even competitors in order to identify key needs and how blockchain could help.
  • Assess how blockchain could affect your company’s tax function – it could lead to improved efficiency and security, but also more scrutiny from the authorities in the future
  • Blockchain has evolved into a robust and agile technology that can future-proof a company’s tax function. It ensures records cannot be tampered with and promises immediate benefits such as process optimization, transparency and auditability. Crucially, blockchain also decreases operational costs.

    EY is at the forefront of applying blockchain technology to challenges faced by the tax function. With digital tax administrations demanding real-time data and transparency, having a secure platform of verified information can make it easier for taxpayers to pay taxes and government tax authorities to close the tax gap.

    The EY TaxChain approach applies blockchain to the tax function’s processes and integrates with enterprise-wide systems. It creates tokenized versions of assets and raw materials, and follows them through the supply chain. VAT-transaction capture is one example for which it can be used. EY TaxChain can both trigger event-based smart contracts and be triggered by smart contracts, as well as support the automated application of tax business rules.

    A digital ledger of this kind can be shared and corroborated by anyone who has the appropriate permissions and distributed across multiple sites, countries or institutions. It gives the corporate tax function solutions that help to meet the challenges and issues that accompany disruption, irrespective of industries or geographies.

  • Compliance with tax administration digital requirements

    •  Digitally submit work papers to tax authorities
    • Real-time auditability and detailed transaction tracing   
    • Reduces risk of incurring unexpected tax liability

    Indirect taxes/VAT reconciliation

    •  A better way to reconcile VAT invoices
    •  Allows vendors and buyers to track transactions and remit agreed tax amount

    Transfer pricing

    •  Solves legislation-based need for capturing transfer pricing activities and increases transparency
    •  Helps you to audit price transactions and effectively manage the supply chain
    • Ties related activities into a block and allows you to trace concurrent transactions

    Intercompany transactions

    • Helps consistent documentation and instant settlements
    • Leverages smart contracts for better efficiency, speed and accuracy
    • Alleviates issues with manual invoicing and varied ERP systems

    As Ernst & Young LLP Senior Manager Santhosh Kumar Lalgudi says: “Tax function transformation is not a ‘nice to have’, it’s a mandate coming from many levels. Blockchain gives you an audit trail on a distributed ledger for each transaction and smart contract event. This means you can easily identify transactions and generate reporting for audit/review purposes. EY TaxChain helps your resources to focus more on strategic analytics and less on data extraction and reporting. It also works to help mitigate absence of clear regulations and consensus.”

    The EY Tax Technology and Transformation teams can help you understand compliance requirements, locate and validate data, and suggest an optimal treatment after fully considering asset attributes and your company’s background. To learn more, visit ey.com/taxtechtransform

Summary

Industrial strength blockchain within supply chains is rapidly maturing, promising to fundamentally disrupt core processes and deliver benefits to businesses and consumers.

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EY Global

Multidisciplinary professional services organization