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POST Food for thought on the blockchain

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"Combined with state data on things like temperature, motion or chemical composition collected from sensors on equipment (aka the internet of things) blockchain could cost-effectively confirm everything that has ever happened to the food someone is about to eat."

via Blockchain For Supply Chain: Enormous Potential Down The Road

That sounds appealing, but it’s not the straightforward. As I explained in a Tomorrow’s Transactions blog post on this subject, the blockchain may be amazing but it isn’t magic. I share this authors suspicion that there may be a very fundamental and very disruptive connection between shared ledger technologies and thingternet technologies, but how would this help in practice?

Let’s look at a specific supply chain failure. The example I used before was that of the famous Amex salad oil scandal.          

"The Great Salad Oil Swindle was carried out by Anthony ‘Tino’ De Angelis, who traded vegetable oil (soybean oil) futures which was an important ingredient in salad oil. "

via How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE

The swindle involved falsifying records of the amount of vegetable oil that was being held in the supply chain. At one level, it was a simple and old-fashioned scam.

"American Express had recently created a new division that specialized in field warehousing, which made loans to businesses using inventories as collateral. American Express wrote De Angelis warehouse receipts for millions of pounds of vegetable oil, which he took to a broker and discounted the receipts for cash. This proved to be an easy way to get money, so De Angelis began falsifying warehouse receipts for vegetable oil he didn’t have. "

via How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE

The execution of the scam was, though, rather sophisticated.

"American Express sent out inspectors to make sure that De Angelis had the vegetable oil that acted as collateral, but what they didn’t know is that many of the tanks were filled mostly with water with a minimum of oil floating on the top to fool the inspectors, or that some of the tanks were connected with pipes to other tanks so the oil could be transferred between tanks when the inspectors went from one tank to the other."

via How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE

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So where could shared ledgers help, if not as a supply chain guarantor. Well...

"If American Express had done their homework, they would have realized that De Angelis’s reported vegetable oil ‘holdings’ were greater than the inventories of the entire United States as reported by the Department of Agriculture. "

via How The Salad Oil Swindle Of 1963 Nearly Crippled The NYSE

So if there had been some sort of salad oil blockchain, and every entry in the ledger was encrypted so that only American Express could read entries relating to their holdings and only Company X could read entries relating to their holdings but that actual amounts of the holdings in litres were in the clear then everyone, including the regulators, would have been able to easily calculate that the total amount of oil was greater than the total amount being produced. It’s the partial transparency that’s the key point here, which is why we refer to “translucent transactions” on shared ledgers as the platform for new kinds of financial marketplaces that will be cheaper and safer. It’s the shared ledger as a regtech again.

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