Feb. 2, 2020 - Perfect Daily Grind: Written by James Harper
Blockchain. Bitcoin. Supply chains. These are some of the many buzzwords passing across people’s lips, often interspersed with the adjectives “revolutionary” and “game-changing”.
Frankly, it can all get very confusing. Are traders going to start paying coffee farmers via blockchain? Are we all going to know how much large companies pay their farmers?
No and no. But it’s understandable why these sorts of myths begin because blockchain can be used to shed light on otherwise hidden information.
To get a better understanding of what blockchain is and how it will impact the coffee supply chain, I spoke with Alexander Barrett, CEO and Founder of iFinca, a data verification company using blockchain for the coffee supply chain, as well as Alec Shaw, Co-Founder of the blockchain consultancy Euphrates Group. Let’s take a look at what blockchain can – and can’t – do.
Once coffee has been grown by the farmer, it’s often sold to cooperatives and buying stations and begins a journey where it will change hands many times before reaching the consumer. So, where does blockchain fit into this?
“Blockchain solutions will remove the cumbersome process of keeping track of the complex paper trail that requires multiple parties to facilitate the goods as they move from farm to the final consumer,” says Alec.
The key to this is creating one single ledger that records information about every transaction. Instead of five companies keeping individual records of a particular coffee as it passes through their hands, they input all this information into the same ledger. They could record prices, cupping notes, weight, moisture levels, and more.
But the real power of blockchain is that it ensures this data cannot be modified later. “Imagine I have a piece of paper and I write something down on it, and then I hand it to you and you write something and then 10, 12 people write something down,” Alexander says.
“The thirteenth person who receives the piece of paper can trust that everything that was written prior to them was not changed by any of the people who did any of the writing, because that’s what blockchain does. It’s a protected… digital ledger.”
He describes it as “software that protects the data”. It’s practically impossible for anybody to change the data, even the software developer.
Another powerful attribute of blockchain is that the information stored is transparent, depending on how the blockchain is managed. In theory, both farmer and coffee drinker can learn what was paid at every point of their coffee’s journey.
But this is what blockchain is. Now let’s look at what it isn’t.
A common misconception is that blockchain is the same thing as cryptocurrency. To understand the differences, it helps to understand what role blockchain plays in cryptocurrencies.
Cryptocurrencies are digital currencies that are bought and sold on online exchanges. To document who owns how much of a digital currency at any point in time, every time a person buys a cryptocurrency from someone else, it is automatically recorded in a ledger.
But there is a serious issue of trust here. What’s to stop someone from hacking into this ledger and amending it to say they own more of this cryptocurrency than they actually do? Cryptocurrencies use blockchain technology to track every time a cryptocurrency changes hands and it’s practically impossible for the blockchain to be altered once information has entered it.
What coffee supply chains and cryptocurrencies have in common is their need to record information that can never be tampered with. A solution they can both use is blockchain. However, the coffee supply chain doesn’t need to use cryptocurrency.
“Cryptocurrency needs blockchain, but blockchain does not need cryptocurrency,” explains Alexander.
“‘How do you pay the producers with a blockchain platform?’ This is a question I get asked a lot,” says Alexander.
But blockchain is just a ledger of the payments made rather than a payment processing system. While it can verify and record the price paid for a coffee, the actual exchange of money is done in the same way we’ve always done it.
“We don’t care how the payment’s made, so long as the payment’s of the correct amount,” Alexander tells me.
Blockchain is all about data – and there’s a lot of it. The Bitcoin blockchain ledger, for example, is currently around 250 GB and growing every month. Downloading it takes hours (and requires significant free storage on your computer), but is necessary if you want to trade Bitcoin.
Fortunately, if you want to access information about a specific coffee purchase, you don’t need to download data relating to every coffee purchase ever made via blockchain.
In the coffee industry, blockchain ledgers are typically set up so all the gigabytes of data are held by a single company who then grants you access to it. Often, this can be accessed via an app that is available for users along the supply chain, from the farm through to the coffee shop.
However, this also means that unlike Bitcoin, the data isn’t necessarily public to everyone. You can only view the information that you are granted access to.
The idea that blockchain technology automatically translates to a transparent and traceable supply chain is an oversimplification. It can create this, but only if everyone involved wants to do so and has access to the technology.
Imagine if the company that ran the blockchain didn’t record what a farmer got paid at the farmgate. This information would never be a part of the ledger. But that blockchain ledger might instead start recording every transaction and price between intermediaries all the way to the consumer.
If a consumer decided they wanted to know what the farmer was paid (and they were able to access the blockchain ledger), they would be presented with a lot of information about everything except for the price the farmer received.
Alexander tells me, “Blockchain doesn’t provide transparency; it protects transparency. It doesn’t provide traceability; it protects traceability.”
We are in a period of unsustainably low coffee prices. More and more people are asking how much coffee producers are getting paid – but it’s notoriously difficult for consumers, café owners and roasters to get that information.
The trail of information about prices often stops at the Free On Board (FOB) price, the one paid to the exporter in the country where the coffee was grown. “All transactions prior to FOB, I call the pre-FOB black hole,” says Alexander. “Until the introduction of our new technology, it just wasn’t possible to collect and verify the farm gate on a large scale.”
Blockchain technology can help farmers by giving supply chain actors a transparent window into the farm-gate price – providing it’s recorded. Once it’s been recorded, no one in the chain is then able to change it. “So now you have this beautiful information that provides full transparency into what happened at the first mile. And nobody can change it later, not the exporter, importer, or others, because it’s on the blockchain. It’s protected,” says Alexander.
Alec points out that blockchain can also cut costs. Unifying the expensive process of creating ledgers of information across the supply chain means that money can be saved. He argues that this could then be used to pay a more sustainable price to the farmer.
“What blockchains will do is enable a way to digitize the very expensive, time-consuming recording process. Instead of these intermediaries taking a fee to process the paper (involving lawyers, accountants and other professionals), these savings can be passed back to the end consumer and grower,” he tells me.
But just because savings are being made, there’s no guarantee they will be passed back to the farmer. They could instead be kept by each intermediary, increasing their margins.
“Others in the coffee industry say they are using blockchain technology as if that makes them fully transparent,” says Alexander. “No, blockchain does not equate to transparency and sustainability. Blockchain is… just software that protects and provides trust in the collected data.”
So, is blockchain the revolutionary solution to transparency and sustainability that some are claiming it to be?
The truth is that blockchain can be a silver bullet, but the type of gun it’s fired from matters. As Alexander kept telling me, blockchain technology just protects data. If the people using it have no intention of improving sustainability, then it becomes nothing more than a buzzword.
However, blockchain does have the potential to increase producers’ incomes if it’s used in a system that prioritizes higher farm gate prices and accessible transparency for all actors across the supply chain.
If roasters and consumers know what a farmer is getting paid and trust the information they’re receiving, they can put their ethics into practice and ensure they only purchase coffee if the farmer received financially sustainable prices. This might then pressure every actor along the chain to pay higher prices to farmers.