Blockchains are generating excitement across industries due to their potential to improve supply chain transparency. Less well known is their capacity to help companies conform to supply chain integrity commitments required by the United Nations Guiding Principles on Business and Human Rights (“UNGPs”), which call upon companies to assess the actual and potential human rights impacts caused by their activities.
The notion of “human rights due diligence” articulated in the UNGPs, of which supply chain integrity is a key implication, has found its way into a growing body of US and overseas legislation, including the California Supply Chain Transparency Act, the Dodd Frank Act, the Lacey Act, the U.K. Modern Slavery Act, and the EU Conflict Minerals Regulation. For present purposes, these laws (1) prohibit companies from sourcing goods or services from suppliers who run afoul of recognized humanitarian standards and/or (2) impose extensive disclosure requirements.
Any company with multi-layered, cross-border supply chains should consider implementing blockchain solutions to comply with the supply chain integrity laws listed above. Blockchains, by design, are incorruptible digital ledgers that can record virtually anything of value. Essentially, a blockchain is a decentralized database whose records are stored in “blocks” which are continuously maintained and verified by a computer network. Blockchains can only be modified through the addition of new blocks; pre-existing blocks cannot be edited, adjusted, or changed. Each computer in the network, or “node,” contains a copy of the blockchain, and these nodes are tasked with validating in real-time any changes made to the blockchain. This makes blockchain data easily verifiable, resistant to alteration, and instantly available to anyone within the network. Moreover, access to the blockchain can be made open to the public, without restrictions, or limited to select stakeholders.
In the absence of blockchain solutions, activities occurring within a supply chain can be difficult to trace beyond the first two levels of suppliers, rendering comprehensive monitoring impractical. In conflict mineral chains, however, seven to eight layers can exist between the mine and the consumer, and that gap can reach 50 layers for electronic components. For this reason, companies are often the last to know about activities in their supply chains that are inconsistent with the company’s policies on issues like the use of child, forced, and/or indentured labor or the acquisition of conflict minerals.
Companies transitioning to blockchain have their records instantly verified by, and stored within, every node in the network, and this self-auditing structure provides a level of transparency and control not afforded by typical centralized databases. By combining the use of blockchain with internet-of-things (“IoT”) applications, such as GPS-based tracking technologies, companies can track goods and services in real time, producing comprehensive reports in seconds, not days. A recent simulated recall by Walmart found that it took 6 days, 18 hours and 26 minutes to manually trace a simple package of sliced mangoes back to their source. A blockchain solution developed by IBM replicated the task in 2.2 seconds.
With an unalterable, self-certifying chain of custody for goods and services, companies are able to identify potential human rights violations quickly and to collect the information necessary to implement solutions. This allows companies to better comply with human rights due diligence obligations. For example, all that is necessary to identify an issue in regard to upstream use of child labor is to marry a robust chain of custody with credible reports of child labor violations by particular sources of supply or in particular regions. Of course, such use of blockchain is only as valid as the reports upon which it is based, and thus it could be abused if reports are generated without regard to actual upstream working conditions.
Various industries are already utilizing the instantaneous tracing capacity of blockchain to ensure products are sustainably and responsibly sourced as well as to ensure that they are received by those who need them the most:
- The World Food Programme’s Building Blocks program utilizes blockchain to facilitate the distribution of cash-for-food aid to Syrian refugees in Jordan. Refugees can shop at a specialized grocery store and, instead of paying with cash or a credit card, their iris is scanned, which confirms their identity and automatically remits payment.
- De Beers announced its investment in a “diamond traceability platform,” employing blockchain to provide a single, immutable record to trace a diamond’s lifespan. It will be the first traceability platform to cover the entire diamond value chain.
- Unilever, supermarket chain Sainsbury, and packaging company Sappi teamed up with several technology startups as well as financial services companies BNP Paribas, Barclays, and Standard Chartered to develop a blockchain system to track and verify contracts for up to 10,000 tea farmers in Malawi (tea is the country’s second largest agricultural export). Specifically, the initiative is intended to provide preferential pricing to farmers that implement sustainable farming methods designed to increase harvests without using more land.
- Coca-Cola and the US State Department launched a blockchain project to combat forced labor worldwide by creating a secure registry for workers and their contracts using blockchain’s validation and digital notary capabilities.
Though it is too early to tell how successful these initiatives will be in achieving their stated objectives, it is worth noting that blockchains are being deployed to support a growing number of human rights claims.
The use of blockchains is not without risk: companies will have concerns about disclosing sensitive and business proprietary information to a wide audience. Further, while increased transparency, along with the democratization of information, is frequently cited as a benefit of blockchain, there is a corresponding danger that the personal and identifying information of those assisted may be utilized or recorded without their permission. In an increasingly connected world where social media have become a fixture even in developing countries, such concerns have become increasingly salient. Accordingly, blockchain systems should take care to limit access to the relevant actors and should be designed to require only such information as is absolutely necessary to manage the supply chain.
Although the use of blockchains in supply chains remains embryonic, the technology holds great promise in the identification and resolution of human rights issues important to corporations and consumers. A transparent, immutable infrastructure can provide benefits to every participant in the supply chain, increases consumer engagement, and credibly distinguishes companies from their competitors by highlighting corporate compliance efforts.