Paul Howard Articles, Blockchain, Blog, Wine Business 5 Comments

Blockchain

The future of the wine industry will be Blockchain

Disruption. A much-overused business word. Every new product, service and start-up we are assured, is disruptive. It’s the game-changer, the holy grail. Yeah, right. Well, the Blockchain probably is.

A couple of years ago I studied a new technology called the Blockchain, on behalf of the Financial Services Industry. I was hardly alone; 22 of the world’s major banks are collaborating on developing and deploying this technology. The Blockchain is now the financial services equivalent of the Second Coming. This time they say, disruption is for real.

But what is Blockchain and what’s it got to do with wine?

I’ll get to the wine bit soon. Firstly though, to understand the Blockchain let’s start with Bitcoin. You’ve heard of Bitcoin, the alternative cryptocurrency. While increasingly accepted by commerce, it’s also the currency of the Dark Web, with its nefarious dealings. Despite this, Bitcoin is gradually moving towards mainstream acceptance. Whether Bitcoin is a revolutionary new currency or not is, however, irrelevant here.

Instead, the relevance of Bitcoin is the decentralised ledger technology called Blockchain that supports it. The Blockchain is the future of transactions. Any transactions. The technology is highly sophisticated, but the usage is simple. It will eventually disrupt the distribution chain in every industry, including wine. The consequences could be enormous.

Imagine Blockchain as a kind of torrent download technology that operates in reverse. Have you downloaded music or films using peer-to-peer (P2P) torrents? Legally of course! Then you might know that the download you receive isn’t from one central computer. Instead, the download consists of pieces of separate data sent to you from a decentralised network of computers. Assembly into a complete and usable file is by your software.

Now apply Blockchain to transactions

Currently, if you want to buy or sell anything, then there are several costly and lengthy stages to go through. Firstly, you need to find a trusted counterparty to buy from or sell to; then the trade requires agreement. Now payment happens. Afterwards, the transaction requires recording and reporting, say for accounting and tax.

But here’s the crux;  how do I trust a counterparty I don’t know? Or if I know them, how infallible and trustworthy are they?

Counterparty Risk

This issue is called counterparty risk. Intermediaries act as a reliable point between the buyer and the seller. That’s what Banks essentially are, or should be. In wine distribution, importers, bonded warehouses, merchants, transporters, auction houses, and retailers are all intermediaries. Each is a separate link in what can be a long chain between the winery and the consumer.

Every intermediary maintains a centralised ledger of the transactions they make. Each acts as the guarantor to both parties in the trade, and shows proof as necessary. Of course, the intermediary takes a nice little earner for its troubles. But the audit trail along the chain breaks readily because each transaction along it is not directly joined to the previous one. Using Blockchain changes the distribution chain by joining all deals up.

In the Blockchain, computer networks compete to facilitate and verify any individual transaction for a fee. The winner adds a new block of data to the Blockchain. The system does this according to a set of pre-agreed rules, carried out by members of the network called miners. They use specialist software and enormous computer processing power. The result is a secure decentralised ledger of all transactions. Now linked together unbreakably, there’s no single data owner or failure point.

Every ten minutes the winning miner creates a ‘block’ of all their verified transactions over the network. As each new block of these deals completes, it links to all the previous deal blocks, so extending the Blockchain.

Sophisticated cryptography and security ensure each block is digitally signed. Any attempt at alteration invalidates all previous entries, right back to the very first one.

The brick wall analogy

Think of a brick wall. If you want to change a brick within the wall, you must remove all the brickwork above it first. That makes every entry in the Blockchain extremely tamper-proof and completely auditable. You would need to control the majority of the network computers and have immense computing power to alter it. And such tampering would be obviously visible. Over time, the wall is built higher and higher, making it ever harder to undo.

Increasing trust and reducing fraud

The Blockchain is public and highly transparent because anyone with permission can see information on every transaction. Hence it transforms transaction verification, recording, reconciliation and reporting. And with high speed and security. It eliminates the risks of defaulting counterparties, contract issues, lost paper trails and frauds. You don’t need to use Bitcoin, any currency can be exchanged. Replacing people by Blockchain’s automation will result in massive cost reductions too. The opportunity for streamlining and increased profits in the name of efficiency will drive adoption.

In my opinion, these benefits mean that in future, those intermediaries without Blockchain will cease to exist.

The Blockchain will probably take off first in financial services. It’s where the investment in R&D is happening now and there are no physical goods to track. Banks have realised they can dispense with costly administrative people, enhance security and transact indelibly at incredible speed.

But there’s no reason why the Blockchain would stop there. It will eventually affect every industry, including the wine trade. It just needs two parties that want to exchange goods, money and information.

If you think I’m overstating the case, then start with this report from the UK Government Chief Scientific Adviser. It also has more details for the tech-savvy. Governments are taking this development very seriously.

As with any new technology, there will doubtless be Blockchain applications yet unknown, some with unforeseen consequences. Just like the development of the Internet itself. But for the wine industry adopters, here are some examples of the potential Blockchain benefits.

Blockchain helps wine consumer protection

Some wine benefits are already becoming clear; including provenance, authenticity, fraud reduction and consequently consumer protection.

At the top end

  • In the rarified arena of wine investment, millions of pounds are spent worldwide on hugely expensive investment grade wines. Verifying the origin of the wine, it’s storage, and the credentials of the owner/seller are fraught with difficulty. Scams are commonplace and occasionally headline news. Even experts can be wrong. The Rudy Kurniawan trial showed that counterfeit wine is massive. Then there are examples of investment companies taking money for wines they don’t have and then conveniently going into liquidation. Storage has an enormous impact on value too. If you can prove that wine storage is top notch, you’ll get a better price. The Blockchain reduces these risks. Caveat Emptor would no longer apply to provenance. Those wines without ID would arouse suspicion and be unsaleable.

The mass market

  • You may find it hard to care about the activities of relatively few wealthy individuals. However, the real world doesn’t escape lightly either. Once again, it’s about verifying authenticity, but on a massive scale. For example, in the 90’s the sales of Pinot Grigio exceeded the amount grown. So what made up the shortfall? There have been recent scandals involving Brunello too. Sadly, there are plenty of other murky incidents. Fraudsters substitute cheaper inferior wines, cut them with water, (called Jesus Units!) or use food additives. They have even added dangerous chemicals such as Diethylene Glycol and Methanol which killed people. The winery could attach an independent DNA fingerprint or chemical analysis to the initial Blockchain transaction. That would remain visible with the wine throughout its life. One might imagine that wineries, their appellations and the Fraud Squad would welcome this with open arms. Organic certification? Easy.

It applies to food too. Adulteration has been commonplace with Extra-Virgin Olive Oil, and you can read about that here.

Blockchain benefits Companies and Governments too

On their own, these examples of using Blockchain as the ultimate bullshit detector might not be enough to justify adoption. Fraudsters are always adept at finding new scams as well. So here’s two more benefits.

  • “The business of business is business”. Companies will want to strip out costs, increasing competitiveness and their profit margins. Blockchain automates costly back office administration, so those workers become redundant. There will be opportunities, especially for large companies, to simplify and scale up by cutting out or acquiring others. They will concentrate on adding value by undercutting prices, enhancing customer service or finding new wines to sell. In ten years time, the intermediary landscape may look entirely different.
  • Ensuring tax and duty payments are correct and timely. Governments show a keen interest in reducing evasion or fraud. After all, this revenue is their lifeblood. In turn, this could lead to a whole new raft of Blockchain-led regulation.

Summing up

For me, the Blockchain is both an exciting and worrying development. But with every new technology; the question isn’t whether the technology is “right or wrong”. The real issues are, “what is the application of the technology?” And, “what are its consequences?”.

Regardless, the Blockchain will be coming for the wine industry and will change it radically.

This think-piece originates from my Blockchain research undertaken for the Financial Services Industry in 2015. I’ve translated it to the wine industry – the principles are the same.

If you are interested in the business of wine, then see my piece on the Cork industry.

Update 21 July 2017: This article is now Number 1 on Google Search for Blockchain and Wine. This is the Zeitgeist.

Comments 5

    1. Post
      Author
  1. Hi Paul. Excellent piece, making a complex idea easy to understand. The blockchain will undoubtedly be a transformative technology across many sectors, from finance and personal data to retail and, as you make in the case for wine, especially where provenance is important. Diamonds, immediately comes to mind; antiques and other areas where CITES regulations exist; even the pet trade. Certainly food for thought. Thanks.

    1. Post
      Author

      Thanks Andy for your encouragement! How Blockchain will transform the wine industry is a particular interest of mine. Please look out for further Blockchain and Wine articles, coming soon…

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