How Blockchain Could Improve the Global Supply Chain

Global supply chains (GSCs) have become increasingly complex and fragmented over the last few decades due to advances in transportation and production technology, economic globalization, and the emergence of multinational corporations (MNCs). Despite their benefits, GSCs present significant risks of human rights violations because of information asymmetry and gaps in the rule of law among different jurisdictions. One of the more significant problems with business and human rights governance along GSCs is the lack of correct, complete, and trustworthy information, which allows for due diligence, traceability, and regulatory scrutiny. Even when MNCs agree to address potential human rights abuses, including cross-border violations, they must rely on all participants along the supply chain to communicate the correct information in a timely manner and with integrity. This remains a formidable challenge. Many MNCs choose to hire third-parties to conduct the reconciliation and verification of records, which is a very expensive process that has not yielded the necessary results.

In a recent article, we suggest that using blockchain for GSCs may be preferable to harnessing business and human rights governance by way of enhancing transparency, traceability, and accountability across jurisdictions. Indeed, among the many emerging technologies, blockchain shows promise in terms of radical disruption and opportunity in GSCs, and it may also serve as a governance tool for disintermediation in addressing business and human rights issues across borders.

Blockchain technology is a decentralized, distributed ledger that records transactions in a secure and transparent manner. It works by creating a network of nodes that validate and verify transactions, which are then added to the blockchain as blocks. Each block contains a cryptographic hash of the previous block, creating an unbreakable chain of blocks that cannot be altered or deleted. As such, blockchain can be used to prevent regulatory arbitrage and avoid market fragmentation in supply chains. By employing blockchain technology to track products throughout their entire lifecycle – from raw materials to final sales – companies can achieve greater visibility along their supply chains, more quickly identify potential risks and violations, and take necessary corrective action. For example, we cite promising developments in the footwear and textile, food, and mineral sectors, where blockchain has been used to increase transparency and traceability.

More specifically, we discuss two key perspectives of blockchain’s potential benefits for business and human rights governance. First, increased transparency: Blockchain can be used to increase transparency in supply chains by providing real-time tracking of products, from their origins through every stage of production, until they reach consumers. Therefore, it can help to reduce information asymmetry by providing stakeholders with more accurate and timely information about product origins, labor conditions, and environmental impacts. This will enable consumers to make informed decisions about their purchases based on ethical considerations, such as labor practices and environmental impact. Meanwhile, blockchain can facilitate collaboration among stakeholders (e.g., suppliers, NGOs, regulators) by creating a shared platform for data exchange.

Second, strengthened traceability: Blockchain can be used to trace the origins of products and materials, which is particularly important in industries such as mining because of concerns surrounding conflict minerals. By using blockchain to track the origins of minerals, companies can ensure that they are not getting materials from conflict zones or areas with poor labor practices. Hence, blockchain can enhance accountability by enabling the traceability of products to their original source.

However, our analysis also acknowledges that there are risks and limitations associated with blockchain technology. While using blockchain for GSCs may overcome challenges surrounding public and private governance, some normative and technical limits and risks remain, including inadequate technical capacity and infrastructure support, low scalability, high implementation costs, cybersecurity threats due to deficient data safeguards, global standardization politics, and the “garbage in, garbage out” enigma (i.e., the integrity of the initial data input).

To address these risks and limitations, we suggest a few solutions. First, we recommend increased public-private partnerships to address capacity and scalability problems associated with blockchain technology. Second, we suggest improvements in cybersecurity to protect against cyberattacks and data breaches. Third, we recommend that technical capacity gaps be addressed by investing in infrastructure and developing standards for blockchain-based applications across sectors.

Blockchain is expected to fill gaps in governance, offering the promising step of disintermediation toward a technological fix for human rights challenges that are prevalent throughout GSCs. Nonetheless, blockchain is not a silver bullet. Rather, it requires careful consideration of the risks and limitations and investments in infrastructure and cybersecurity to ensure successful adoption. Our contribution to the fields of comparative corporate governance and regulation, corporate social responsibility, and ESG potentially lie in the exploration of a somewhat novel approach to human rights risks in GSCs. By highlighting the potential benefits and limitations of blockchain technology in improving transparency and accountability, our article provides a framework for future research and practice in this area.

This post comes to us from professors Chang-hsien Tsai and Ching-Fu Lin at National Tsing Hua University in Taiwan. It is based on their recent article, “Shedding New Light on Multinational Corporations and Human Rights: Promises and Limits of ‘Blockchainizing’ the Global Supply Chain,” available here.