Juan Forero, Melissa Lewke, and Bernard Arulanandam - Jan 10 2023
Blockchain’s Potential as a Supply Chain Tool in Expanding Markets in Sri Lanka

Companies worldwide will continue to tout their sustainability in 2023, but how can consumers and regulators trust sustainability claims and understand where exactly their products are coming from? In Sri Lanka, Selyn Handlooms, the only handloom fair trade certified company in the country, is hoping to provide its customers with ‘radical transparency’ for everyone in the supply chain, from weavers to consumers.

And to do so, they’re using blockchain technology.

Blockchain technology helps companies address these concerns – a trend expected to increase over the next several years, with some estimating that the market for blockchain-based supply chain solutions will increase to $3.3 billion by 2026 (up from $253 million in 2020).

Not only are consumers becoming increasingly environmentally conscious with their purchasing decisions, but many countries have also begun debating and enacting stricter environmental regulations, including traceability requirements on imports. For instance, the recently proposed European Green Deal, which envisions climate-neutrality for all 27 member states by 2050, includes strict import criteria which emphasises giving customers the information they need to become more knowledgeable about product sources, sustainability, and green claims.

Countries looking to increase exports into European and other markets, such as Sri Lanka, must comply with these security and transparency standards to remain competitive. Blockchain can address some of the major compliance barriers these sectors currently face, such as a food security and safety, brand protection, risk mitigation, certifications and compliance, efficient cross-border trade, carbon security, environmental stewardship, and social/economic sustainability.

Businesses adopting this technology will be able to better control product quality, monitor their supply chain, and track raw materials from production through to consumer tables and stores around the world. This additional traceability and transparency will help micro, small, and medium-sized enterprises (MSMEs) access and become competitive in new markets.

With a single unified ledger, blockchain technology takes data and transactions from across the value chain to allow the company and its consumers to follow the product’s journey from beginning to delivery. At the same time, it’s gathering critical information that includes supplier sourcing, sustainability, and labour standards.

Improved uptake of blockchain technology by MSMEs can also lead to increased incomes for their suppliers, further contributing to a country’s economic growth. In food processing, for example, sales data validated by the blockchain could boost farmers’ and suppliers' bargaining power, helping them obtain loans by showcasing the transparency of and consistent market for their products.

However, many Sri Lankan MSMEs aren't equipped to manage their supply with this technology, putting stress on businesses as they struggle to compete internationally and experience resource and produce waste due to limited insight up and down their products’ value chain.

While some businesses have had success in integrating blockchain, wide adoption of the technology is minimal due to lack of public awareness, reluctance by businesses to adopt new and potentially disruptive change processes, high implementation and data collection costs, institutional capacity, preparedness of value chains, scalability, interoperability, and a lack of knowledge and experience.

Blockchain in Action

In Sri Lanka, USAID CATALYZE Private Sector Development Activity (PSD) is promoting increased adoption of blockchain technology in Sri Lanka for MSMEs interested in piloting blockchain for their products. PSD partner Selyn as one of the first firms in the apparel industry to integrate blockchain into its products. Selyn used a public blockchain to produce and transfer digital assets and embedded a Near Field Communication (NFC) tag on its newly launched Banana Bag.

The NFC communicates Selyn’s unique story with customers, including details of the age and socioeconomic profile of the artisan, their working conditions, and the product’s carbon footprint and material composition. Kantala, another PSD partner and manufacturer of eco-friendly accessories that sources sustainable and verifiable materials, has begun using blockchain to do the same.

Despite the success of these pilot projects, blockchain’s full potential remains underutilised in Sri Lanka. According to Bilal Bhatti, CEO/Founder of technology provider PaperTale AB, “The market is restricted by a lack of understanding of and a lack of qualified professionals.”

“Instead of being used for actual transactions, blockchain is more often used as a PR tool or buzzword. The capacity of this technology to strengthen product traceability, improve partner cooperation, and ease access to funding will dramatically improve supply chains,” Bhatti explains.

Supporting the Shift to Blockchain

Further knowledge sharing initiatives, pilot projects, and research are required before Sri Lanka can realise the full potential and impact of blockchain on trade facilitation. Financial institutions (FIs) can also support blockchain by investing in infrastructure and the businesses that use it.

However, this will require new ways of doing business for these historically risk-adverse institutions, as traditional credit evaluation schemes do not support funding requirements of small ICT companies looking to scale-up operations by adopting such technologies.

Which means that it’s crucial to understand blockchain’s potential and develop strategies and new systems that will support them by providing the required funding. One of the ways to do so is to build the capacity of and educate FI staff on ICT MSME business models so that they can more accurately assess risk and credit worthiness, develop products suited for these small businesses, and increase lending to the sector.

If cross-industry groups band together and adopt this technology, it will enable the development of a customer-centric and value-based ecosystem with increased data sharing transparency, improved supply chain operations, and more informed stakeholders. Sri Lanka and other markets can advance their plan for digital transformation utilising emerging tech like blockchain, which will significantly affect the expansion of a country’s economy in 2023 and beyond.

USAID CATALYZE PSD is implemented by Palladium and funded by the United States Agency for International Development (USAID). Juan Forero is Activity Lead at the USAID CATALYZE Private Sector Development Activity (PSD) Sri Lanka, Melissa Lewke is the Communications and Learning Manager at PSD and Bernard Arulanandam is the Technical Solutions Manager, SME Competitiveness at PSD.