Written By Ronnie Lavie and Alex Verge
We chatted to Sweetbridge CEO, Scott Nelson, about why he’s chosen to start a blockchain not-for-profit, and how Sweetbridge is set to eliminate the pain point in the supply chain, to everyone’s benefit.
At what point did you gain knowledge of blockchain technology, and when did you realise this could transform global supply-chains?
The idea behind Sweetbridge emerged from my experiences in the early 2000s with big supply chains, when I recognised how broken the supply-chain system was in the settlement process. Our company, Trax Technologies, actually capitalised on how broken the system was. We would find all the disconnects between all the parties, quantify the financial risk of that to the company, identify potential fraud and other things that could have a financial impact. The numbers were huge, an average of 54 basis points on whatever they spent in the supply chain.
So that’s what Trax Technologies, your old company, was doing?
Yes. We would automate their contract agreements in what would now be called a smart contract and use that information to audit all the transactions flowing through the system to see if they agreed with the contractual terms. What you would find is a tremendous amount of discrepancy. In fact, on average, 13% of the transactions had at least one discrepancy, and the discrepancy might be worth 5 dollars or 10 cents. In some cases it’s worth the entire cost of the invoice, but the effect financially was about 54 basis points on whatever they spent. These are companies spending tens of billions of dollars a year or more, so half a percent is a huge number.
I’d seen how identity, contract, accounting, and payment were frequently out of synch with one another. I recognised that the blockchain would allow you to basically take these four separate things, and make them happen in anatomic transaction where they all had to agree when the transaction would occur. They could all be housed in one system that would actually sit outside of the four walls of the organisation, which meant nobody could lie and cheat at scale, at least easily, and that it wouldn’t be economic to do it. That was when the penny dropped. I realised you could get rid of all the confusion we would find at Trax, and if you could get rid of it, it had all sorts of other implications. It meant you didn’t need audits, it meant it would massively reduce the amount of financial risk in transactions, it meant you didn’t need intermediaries to make financial judgements, like credit readings. You have all these knock-on effects. But one of the most powerful effects is that you wouldn’t actually need money to change hands. You can actually move value from accounting system to accounting system without transferring the money, and many people don’t know that that’s how conglomerates really make a lot of money.
Could you give us an example?
So I worked with people like Cargill, and they’re a horribly inefficient organisation, but they make so much money in comparison to smaller independents that they compete with, through mechanisms that those independents can’t access. They don’t actually have to move commodities to trade the ownership, and they don’t need to move money to move the value, they can just do it in an accounting system, because of all the organisations they own. So, they don’t have to pay foreign exchange rates, they don’t have to exchange currencies and have the delays of moving things around the world, they don’t have the uncertainty of counter-party risk, they don’t need letters of credit, they don’t need trade financing, they don’t need supply financing. They just move this between companies, and all they’re moving is denominated value and the denomination happens to be a monetary amount. It was the realisation that that’s how they were making all their money that made me realise, if you had an accounting system that sat between all of the entities, and if you had a way of locking up all of the assets in a way that would not allow them to be double-spent, then you wouldn’t actually have to move it but you could move its value. That’s when the penny dropped. Because you’re talking about eliminating the need for trading and supply-chain finance, and you’re talking about being able to create liquidity out of the value locked in any asset.
Are there any further implications that come with the application of blockchain to supply-chains?
Because of my prior experience, I realised that the supply chain services companies, the people that own the warehouses, that own the trucks, the boats, etc. They could be the new merchant banks. They are the custodians, and they can solve what problems the banks can’t solve, which is how you dispose of the asset that you end up owning from a bad credit risk. This is the problem banks never want to own. Logistics companies can solve that because they can move the asset to anybody, anywhere, and deliver it. They already have the mechanism to do the legal transfer, it’s called a bill of lading, and it’s backed by the maritime law structure that’s signed by 192 countries around the world. With the advent of e-commerce and people like Alibaba and Amazon, you have ubiquitous markets where you can now price, discover, and sell everything, which solves the problem of having to get rid of assets that you end up owning in supply chains that don’t have a customer. The people who are the custodians, who are transporting or housing in any way, they are the natural parties to do this. They can verify the quantities and the information, they have to do that any way and they’ve already got all the infrastructure for it. There’s warehouse receipts, bills of lading and customs invoices, manifests, all these things that are already there, they’re already validating everything, and the penalties for lying are jail!
You have the perfect alignment of incentives. You can reinvent the entire commercial supply-chain financing mechanism at a fraction of the cost, and create infinite liquidity backed by all the assets in the supply-chains of the world, which are the most hedged assets in the world because they generate 54 trillion of GDP which is profit. That’s after every theft, every failure, every hurricane, every volcano, every bankruptcy, it still generates 54 trillion, so there’s no risk! All the risk is artificial and is localised in individual systems, so the only question was, how do you get the stuff at scale, and it turns out there’s only a handful of organisations that control all the supply chain assets in the world.
I was having these light bulbs go off and I realised, this is now very doable. There’s one company that controls 37 percent of all the vessels on the oceans, There’s three companies that control over 20 percent of all global commerce, that physically house or move 20 percent of everything that happens in commerce. Today they’re just the shell, the housing, but they could become the bank for that, and there are no banks at that scale, and I don’t think we want a bank at that scale, it would be too much risk. So you need to do it in some way that decentralises that, and I realised that blockchain was the way.
So considering this a non-profit organisation, what’s your business model, how do you operate?
We have a two-token system. One token takes the value in assets and converts it into a new asset class, which is stable and can be pegged to a fiat currency of your choice. It is designed, with built-in regtech, to support all governments with the right to enforce trade and tax compliance. You can’t steal it and you can’t actually lose it. So it’s an asset-class that’s safer for governments, more compliant than money, and fungible and stable. We’re in the process of working to get it rated, and hopefully we’ll have a AAA rating. That means you can use it as an alternative to cash. There isn’t anything like that in the world today.
On the other side we have a loyalty token, which before being launched has had the same kind of level of scrutiny that the euro did before it was created. We’ve got multiple PHDs, quantitative analysts, and complex systems theorists, who’ve run thousands of models on it, to try optimise it and make sure it’s stable. When you own this loyalty token, it reduces your cost for everything in the network – all goods, services and fees, including interest and exchange rates, any in network, hotel, airline, supplier – in the form of cashback. But not cashback that’s two or five percent, it’s dependent on how much of the coin you have. It can even be cashback as high as a hundred percent. So it means you can get interest-free loans, and instead of investing in a future where you have a higher return because of interest, or because of earning a reward, you can invest in a future where you have a lower cost. Which is always better because the lower cost self-adjusts for inflation. Also, it’s a loyalty system in which, when a merchant or somebody joins they become a miner – they mine the coin through proof of economic growth, anybody who grows the network, any bank, any organisation, becomes a miner, and the money that they get from the coin offsets any discount that they provide to users, even up to a hundred percent of their revenue.
And that’s how you’re able to keep this a non-profit company?
That’s where the money’s made. All the money’s made purely in increasing the value of that token, we don’t make any money from operating the system, which means we have the exact same incentive as anyone we’re asking to buy it since that’s the only way we make money. Everybody who owns it has an incentive for the system to grow, because whenever it gets larger, the discounts go up, the more cashback that you get, the lower your cost increase. It also means that it’s a token that’s not based on speculation, neither of the tokens are speculative, they’re all backed by physical assets in one case, and a provable value in the other case. The more token you own, the more cashback you get on network services, and it’s pure maths, you own ten times as many, you get ten times as much cashback. You just can’t get more cashback than you buy in network services.
How easy do you think it will be for individuals and companies to make the transition to blockchain?
We’re going to make that super easy for them, because what we sell to the companies is the service to change the business model. We’ll give all the infrastructure, all the tech, plus the people that will implement it. We’re doing that by lining up partners all over the world, who are in something called the Sweetbridge Alliance. The only cost in the entire network is ten basis points on every transaction, and that cost is purely used to run the network, and as the network grows that number drops, and eventually gets down to under half a basis point.
How do you see Sweetbridge evolving?
We’re just a few months away from launching products. We’ve got test-products that are out there to prove some concepts that we’ve been running. All those have gathered feedback that have led to refinements, and now we have the regulatory approvals to move ahead. We’ve got the legal structures that we needed to get going, we have the partners to make all of this happen, and now we are just finalising our strategy. We’ll be launching for real this Fall, and we’re doing our major test market-pushes in London and Phoenix, so you’ll hear a lot about us here in the near-future. We hope to be ubiquitous.
So you’re looking at B2B and B2C at the same time?
Yes, we’re doing the entire commerce chain from ground all the way to the consumption. We have actual go-to-market strategy that could realistically deliver a billion customers and a trillion dollars of economic activity within a two to four year period of time, all we have to do is close five sales.
We sell to businesses and governments that are under threat and we can help high-streets solve the problem of Amazon. We can help logistics companies have profitable businesses, instead of losing money three out of every ten years and making almost no money in the other seven. They have hundreds and hundreds of billions of dollars of assets that are the critical infrastructure that makes our whole world work, and yet they’re massively undervalued and have poor credit ratings. We can turn them into highly-valued, highly credit-rated businesses, and improve their stock price. We can take the banks that are being hurt around the world, and turn them into banks that actually make money and offer services no major bank can offer. We can do all that through the union of these four things [identity, contract, accounting, and payment] not being able to be out of synch with one another. It’s hard to estimate how big that impact is, but almost all financial laws and regulations that are related to any kind of commercial trade, are related to the fact that these four things can be out of synch. You can now make sure they’re not out of synch technically, which means you can enforce regulations without armies of people. You can make enforcement obsolete, and you can do all of that in something which happens in microseconds, in a transaction that can’t be easily corrupted. We haven’t been able to do that before, and that has implications that will ripple through many, many decades.