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Completely redoing the supply chain – letters of credit

April 24, 2015

So bitquant does research, and this is sort of a status report on the research we’ve been doing on completely reshaping the logistics chain and trade finance system.

So we are in the process of replacing letters of credit with bitcoin escrow.  The advantage of bitcoin escrow is that we can do micro-credit.  I’ve started by shipping USD 1000 packets of electronics goods to Kenya, and providing credit to merchants.

We are looking at shipping other things.  The things that we are looking at shipping are:

* coffee – the idea is to make it economical to ship individual 50 kg bags of premium coffee from the farm direct to the coffee house.  We were thinking about Kenyan coffee, but the Kenyan coffee industry turns out to be politically complicated, so we are focusing on Tanzania and Costa Rica

* gold – it turns out that it is not economically viable to buy gold from Africa, but we are looking at secure mechanisms by which someone can pay for Chinese goods with unrefined gold

* used luxury cars – You can get used cars in Hong Kong very cheap.  Used cars are pretty nice because they are larger than electronics, but still smaller than bulk shipping

* exotic environmentally friendly dried meat – It turns out that East Africa has a problem in that because the apex predators are endangered, you have a population explosion in herbivores that need to be culled to keep the herds healthy.  Apparently this creates very tasty jerky.

The other thing is that in the process of doing this we’ve been reinventing the retail distribution model.  For example, normally the wholesaler will not want to retailer to talk directly to the manufacturer.  Because I provide financing, I charge a fixed markup between the retailer and the manufacturer.  Once you charge a fixed markup, the incentives change so that you want to encourage the retailer and the manufacturer to talk to each other.

Also, I don’t do shopping carts, since the value add that I do is as a broker.  Rather than reducing transaction cost, my interest is in creating value.  If I find that the retailer can pull me out of the loop for say electronics parts, that’s fine because they might still need me to broker used cars.

The other thing is that because this is high value, high labour, I don’t mind if everyone else copies me.  I only have time to keep a few clients happy, and if you want to copy me with another set of clients, be my guest.  The more people in the network the better.

Once you think about what this means, you find out why the current system can’t survive the internet.  Right now, people make money off the difference in price between the manufacturer and the wholesaler and the wholesaler and the retailer.  Fundamentally this depends on hiding information.  Usually the wholesaler does not want the retailer to know what his costs are because they are afraid to be “cut out of the loop”.  However, this will not work in an internet world where everyone can look up this sort of information.

Putting some transparency into the system is cool because you then find new business opportunities, once you see the whole network.  For example, it turns out that coffee beans have husks that make a nice tea, but no knows about it, and no one thinks of shipping over dried coffee beans with the shell on.  Instead, the shell ends up in the compost heap, and the coffee house doesn’t have another product which might be saleable.

Finally, all of this is something that works better with a small company.  If I were to work at a bank and said “let’s finance used cars to Kenya”, the response would be that we are not in the used car business.  If I did this at a shipping company, they’d say we aren’t in the banking business.  The problem is that with a large company, you just don’t have the flexibility to do things quickly, whereas my company has two people (me and my wife), so if can say “hey this might make money, let’s do it.”

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