Blockchain technology in the Scottish food and drink sector: against the grain?

Scotland

Introduction

Scotland’s food and drink sector is reported to be a c. £15 billion industry. However, while the importance of the sector to the Scottish (and wider UK) economy is unlikely to change, the technology available to producers in terms of how they run their businesses is constantly evolving. In this Law-Now, we outline various ways in which businesses operating in the food and drink industry may be able to make use of fintech to maximise the potential of this vibrant sector. 

Use cases

Given the current success of the Scottish food and drink sector, producers may question the necessity of implementing new technologies (and incurring commensurate costs). However, while there will be cost associated with the implementation of innovative technology into their operations or offerings, businesses may find that doing so will provide further opportunities to maximise the economic potential of their products.

Identifying provenance

Some producers are already taking advantage of new technologies and integrating them into established business practices. For example, we have seen examples of businesses making the details of their entire supply chain available on blockchain, which can be thought of as decentralised ledger where data can be recorded, with each new “block” of data being linked to those preceding it (forming the “chain”). The range of information which could be logged (for instance, demonstrating that a particular variety of barley was used to make a bottling of whisky, where and how long the spirit was aged, and the qualities of the cask used) are vast. Providing such detail allows consumers to make more fully informed choices and may provide an opportunity for producers to charge a premium given the certification of their products’ qualities.

While this can be easily visualised as being applicable to relatively high value products which are the outcome of a process (such as distillation), all Scottish produce will provide information with the potential to be documented. Being able to demonstrate on a blockchain the provenance of beef from a particular herd of cattle, or where and how Scottish seafood was sustainably sourced and processed, would give consumers valuable information about the origins of their food and allow producers to demonstrate the intrinsic quality of their product in a secure, immutable format (on which, see further below).

Non-fungible tokens and tokenisation

While more commonly associated with digital artwork, non-fungible tokens (“NFTs”) provide another way in which food and drink businesses can incorporate technology into their business. In brief, NFTs are unique digital tokens existing on a blockchain which are non-interchangeable and cannot be replicated (for further background, see CMS’ guide to NFTs here).

As briefly mentioned above, one key feature of blockchain is that information recorded thereon is immutable. This means it is not possible (or at least extremely difficult) to amend or delete information already recorded on a blockchain. As such, blockchain provides an extremely secure method of recording large quantities of information.

The characteristics of NFTs and blockchain make usage in the food and drink sector entirely doable (or even desirable). We have already seen instances of certain distilleries offering NFTs linked to the ownership of a specific bottle of whisky which can be redeemed for the physical bottle. Recording ownership on an NFT listed on a blockchain provides a clear and inarguable display of where the right to an asset sits. The rights can then be easily and securely transferred on the blockchain.

In addition, the unique characteristic of NFTs makes them suitable as a collectible – an NFT can be linked to a specific asset (such as a bottle of whisky) and cannot be exchanged on a one-to-one basis. As a collectible, NFTs provide an opportunity for businesses to encourage brand loyalty and engagement, with the potential to reach untapped markets and potential customers.

Whether as giving collectors the satisfaction of obtaining the equivalent of a cast-iron (digital) certificate of ownership or providing a method whereby assets can be traded securely, many food and drink businesses may be able to find a place for NFTs as part of their offering. 

Another way in which blockchain technology may be utilised is through tokenisation, whereby multiple tokens are issued on a blockchain which represent an asset. The difference from NFTs (which are a specific type of token) is that tokens more generally are fungible in that they can be exchanged with other tokens of the same class. They are not unique. These characteristics have allowed various use cases to arise where the tokens are linked to real world assets – such as the tokenisation of real estate and company shares under English law.

This could certainly be an option for food and drink producers seeking to facilitate investment in their assets. One obvious example would be tokens linked to ownership of a cask of whisky. The concept of purchasing casks of whisky, either as part of a distillery’s fundraising efforts or as a standalone investment is common. However, the price of purchasing a full barrel, butt, puncheon, or hogshead cask’s worth of spirit will be beyond the means of many whisky enthusiasts.

Tokenisation offers a way to allow greater participation in investing in highly valued whisky casks. Such innovation would both facilitate investment for distilleries (and independent bottlers) seeking finance and enable a wider range of enthusiasts to participate in investing in whisky casks. While purchasing shares in casks (for investment purposes only or with a view to obtaining bottles of whisky) is already offered in some cases, doing so through tokenisation provides further opportunities in terms of facilitating secure transfers of tokens. There are already examples of this innovative approach in practice – others may be increasingly minded to do the same as the technology becomes more widely known. 

Conclusion

The Scottish food and drink sector makes a significant contribution to the Scottish (and wider UK) economy. Making full use of emerging technologies such as blockchain is another method producers can use to both encourage investment and to demonstrate the provenance of their products.

Article co-authored by Euan Reid, Trainee Solicitor at CMS.