Virtual Reality

VIRTUAL REALITY ADAPTING COFFEE SUPPLY CHAINS TO COVID-19 A whitepaper exploring how blockchains enable transparency and reinforce trust in coffee ecosystems.

CONTENTS Problem Background • Smallholder Coffee Farmers • Ethical Coffee in the Age of ESG • Blockchain as a Supply Chain Backbone Solution • What Makes a Good Coffee Blockchain? • Four Key Qualities • Day in the Life of a Coffee Farmer Conclusion

PROBLEM The COVID-19 pandemic is the proverbial straw that broke the back of global supply chains. The pandemic has impacted nearly every aspect of supply chains—from production to transportation to distribution. It exposed the fragility of outdated record-keeping systems and revealed the opacity of a good’s journey. As global focus on sustainability intensifies across all sectors—from consumer demand to environmental, social, and governance (ESG) investing— the pandemic has rendered travel a non-viable solution for gathering reliable supply chain information. Travel bans pose an intractable challenge to third-party certification and verification practices. Especially for complex agri-food supply chains like coffee—where standards, labor, and environmental practices vary across geographies—in-person verification by a buyer themself or a trusted third party is the gold standard. Digitalization and increased transparency have emerged as salient buzzwords in the conversation around mending and reinforcing shattered supply chains. However, these concepts do not account for the fragmented reality presented by the disparate actors along global coffee supply chains. Each of the many actors along the supply chain, from the farmer, to the washing station, to the exporter, may have competing incentives, which can affect the data they log at each step of the product’s journey. While both digitalization and transparency are certainly critical, neither alone offers a seamless solution to presenting proof of data and inducing trust without sharing sensitive information. 1

PROBLEM These challenges are not temporary. While many countries in the Global North have accelerated COVID-19 vaccinations, countries in the Global South, the source of nearly all coffee supply chains, may not see a vaccination rollout until 2023. With new variants cropping up regularly and the potential for another global pandemic perpetually on the horizon of our increasingly globalized world, travel disruptions may become more of a norm than an aberration. SO, HOW CAN WE ENSURE EVERY ACTOR ALONG COFFEE SUPPLY CHAINS, FROM THE FARMERS TO THE CONSUMERS, CAN BE INCLUDED IN THE PROCESS AND TRUST THE DATA PRODUCED, WITHOUT VERIFYING THE CLAIMS MADE WITH THEIR OWN EYES? 2

BACKGROUND SMALLHOLDER COFFEE FARMERS As previously highlighted, nearly all coffee supply chains begin in the Global South, where the “coffee belt” running between the Tropics of Cancer and Capricorn produces the ideal tropical conditions for coffee production. The top five coffee-producing nations—Brazil, Vietnam, Colombia, Indonesia, and Ethiopia (in order of metric tons per year)—span three different continents. Smallholder farmers produce an overwhelming majority (70-80%) of the world’s coffee. “Smallholder” refers to farmers who cultivate a relatively small volume of export commodities on relatively small plots of land (usually categorized as under 2 hectares), which they may or may not own. They are less well-resourced than commercial-scale farmers, and usually work within the informal economy as they often lack licenses and regulatory support. While the conditions smallholder coffee farmers face vary by country, region, and farm, they are almost always the most vulnerable link in supply chains. Exploitation of smallholder farmers in the coffee industry has received global attention. Issues such as indentured slavery and child labor are only the tip of the iceberg. Smallholder coffee farmers generally receive about 7-10% of the wealth generated by the product they produce. Most of the wealth and power accumulates at the top end of the supply chain, with roasters taking almost 80% of the wholesale coffee price. Traditional coffee supply chains are notoriously long and complex—as many as 20 middlemen and six months stand between bean and brew. As such, one of the biggest challenges facing smallholder coffee farmers is their lack of direct access to export markets. The lack of market access forces farmers to rely on a string of middlemen to get their green, unroasted beans to the market. 3

Typical coffee supply chains thus exclude the farmer from more profitable activities along the process, once the crop leaves the farm. As a result, smallholder farmers receive a disproportionately small cut of the wealth from their product—compared to the middlemen who generally play a far less labour intensive role. There are significant barriers to entry for smallholder coffee farmers who want to move up the supply chain. Coffee farmers are generally extremely low-income. Enveritas estimates that of the 12.5 million smallholder coffee farmers at least 5.5 million live below the international poverty line, earning less than $3.20 a day. Low income prevents farmers from investing in the equipment, land, and other resources required to scale up production. Many smallholder farmers located in remote areas may have little access to banks and other traditional forms of financial inclusion, forcing them to seek out loans from third-party or private lenders. These lenders may be unethical or predatory and charge extortionately high rates that can exceed 20% per year. Taking a loan from a lender can thus send smallholder farmers spiraling into an inescapable debt, which can result in losing the little they do have. Actors across entire coffee supply chains are subject to geopolitical instabilities, a volatile market, and ecological impacts that reduce income stability. A lack of institutional support and regulation in the informal economy compounds these challenges. ETHICAL COFFEE IN THE AGE OF ESG Over the last decade, the rise of conscious consumerism has impacted nearly every industry. Conscious consumerism can be defined as a consumer’s approach to engaging in the economy with greater awareness of how their consumption impacts the world at large—with regard to both social and environmental impacts. This awareness, coupled with increased visibility afforded by the internet, overwhelmingly affects the purchasing choices of Millennials and Generation Z (sometimes referred to jointly as ‘Generation Green’). 4

Much research has been carried out on the consumer behaviour of Generation Green, who represent the imminent economic future of this planet. A 2019 report, The State of Consumer Spending: Gen Z Shoppers Demand Sustainable Retail found that 54% of Generation Z and 50% of Millennials are willing to spend an additional 10% or more on sustainable products. This compares to 34% percent of Generation X and 23% percent of Baby Boomers, indicating that with each generation, the demand for sustainable products increases. Another 2019 study by Markstein & Certus Insights found that 70% of US consumers want to know what the brands they support are doing to address social and environmental issues and 46% pay close attention to a brand’s social responsibility efforts when they buy a product. It should come as no surprise then, that the brands that do deliver on these imperatives are more successful than those that do not. A 2018 study by New York University’s Center for Sustainable Business (CSB) found that the sale of sustainable products as a category increased steadily over time (a 29% increase from 2013-2018), grew 5.6 times faster than non-sustainability marketed products, and delivered 50.1% packaged goods market growth (2013-2018), despite representing only 16.6% of the category. The first Fair Trade certification for coffee was born in the Netherlands in 1988, as a response to a drop in coffee prices, which severely impacted smallholder farmers. Fair Trade and other ethical and sustainable certifications have become a mainstream marketing advantage. Marketing smallholder inclusion enables companies to differentiate their offerings and enhance their reputation, while helping to address the critical problem that most large-scale food supply chains bypass smallholders entirely. Fair Trade and other agri- food certification programs aim to address a major challenge in the growing profit-for-purpose spectrum—how can consumers trust the sustainability and ethics claims made by companies? 5

Standards and certifications provide critical infrastructure to help consumers engage critically with the impacts of their consumption—but the rise of in-house certification has created a market saturated with green ticks, with little to no method of verifying real impact. This challenge will only become more entrenched, as substantial data continues to indicate that consumers today are more drawn to purpose-led brands, and that the return on impact for these brands is significant. Greenwashing—when a company falsely frames their products and practices as sustainable in order to gain a business advantage—is an unfortunate consequence of and reaction to the mass consumer appeal of ethically sourced and environmentally sustainable products. As a result, we see the consumer market awash with “sustainable” or “ethical” products, with few mechanisms to ensure the companies hawking them actually deliver their environmental and social impact promises. However, greenwashed sustainability and impact claims are not convincing Generation Green. A 2019 Porter Novelli/Cone Gen Z Purpose Study found that 75% of surveyed Gen Zers in the US will do their own research to see if a company really “walks the talk” when it takes a stand on a social or environmental issue. While demand for impact-led brands has increased steadily, consumer trust in those claims has decreased. At the same time, most certification systems are still largely reliant on on-site audits in order to verify the claims they make. With no immediate end in sight for COVID-19 travel bans, certification programs will struggle to maintain validity as their relevance to consumers wanes in tune. Direct trade has emerged as an alternative to large-scale, certified coffee brands. To address the certification problem, traders and importers travel to visit the farmers they source from themselves, in order to verify working conditions and quality. This system is both expensive and imperfect, but worked reasonably well until COVID-19 travel bans came into play. Given that the brand differentiator for direct trade coffee companies is based on proving ESG and quality claims, the direct trade business model has taken a major hit. 6

Direct trade is when coffee roasters buy directly from the growers, cutting out both the traditional middlemen as well as the organizations that control certifications. There are problematic aspects of both direct trade and global certification systems that pre-date COVID-19. Direct trade provides no method for consumers to verify the claims made by coffee companies. Because direct trade programs hinge on the forming of a business relationship between coffee companies and smallholder producers, they disproportionately benefit well-off, larger-scale farmers who speak English or Spanish and provide a ready-made product for export. Likewise, some studies have shown that while Fair Trade may benefit higher-income farmers, it provides negligible benefits for smallholder farmers. Neither system is perfect, and many barriers to ensuring smallholder farmers equity have only been exacerbated by COVID-19. Proving smallholder farmer participation to conscious consumers who increasingly expect brands to verify their claims, without being able to visit the farms, presents a significant challenge. As Generation Green steps into economic power, we will witness an increasing demand for new methods of remote ESG claim-verification, including the ability to prove the fair participation of smallholder farmers in coffee supply chains. BLOCKCHAIN AS A SUPPLY CHAIN BACKBONE Lacking the ability to visit smallholder farms in order to verify ESG and impact claims well into the foreseeable future, many are looking toward digitized supply chain solutions to fill the gaps. However, the unique social and environmental contexts presented by coffee supply chains raises significant questions about the applicability of traditional, digital supply chain solutions. 7

Digitized supply chain solutions offer no means of verification for reported data. Data can be manipulated or falsified by any actor along the supply chain. It requires no stretch of the imagination to understand that buyers and sellers along supply chains may have anti-aligned economic incentives. In coffee supply chains, actors may misreport data on yield or payments. Digitized records alone cannot inspire trust along a supply chain without sharing the entirety of contextual information. Blockchain technology enables users to selectively unveil information without context. It captures not the data itself, but the proof of that data, which any claim can be checked against. Supply chain data relies on identifying those who enter data on record, in order to help build accountability into their systems. Smallholder farmers, however, may not feel comfortable reporting data if they are worried about repercussions. While a digital approach can provide for anonymized data entry, this greatly reduces the ability to verify the information recorded. The World Economic Forum, in chorus with many resounding voices from the tech community, is pushing blockchain technology as a potent solution to this major supply chain problem. Though blockchain technology has been making waves in the world of finance and economics for years, its influence has yet to reach maturity across the broader use-cases for which its potential is routinely touted, especially with regard to applications in a development context. Blockchain technology offers what is known as trustless transparency. The word ‘trustless’ implies that the technology doesn’t require users to trust the parties involved in a transaction. This quality eliminates the need for a middle-man to carry out a transaction, diffusing trust by cutting out traditional powers who may, in some contexts, be deemed unaccountable, like banks or governments. Instead, the technology itself acts as the verifier of authenticity and the mediator of the exchange. 8

Blockchains are often defined as a distributed ledger technology, but they are far more than just digitized records. They provide verifiable proof of the entire journey of any asset tracked on the blockchain—from tangible assets like diamonds or nutmeg to tokenized assets like funds or even impact. This feature of blockchains holds unique value for addressing the problem of anti-aligned reporting incentives along supply chains. Blockchains offer a secure way to immutably capture information with history and to share proof of that data without revealing the data itself. The value this holds for coffee supply chains can’t be understated—it cuts right through reporting problems. No other solution currently available can provide anonymous, verifiable proof of data. Blockchains are unique in their ability to allow for information to be verified without the information itself being made public—digital solutions alone can’t do that. Blockchains can be anonymized without compromising the verifiability of the system. Blockchain data is both verifiable and tamper-proof by nature—it cannot be stolen, fabricated or lost. 9

Blockchains offer a secure way to immutably capture information with history and to share proof of that data without revealing the data itself. When a record is added to the blockchain, the information itself is not included. On the public blockchain, anyone can see where that entry is recorded, but no one can extract any details. Information is verified by comparing the “shape” to the one embedded in the blockchain. If the shapes are an exact match, that party has confirmed the information is the same as immutably recorded on the blockchain. 10

SOLUTION DIVING DEEPER - WHAT MAKES A GOOD BLOCKCHAIN? While blockchain technology is appealing from the headline perspective, there is much to unpack regarding exactly how this innovation can solve problems faced by the coffee industry— including both pre-existing certification challenges and supply chain visitation hurdles wrought by COVID-19. Contrary to popular belief, there is no one “blockchain”, but many blockchains. Some blockchains are purpose-built (the vast majority of these are built for the finance sector), but most are general-purpose. This reality begs several questions. First, what makes a good blockchain solution for the purpose of coffee supply chains broadly, and for targeting smallholder farmer inclusion and transparency more specifically? And second, what might a blockchain implementation look like in practice? In relation to our first question, it’s less about “good” or “bad” solutions, and more more about understanding “what’s right for me”. For example, some blockchains may be incredibly performant, capable of executing tens of thousands of transactions per second, but also prohibitively expensive. By the same token, some blockchains may be excellent for applications like banking, but lack features required for true supply chain traceability in a coffee- industry environment. In the case of bringing transparency and verifiability to claims around ethical coffee production and smallholder farmer inclusion, what’s most important for a blockchain-powered solution? We would identify four qualities that make a good coffee blockchain. 11

ACCESSIBILITY:Given that we’re looking for a solution that is focused on the inclusion of historically disenfranchised and marginalized smallholder farmers, we need to make sure that our blockchain isn’t an “enterprise blockchain” that is built for those already holding the power. We need a solution that works equally in the favor of everyone, and cannot be controlled, manipulated, or weaponized by more powerful supply chain participants. Likewise, many digital solutions require a high-tech, systems approach to transformation. This may be an approachable, if still challenging, prospect for multinational organizations—but is simply not viable for all actors along coffee supply chains. The often remote, rural nature of the first half of coffee’s journey from bean to brew, renders a high-tech approach to recording data an untenable solution. While mobile penetration in the top coffee- producing nations is relatively high, most blockchains are not built to be low-tech accessible. COSTS: Most blockchains apply fees based on the volatile price of a native cryptocurrency. The blockchain solution we need is not crypto-based. In our case, a fee system tied to a cryptocurrency provides no value and is actually incompatible with the function of transacting small values, often less than $100 in goods moving at a time. We need to have low costs, tied instead to the assets created or transferred over the network. A low-cost system will provide a more inclusive and accessible network for a larger diversity of smaller actors. PUBLIC VERIFIABILITY: Blockchains can be either public or private. In the case of supply chain transparency, it’s fundamental that all actors—from farmer to consumer—can legitimize the claims made. Only public blockchains can provide the level of transparency, without any compromise to the pseudonymity afforded by blockchain technology in general. Individual supply chain actor’s identities will remain obscured, while the proof of data entered on chain will remain publicly available. 12

DATA GRANULARITY: Certain blockchain paradigms are more conducive to tracking unique assets as opposed to simply updating gross inventory balances. In the context of coffee supply chains, we want a blockchain infrastructure that is purpose-built to track the asset itself. This functionality allows us to illustrate the entire journey of a crop—from bean to brew. For high-end direct trade coffee in particular, a blockchain that enables data granularity provides higher visibility of a product’s journey, presenting a differentiating market opportunity to engage consumers in that journey. While exact needs may vary from region to region and supply chain to supply chain, we believe the above points capture the common needs across most coffee ecosystems, from large-scale operations to boutique, direct trade companies. It’s important to recognize that there are always tradeoffs between technological solutions— what may be the right technology for one industry doesn’t always translate as the right solution for another. Our second question, “what might a blockchain implementation look like in a coffee supply chain?” is best explored through a real- world scenario. 13

AS AN ILLUSTRATIVE EXAMPLE, HERE IS A DAY IN THE LIFE OF A SMALLHOLDER COFFEE FARMER: Our ‘Day in the Life’ begins at 5:30 am before sunrise, because there are some things that technology probably won’t change about farm life. It’s harvest season, so once our farmer reaches the section of coffee bushes that they’ll be picking from today, they take out their smartphone and log into his blockchain-powered traceability application. This login will associate all of the subsequent data collection they collected, which is linked to their unique, self-sovereign identity. By linking a farmer’s production to their identity in this way, buyers and consumers can be more assured of the veracity of claims made that the coffee they are buying is actually produced by individual farmers, who are treated and in turn treat their coffee with dignity and care. These well-established histories are verifiable yet pseudo-anonymized in order to protect the farmer’s identity. They provide the distinct advantage of verifying the farmer’s identity, work, and other information (such as how much they harvested or what they were paid). This information cannot be fabricated, as a profile picture can be. Once logged in, our farmer will take a few pictures to show where today’s cherries are originating from. The smartphone camera stands in for the eyes of the importer or verifier at a lower cost and in real-time. So, this is happening everyday, not just when travel permits. These images, along with a simultaneously captured geo-tag, will form the first chapter of the story that consumers see when they purchase our farmer’s coffee. The harvest is now going to continue undisturbed by technology until our farmer arrives at the washing station with their day’s yield. At the station, an attendant weighs our farmer’s bushels and then scans a QR code generated by our farmer’s app to log their origin. Linking this transaction in such a way adds additional information to the coffee’s story, while at the same time augments our farmer’s self-sovereign digital identity as part of his production history. This history can, over time, be used to increase our farmer’s credit- worthiness. The attendant now records the weight of the provided bushels, which immediately triggers a push notification to our farmer’s phone for their review. Once the farmer confirms both the day’s price and the quantity they’ve provided, a two-way transfer is executed on the Topl blockchain, with a digital twin of the coffee moving to the washing station and an e-money transfer to the farmer’s account. 14

This system provides a verified history not only of the data entered by our farmer and washing station attendant, but also of payments made to individual farmers. This is a critical differentiation from previous systems, where irregular audits and bulk payments don’t allow for a transparent infrastructure for continuous, direct payments to farmers, trackable by those further up the supply chain, like roasters or consumers. Further, this system is capable of not only integrating payments to farmers— avoiding the need for cash transfers between middlemen or alternative cash transfer systems—but also enables the creation of an alternate credit history. Empowering the creation of an alternate credit history for farmers can enable farmers to take out loans where previously unable, affording new opportunities to move up the supply chain. Now, right here I want us to observe that something a bit different happens. Since our farmer is actually a part-owner of this cooperative washing station, only 90% of the funds flow to him directly. The other 10% is moved into his contribution account at the washing station as they are attempting to save up money to purchase the equipment needed to roast beans themselves. This unique functionality of our system, enabled by Topl’s blockchain, allows us to move beyond the status quo, and take the opportunity to advance and create more equitable value chains. Delivering additional value through profit sharing is not the only way that blockchain can facilitate impact creation. As demand increases for more sustainable and carbon conscious methods of agriculture, farmers could even earn carbon credits when they implement sustainable agroforestry practices. Carbon credits can be monetized by Topl’s blockchain protocol, and used to supplement farmers’ incomes. This process could facilitate an additional level of impact—incentivizing sustainable farming practices and providing visibility of the environmental impact of coffee production. From the washing station, the coffee continues its journey accumulating information to complete the story that our farmer opened. By the time it arrives in stores or cafes, a QR code is accessible to consumers, which when scanned will provide them with a complete, verified, and batch-specific story of the coffee they are purchasing. It is the transparency and reliability coupled with the ethical content of this story all enabled by blockchain technology that differentiates this coffee and justifies the price premium it commands. Our system presents a major advantage for consumers who don’t feel they can simply trust that a certification on a product means that product is ethical or sustainable. Our consumer now has the power in their own hands to verify the information they want to know for themselves. 15

CONCLUSION One-size-fits-all solutions are rarely—dare we say, never—suited to everyone. This is a hallmark of our thinking at Topl, where we have focused on developing the only ESG blockchain on the market. We recognized that blockchain technology is a reservoir of untapped potential for responsible use as an ESG tool, but there were no existing blockchain infrastructures that could provide the level of flexibility and specificity required for use in development settings. So, combining years of on-the- ground experience in the development sector with advanced blockchain research and development—we decided to build our own. From the smallholder farmer, through to the Generation Z consumer, a Topl-powered coffee supply chain can execute a number of critical functions—enabling smallholder farmer inclusion and supply chain transparency is only the beginning. At Topl, we dream big. Our vision for blockchain-powered coffee supply chains can also empower alternative credit scores, and create a carbon credit market. The Topl supply chain revolution could help farmers gain mobility in the supply chains they work at the very heart of, and enable a previously unimaginable level of trust in sustainability and ethics claims. Topl’s blockchain is the solution for a more equitable and sustainable future, powered by you. You make the world a better place. We help you prove it. Our blockchain protocol can help to revolutionize supply chain transparency in the wake of the COVID-19 disruptions. We have been listening to the needs of our agri-food partners in the field and we are working on building responsible solutions together to address the specific barriers to smallholder farmer equity and inclusion in global coffee supply chains. We’re still in the midst of a global pandemic, and we’re all still learning. 16 Topl is constantly looking for partners in the industry to work with us in defining how blockchain can best be applied to solve their problems. Get in touch if this sounds like you.