A vision for a transparent global Rare Earth Element system using blockchain technology

solar panel blockchain with rare earth

Provenance has partnered with the Swedish Agency for Growth Policy Analysis Agency (Growth Analysis), to explore how blockchain technology can help to valorise sustainable practices in the Rare Earth Elements mining sector. The result? A report proposing three system solutions that could reshape the industry and set the clean energy technology sector on a path to sustainability.

Read the short version of this report on Medium.

Interested in understanding how supply chain transparency could benefit your business? Get in touch here.

1. Introduction

The demand for Rare Earth Elements (REEs) is increasing. The market is set to grow by 8.5% annually in the coming years. It is forecasted that by 2026, demand will mainly be linked to the rise in clean energy technology, in particular for neodymium-iron-boron (NdFeB) magnets –– critical components for electric and hybrid vehicles as well as wind turbines. The central role that REEs play in the functioning of clean energy technologies makes these elements increasingly strategic resources for economies into the 21st Century. This is particularly true, in the context of the growing number of international commitments to carbon neutrality, such as Sweden’s pledge to reach net-zero carbon emissions by 2045.

Since the 1990s, China has supplied the lion’s share of the world’s demand for REEs. China’s low prices have historically undercut global prices and pushed out foreign competitors –– such as the Mountain Pass mine in California, which closed in 2002. The clean energy technology sector achieved considerable growth with China’s low REE prices and advances in manufacturing technology, growth that some associated with low environmental and social sustainability standards. Nevertheless, over the last few decades the world largely relied on Chinese REE supply. That is, until 2010 when China publicly announced new quotas reducing REE exports by approximately 40%. A move that led to international concerns around supply security and the political motivation behind China’s export restrictions. In 2011, these concerns, specifically complaints from the United States, Japan and the European Union (EU), prompted the World Trade Organisation to rule against China’s export restrictions.

Moreover, the scare incited the international community to increase focus on supply security. Countries with reserves have reconsidered their extraction, processing and manufacturing pursuits, while countries without reserves have invested in recycling and stockpiling.  Governments and companies have also been observed to direct new foreign invest streams specifically to mines outside of China. Activities which appear to be experiencing considerable progress. There are currently mines in Europe, Australia, Africa and North America at the feasibility study stage (the final stage of pre-production, that determines whether to develop a mine), with some –– such as the Nolans Bore mine in Australia –– set to be operational within the next three years. However, with the comparatively high costs of production for these mines, particularly factoring in wages and adherence to sustainability standards, competitiveness will likely remain a challenge.

The success of sustainability pursuits rests in part, on the sector’s ability to valorise sustainability practices. Transparency is considered to play a critical role in verifying, tracking and rewarding sustainable practices, and is therefore a key element in the competitiveness of sustainable REE mining and processing activities. While complete transparency in the sector (which assumes to require physical tracking of products all along the value chain), is considered by some essential in a long-term vision for a more sustainable sector, it has to date been economically, technologically and practically unfeasible. Chapter 2 of this report outlines some of the barriers observed to play a prohibitive role to transparency for REE mining and processing.

Blockchain technology is however, providing new opportunities for governments seeking to guarantee and incentivise sustainable practice across their respective economies. These include, new digital reward and market solutions capable of ensuring security and trust as well as significant infrastructural and operational cost reductions benefits. Various applications of blockchain technologies could play a significant role in both the short-term as well as long-term vision for more sustainable REE value chains. In the short-term this may involve the incentivisation and mechanism for allocating sustainability premiums, stimulating the flow of money towards sustainable practices. In the long-term this may include the achievement of physically traceability and full value-chain transparency in the sector.

This report explores the role that blockchain technology could play in the transition towards more sustainable REE mining and processing practices. We first, in Chapter 2, outline some major challenges to transparency in the sector. Chapter 3 then introduces some available blockchain-backed tools to address these challenges as well as describes system design scenarios that illustrate possible system sustainability solutions. Chapter 4 goes on to outline the role that state government can play in turning these scenarios into a reality and finally, Chapter 5 summarises some high-level conclusions uncovered during the research.

2. The major challenges

The REE system has been found to be opaque and complex. Without greater transparency it will be challenging for the mining industry to verify, track and reward standards and practices critical in the transition to a more sustainable, responsible and low carbon economy. Initial research has uncovered four major challenges to a transparent global REE system, which are outlined in this chapter.

2.1. The lack of reporting and standardised data collection. 

There is no industry-wide certification or standard for socio-environmental reporting across the REE value chain. Lack of standardised sustainability reporting makes it difficult to compare sustainability performance between source mines, set sustainability targets and reward best practice.

The reasons for the lack of global sustainability standards are manifold. Firstly, the unique nature of each mine, and therefore the differing steps taken to mine REEs is likely to have played a prohibitive role in the establishment of a global standard for sustainability in the sector. Secondly, to achieve a global standard would require collaboration across industry and require a leading role from China –– producing around 89% of global REEs –– who has historically adopted a protective stance towards information sharing and has only recently begun to actively pursue sustainability objectives (Mark Saxon interview, 2017).

Thirdly, lack of accountability and the fact that REE value chains contain many steps, makes it difficult for manufacturers, brands or retailers to obtain valid data about the upstream value chain. Although the manufacturer may have documentation about the source, without full value chain traceability they cannot know where a product has truly come from, whether the mine did adhere to the standards it claims and if the data is even valid. And finally, the lack of reporting can also be attributed to REEs almost always being mined as by-products (B.C. McLellan, G.D. Corder, A. Golev, S.H. 2014. Ali, 2014) making it difficult for monitors to distinguish the impact of a REE from the rest of the ore.

2.2. Rare Earth Elements are fungible.

REEs are fungible, meaning that, for example, 1kg of neodymium (Nd) is mutually interchangeable from another 1kg of Nd. In other words you cannot physically differentiate a sustainably sourced REE from a non-sustainably sourced REE without the use of tagging. However, tagging and tracking can often, as is the case here, be cost prohibitive.

Existing tagging options for precious metals and stones, such as fingerprinting for gold (Mark Saxon interview, 2017) are currently not considered economically viable for REEs. As the quantities used in REEs are too small and the price of REEs too low to validate this method. Moreover, known tagging methods currently cannot withstand some stages of the REE value chain, such as processing and recycling (Benjamin Claire interview, 2017). Meaning that tagging and re-tagging needs to occur at multiple stages of the value chain, adding to the overall cost of a physical tagging and tracking system.

2.3. Illegal mining and opaque value chains.

Approximately 40% of the local Chinese REE market originate from illegal mining. Given China’s market-leading role, this equates to approximately 30% of the global market. Illegal mining occurs in part because legal production within China is unable to meet producers’ demand. Illegal REEs get sold into the value chain in cash. Without invoices or a paper trail there’s no visibility into where the REEs originate from, nor how they were mined.

To overcome illegal mining, China is making efforts to consolidate and further vertically integrate their value chain by closing down small-scale artisanal mines. Through consolidation, the country will most likely reduce value chain complexity, the aim being to have only six state-owned mines in operation. Evenso, it is uncertain whether this will bring greater transparency to the industry. With REEs being defined as a protected and strategic mineral in China since the 1990s (British Geological Survey – Rare Earth Elements 2017), the country has made deliberate efforts to safeguard the strategically important data from the rest of the world –– a position that is unlikely to change into the future.

Rare Earth mine in China in Provenance rare earth blockchain report

Worker at a rare earth mine in China (Photo: Reuters)

2.4. Low financial incentive to track Rare Earth Elements.

REEs have historically garnered low prices, resulting in little incentive to track them throughout their lifecycle. Until 2010, prices for REEs were depressed to the point that it was not financially viable to recover materials through recycling (British Geological Survey – Rare Earth Elements, 2017). In addition, the small amounts of REEs in products has been insufficient to warrant the financial cost of tracking and recycling. This has continued to be a problem in the industry, with companies finding that the cost required to track and recuperate materials for recycling outweighs the benefits.

Incentive to recycle and therefore track is however expected to increase with REE demand growth and the associated price increase, as well as simultaneous advances in recycling technology for REE. Honda, for instance, has already begun extracting over 80% of its rare earth materials from nickel-metal hydride batteries, and it is predicted that by 2030, 10% of Nd demand in the EU will be met through recycling magnets from electric vehicles, wind turbines and hard disk drives.

3. The role of blockchain

3.1. Introduction to available tools

In order to tackle the major challenges to a transparent REE system, outlined in Chapter 2, there are two relevant tools that require deliberation: blockchains and Chain of Custody (CoC) models.

What are blockchains?

Blockchains are new types of data systems that differ from traditional centralised databases as they are not controlled by any trusted third party. They enable peer to peer interaction over the internet by removing intermediaries and replacing them with a decentralised network, maintaining a registry secured by cryptography. Users trust the protocol itself rather than single entities that are by essence not reliable. Key features include:

  • Transparency: Through blockchains, stakeholders can reliably prove behaviour to external parties, regulators or consumers.
  • Minimal infrastructure costs: In the best case, stakeholders do not need to coordinate nor pay upfront costs to run a blockchain-backed system.
  • Efficient rule enforcement: Blockchains can enforce rules automatically and guarantee compliance. For example, the prevention of the double spending (see definitions) problem on the bitcoin blockchain.
  • Secure digital signatures: Strong cryptography techniques make replacing paper records feasible and secure.
  • Ease of scale: The decentralised nature of data storage on blockchains increases system scalability.

Benefits of blockchain-backed systems are already being harnessed along the value chain

In an increasingly globalised and complex world, digital governance systems –– in particular blockchain systems –– are emerging as viable solutions capable of efficiently enforcing rules and ensuring trust and transparency. These models are already bringing efficiencies and rewarding sustainable practice in sectors ranging from the built environment, to fishing and fast moving consumer goods.

Pilot studies by Provenance have explored how sustainability data can be tracked on blockchains, ensuring trustworthy information about ethical supply chains can be shared with end consumers. In Ghana, another startup, BenBen, is using a blockchain-based system to securely certify land ownership. By registering land ownership in various regions, BenBen limits the possibility of eviction of local populations by corrupt governments or large industry. In addition, green energy trading schemes –– such as Gridplus in the US and Power Ledger in Australia –– harness blockchain technology to incentivise green energy consumption. Here, the blockchain allows consumers to trade green energy affordably, quickly, and reliably without a third party. The system reports and stores all transactions in a decentralized, open manner and ensures energy credits are only spent once –– curbing fraud and increasing trust through transparency.

Public vs. private blockchains

Blockchains can enable sustainable practice through verifying and valorising desired industry practice. They can be organised in various ways, differing substantially in privacy features, governance flexibility and cost. One critical distinction relevant to this study is whether the consensus model is public (like with Bitcoin) or private (where access to the blockchain system is limited to individual entities or a consortium).

Public blockchains are considered to take maximum advantage of the benefits made available by blockchain innovation. Since they are secured through the consensus of an open set of economically incentivised validators, they operate at zero operational cost, including a decentralised payment system. Transactions are commonly paid for by the user, at a cost calculated as follows:

Transaction price = free market price * complexity of transaction

The decentralised and open infrastructure of public blockchains also increase benefits associated with trust in sectors or regions where the lack of trust in competitors or authorities acts as a disincentive for cooperation. Moreover, the ease of scale and trustless governance inherent to public blockchains supports international cooperation.

On the other hand, private blockchains rely on the consensus of a fixed set of known reputable entities, who are required to run the infrastructure in a similar way to a centralised setup. Private chains offer increased throughput and privacy features compared to their public counterparts, but also incur significant infrastructure and operational costs. Infrastructure costs for participants include maintaining nodes of the network themselves. These networks can operate at zero cost for users, however it is usual to include some limits on usage to disincentivise spamming. This equivalent of the public blockchain transaction fees has to be designed and governed as part of the solution.

Chain of custody models

In the context of value chains, traceability is the ability to track products through a chain of custody. Today, a typical value chain may see physical and/or legal ownership of a product being transferred multiple times between producers, traders, manufacturers, subcontractors, and retailers. This is referred to as chain of custody. Different CoC models specify how a product can be handled and if/how mixing between certified and non-certified material occurs.

In order to apply blockchain technology to the REE value chain, a Chain of Custody (CoC) model must be chosen. There are a variety of models which offer different levels of granularity for asset tracking. The suitability of the CoC model to an application is dependent upon the physical nature of the asset or the ‘trackability’ of the asset, the objectives of the associated sustainability standard as well as other case-specific requirements. For a detailed description of available models see this ISEAL reference document. With the specific transparency challenges associated with the REE material value chain (see Chapter 2) and with feasibility considerations in mind, we have divided the available models into two relevant categories –– with physical tracking and without physical tracking. These are briefly described in the subsequent section.

Physical tracking along the blockchain

Three CoC models –– Identity preservation, segregation and mass balance –– use physical material tracking along value chains. The idea with physical tracking is to cascade sustainability claims, alongside the physical product, from source to manufacturer.

Without physical tracking on the blockchain

One CoC model –– book and claim, also sometimes called a certificate trading scheme –– relies on the creation of sustainability credits proportionate to the certified production at the source. These credits can then be purchased directly by manufacturers. Making it possible for manufacturers to buy credits –– and thus valorise and support the certified practice –– without physically holding the certified assets. These assets are sold through the existing value chain with no requirement to physically track them.

Key properties of physical tracking vs. without physically tracking

physical vs. non-physical tracking rare earth

Rare Earth Element value chain and available tools

Based on the preliminary research efforts into the REE value chain for Sweden, the following conclusions have been deducted.

Physical tracking represents a costly and higher-risk option to implement in the short-term. Although REE prices are set to rise, their current relatively low price coupled with the small quantities which are used in an individual product, brings to question the feasibility of physically tracking REE along existing value chains. Further, the fungibility of REEs –– one atom of REE is mutually interchangeable with any other –– makes it difficult to isolate a certified chain from an uncertified chain. This further increases the cost of physical tracking given more stringent monitoring and enforcement efforts would be required to ensure the integrity of certified products. As much as we can see a physical traceability system work for Swedish REE, such stringent requirements would be hard to extend to other players worldwide. As blockchains are predominantly collaboration tools, we don’t see them playing a role in a scenario that doesn’t require collaboration.

A credit-based model, on the other hand would not only take out the cost requirements associated with physical tracking, it is also expected to increase ease of scale and international adoption capabilities owing to lower disruption of existing supply chains. Moreover, certificates being purely digital goods make them an ideal target for blockchains which excel at enforcing rules on digital assets, as seen with Bitcoin and more recently so called “smart contracts”.

Beyond the CoC model selection, there are also significant advantages to integrating with an existing public blockchain such as Ethereum, rather than deploying a new one. Adopting a public blockchain allows for the delegation and enforcement of the rules to a proven decentralised community, acting as a neutral layer of consensus-based governance through validating transactions. It also enables the system to ‘piggyback’ off the existing infrastructure system, including the use of the existing payment system, which is expected to lead to significant cost savings and gains in automation.

In the long-term however, the expected rise in demand and price of REEs could increase the feasibility of physically tracking along the value chain. As technological advances improve tagging capabilities and reduce associated costs, it is possible that a credit-based model could be feasibly transitioned into more granular and transparent physical tracking system. This would be further supported by expected advances in the recyclability of REEs, and the subsequent financial incentivisation of tracking and recuperating these resources at the end of a use life. Finally however, the infrastructural cost of a public or private blockchain is highly dependent on the evolution of blockchain technology as well as the business case for REEs. With the current speed of technological advancements it is reasonable to assume that the near future may bring the technological possibility of developing hybrid or connected approaches, rendering a hard distinction between public and private platforms irrelevant.

Case Study: Palm Oil

Certificate trading models have already been employed to encourage sustainable practices in the value chains of commodities from renewable energy to palm oil. Like these materials, REEs share properties that make a credit trading approach suitable –– these include; fungibile as well as opaque, complex and global value chains with many actors.

In 2006, the Roundtable on Sustainable Palm Oil (RSPO) set up a certificate trading scheme, to encourage sustainable practice within the palm oil industry. The programme enables palm oil users to offset their use of palm oil products by funding the production of an equivalent volume of oil by an RSPO certified producer. Within the programme, producers of palm oil are audited annually, according to RSPO certification standards, and allocated a volume of ‘sustainably produced’ palm oil product that they can then trade in the sustainable palm oil credits market — a digital marketplace accessed through the RSPO website and managed by UTZ . Manufacturers, such as Unilever and BASF, who use palm oil in their products can then purchase these credits via the market to demonstrate and promote their commitment to sustainability.

With a commodity like palm oil, there are various factors that complicate tracking the flow of the physical good, chief among them are; a) mixing – palm oil from both sustainable and non-sustainable sources will be mixed at various stages as it is traded; and b) the number value chain actors – there are many intermediaries in palm oil value chains including transporters, traders, and refiners.

Designed to bypass the complex physical chain of custody, a certificate trading model decouples the physical flow of palm oil from the sustainability of the farm, and gives manufacturers like Unilever a mechanism to reward and stimulate sustainable practice through the price of the credit. The producer receives a premium (i.e. price of credit) for their certified palm oil, encouraging an increase in sustainable production at the farm level, helping to build a sustainable value chain.

Currently, the price of palm oil credits looks relatively cheap and likely does not fully capture the marginal cost of sustainable practice — in January 2018, a tonne of palm oil costed approximately $615 and RSPO credits representing the equivalent volume trade between $2-$3 , representing a premium of approximately 0.5%. That said, as the market for palm oil credits develops and becomes more widely adopted, price of the credits should go up with buyers, further incentivising sustainable behaviour by producers. Still in its relative infancy, the credit trading model is not without challenges, but offers a strong template, once described in Forbes as “a model more commodity supply chains should learn from.

3.2. Three system scenarios

Three scenarios have been designed to illustrate possible blockchain-backed REE system design solutions. These scenarios have been developed with the European REE value chain in mind. In each of them, we introduce an actor called “Blockchain” which operates as an unbiased, technology-enabled additional entity.

European rare earth value chain

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Scenario 1: Short-term certificate trading

In the short-term, we consider a certificate trading scheme focused on Swedish/EU source mines and manufacturers only. In the future this system could be extended to a small number of global participants

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Certificate trading using the blockchainSystem parameters:

  • Credit allowance issued by Government for volume of estimated pure REE output per specified time period. E.g 1kg of estimated pure elements of sustainably mined REE = 1 credit. (100% Rare Earth Oxide ≈ 60% REE).
  • Certification is awarded to the ‘Source Mine’ (which is assumed to deal with initial processing near the mine), after the ‘Acid Leach’ phase in the European value chain for a specified volume.
  • Certificate is sold in the ‘Certificates Market’ by the ‘Source Mine’ to the ’Manufacturer’.
  • The ‘Certificates Market’ is characterised by point-to-point trading between the ‘Source Mine’ as the seller and the ‘Manufacturer’ as the buyer. No trading is permitted after a certificate is sold.
  • Once a certificate is sold, it can back Manufacturer sustainability claims for a predetermined period of time (e.g. fiscal year). At this point the ‘Manufacturer’ can no longer claim associated certification.
  • Incentives: Publicly available ‘leader-board’ showcasing manufacturer performance incentivises certificate purchase. Participant incentive can also be generated through regulatory requirements to adhere to and prove adherence to associated sustainability standard.

    Actors:
  • The Government:
    Sets the sustainability standard.
    Awards the right to create credits to ‘Source Mine’.
  • The Auditor:
    An independent third-party conducts audit at two points:
    At ‘Source Mine’ to assure adherence to sustainability practice standards.
    At ‘Manufacturer’ to assure sustainability claims by manufacturer are proportionate to certificates purchased across set time period.
  • The Source Mine:
    Defined as company controlling Mine to Acid leach separation phase on REE value chain.
    Creates and sells certificates in the blockchain-backed ‘Certificates Market’.
  • The Manufacturer:
    End-product manufacturer belonging to a certified group of buyers who have agreed to a level of transparency.
    Buys certificates in the ‘Certificates Market’.
    Through the purchase of certificates an end-use claim can be made by the manufacturer at a business level (not product level). For instance, “40% REE in phones produced are sustainably sourced”.
  • The blockchain:
    Organises trading of certificates in a fair way, avoiding double spending.
    Makes audits, trades and governance choices transparent.
    Governance could be started centrally, an organ of the Swedish government defining rules and granting rights to selected partners to certify sources, then made more decentralised.

    Limitations:
  • Audit consistency across sources is necessary in order for certificates to be indistinguishable for manufacturers. Otherwise, markets would fail to converge to a single price for credits, which would make the system confusing for manufacturers.
  • Sustainable practices are only directly incentivised at the source mine.
  • Unsustainable behaviour is not phased out in the short-term. Since manufacturers can keep on buying from unsustainable sources, only premiums flow to sustainable sources with limited transparency.
  • Governance around the sustainability standard is an open question. Though it is realistic for Sweden to define the standard in the short-term, decentralisation of the standard definition process might be necessary, especially if Sweden ends up being a consumer of the produced certificates.

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Scenario 2: Long-term modular multi-tier certification

A multi-tier certificates trading scenario could theoretically capture and incentivise varied sustainable practices at multiple nodes along the value chain, thereby expanding on scenario 1 by incentivising beyond the source mine. This is considered a long-term scenario because of the expected economic complexity associated with setting up a certificates market with multiple certificate types.

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Multi tier certificate trading using the blockchain System parameters:

  • Certification allowance issued by Government for volume of estimated pure REE output per specified time period. E.g 1kg of estimated pure elements of sustainably mined REE = 1 credit. (100% Rare earth oxide ≈ 60%REE).
  • C1 certification is awarded to the ‘Source Mine’ (which is assumed to deal with initial processing near the mine), after ‘Acid Leach’ phase in the European value chain, for a specified volume.
  • C2 certification is awarded to the ‘Advanced Separation Company’ at the advanced separation phase of the value chain for a specified volume. Certified inputs are not needed to emit C2 certificates, so that C1 and C2 are independent.
  • C1 Certificate is sold in the ‘Certificate Market’ by the ‘Source Mine’ to the ’Manufacturer’.
  • C2 Certificate is sold in the ‘Certificate Market’ by the ‘Advanced Separation Company’ to the ’Manufacturer’.
  • The market is characterised by point-to-point trading between the ‘Source Mine’ or the ‘Advanced Separation Company’ as the seller and the ‘Manufacturer’ and the buyer. No secondary trading is permitted.
  • Once a certificate is sold it “burns” after a predetermined period of time (e.g. fiscal year). At this point the ‘Manufacturer’ can no longer claim associated certification.
  • Incentives: Publicly available ‘leader-board’ showcasing manufacturer performance incentivises certificate purchase. Participant incentive can also be generated through regulatory requirements to adhere to and prove adherence to associated sustainability standard.Actors:
  • The Government:
    Sets the sustainability standard.
    Awards the right to create credits to ‘Source Mine’ and ‘Advanced Separation Company’.
  • The Auditor:
    An independent third-party conducts audit at three points:
    At ‘Source Mine’ to assure adherence to sustainable practice standards.
    At ‘Advanced Separation Company’ to assure adherence to sustainable practice standards.
    At ‘Manufacturer’ to assure sustainability claims by manufacturer are proportionate to certificates purchased across set time period.
  • The Source Mine:
    Defined as company controlling Mine to Acid leach separation phase on REE value chain.
    Creates and sells C1 credits in the ‘Certificates Market’.
  • The Advanced Separation Company:
    Defined as the company controlling advanced separation process.
    Creates and sells C2 credits in the ‘Certificates Market’
  • The Manufacturer:
    End-product manufacturer belonging to a certified group of buyers who have agreed to a level of transparency.
    Buys certificates in the ‘Certificates Market’.
    Through the purchase of certificates an end-use claim can be made by the manufacturer at a business level (not product level). For instance, “40% REE in phones produced are sustainably sourced”. Through combining C1 and C2 certificates, the Manufacturer can claim certification at multiple points along the REE value chain.
  • The blockchain:
    Organises trading of different types of certificates in a fair way, avoiding double spending.
    Makes audits, trades and governance choices transparent.
    Governance could be started centrally, an organ of the Swedish government defining rules and granting rights to selected partners to certify sources, then made more decentralised.

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Scenario 2B: Long-term physical traceability

In the long-term, expected increases in REE demand and price as well as advances in tracking technology should increase the economic feasibility of physically tracking REEs along the value chain. Scenario 2b, illustrates system design architecture relevant to such a context.

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Physical traceability on the blockchainSystem considerations:

  • In a scenario where physically tracking material along the value chain is economically feasible, segregating certified from non-certified product would theoretically be possible. Such segregation could take place until the last point of the value chain, where mixing can occur. Mixing at this stage is one way to ensure sufficient volume is supplied to meet market demand. System parameters, limitations and the role of actors are dependent on the tracking technology in question. The movement of goods through the value chain is recorded on a blockchain thanks to handshakes –– cryptographic agreements involving both parties –– happening at each delivery. The constraint of complete material segregation can be removed if the digital assets can be proven to be transferred along at delivery. In this case, certified and non-certified ‘Advanced Separation’ can be operated by the same node, as long as they run two separate accounting systems. The system would make sure that nodes do not create more credits than they received. Physical mixing could in this case therefore be allowed. Audits would still be necessary to avoid cheating.

    Actors:
  • The Source Mine:
    Issues blockchain-backed digital assets representing physical production. This time, those digital assets are not intended to be sold but only transferred through the chain.
    Transfers digital assets to the next actor at material delivery.
  • The Advanced Separation Company:
    Receives digital assets from Source Mine.
    Uses those assets as an input to create digital assets of processed materials.
    Transfers digital assets to the next actor at material delivery.
  • The Manufacturer:
    Can inspect digital assets owned by their suppliers and check sustainable practices back to source.
    Can prove to third parties (through open blockchain records), that they source material from verified supply chains.
  • The blockchain:
    Keeps a record of the movement of the REE batches throughout the chain.
    Secures the transfer of ownership of physical REE batches.
    Provides transparency on selected details of the chain of custody.

3.3. Enabling forces

When considering the three blockchain-backed system design scenarios in the section above, it is useful to think about about the enabling conditions that we believe go hand-in-hand with their respective realisation. In this section we have included three of the enablers –– technology, finance, and market awareness –– that we believe could play a particularly significant role in the scalability of these system design scenarios.

Rare earth mine in the Provenance report on rare earth blockchain solutions

Satellite image of rare earth mine (Photo: Wired)

Technology enablers

Emerging technologies such as sensors, Internet of Things (IoT), and satellite imaging can allow sustainability data to be collected automatically at source and immediately transferred onto a blockchain. For sustainable REEs, relevant technologies might include (a) sensors that can measure toxins in water and soil, providing an indication of containment of toxic waste by-product, and (b) satellite imaging data that assesses impact on a region over time, including identifying farmland destruction. Automated collection of such data can significantly reduce the burden of audit of and lower the barrier of entry to sustainability certification, enabling a system to scale far more quickly.

Trade finance

Today, financial institutions have a considerable lack of empirical insight into their customers’ value chains, often resulting in relatively uninformed financing decisions and high default and reputational risk. Blockchain-backed transparency has the potential to legitimise low-risk activities and therefore result in cheaper and faster financing for sustainable businesses.

Provenance is currently partnering with a consortium of startups, corporates and financial institutions to experiment with this new approach for linking finance to certified sustainable or ethical practice. The idea around the collaboration is that by connecting verified blockchain-stored data on sustainability with financial institutions, banks will have visibility into an increased amount of trustworthy sustainability related data that can inform their financing activities. Preferential trade financing based on sustainability transparency could act as a powerful financial incentive for the mining sector to become sustainably certified.

Market Premium for Sustainability

In the food and fashion sectors, companies are able to capture a premium on sustainable products such as organic cotton and fairtrade coffee. While the same cannot yet be seen in the metals industry, we are beginning to see sustainability claims being shared more publicly with end consumers, for example: Fairphone’s release of an ethical smartphone , Apple’s public pledge to cut its use of mined materials, and Audi’s sustainability focus. It is likely that these public actions will stimulate similar, more sustainable, behaviour among competitors, and augment consumer awareness of the environmental and social issues with REEs. With greater market awareness, it is possible that a price premium could one day be adopted based on a sustainability claim.

4. The role of the state

In Chapter 3, we presented three scenarios for a blockchain-backed sustainable REE system. Now, we consider how the state can play a role in making these scenarios a reality. To do this we ask, what policy interventions types could Sweden leverage to promote a transparent REE system?

The Ellen MacArthur Foundation report, A toolkit for policy makers, identifies six policy intervention types that enable a circular economy. We’ve used this framework as a guide to identify intervention types applicable to a blockchain backed REE value chain. In the table below, we present ways in which the state can play a role in encouraging a more transparent and sustainable REE system, with proposed policy interventions grouped into six broad categories: collaboration platforms, business support schemes, public procurement and infrastructure, regulatory frameworks, fiscal frameworks, and other.

Table 1: Policy intervention types and descriptions

policy interventions for blockchain rare earth solutions

policy interventions for rare earth blockchain solutions

The policy intervention examples listed in table 1, were identified in a brainstorm of the various policy initiatives that could play a role in fostering a system for transparent and sustainable REEs. Of course, some interventions are more relevant or easily implemented than others, and the implementation of any new policy brings context-specific challenges — be they political, financial, or technical. We canvassed opinions from the Provenance team and a number of sector experts, to identify the interventions that would be most relevant and practical to implement. The below table shows the average of the team’s opinions, using a ‘high’, ‘medium’, ‘low’ key, and is intended to guide thinking on policy.

Table 2: Matrix: Relevance of various policy options

policy interventions for rare earth blockchain solutions

5. Conclusions

Blockchain-backed systems could play an instrumental role in the transition towards economically profitable, sustainable REE sector in the global context. Blockchain provides a mechanism by which best practice, market entrant mines, or incumbent players wishing to transition to sustainable practices can prove claims and extract premiums for their best practice. Blockchain’s autonomy ––  through acting as an independent actor –– can also enhance trust and ease of international cooperation in the historically opaque and complex global REE system. Successful cooperation along the supply chain and across regions, often being considered a key ingredient to a transition towards sustainability.

However, whether or not blockchain can provide more benefits than a traditional sustainability standards model (such as say Fairtrade or MSC), when applied to a single, centrally organised sector, such as in REE’s in Sweden is dependent on the number and nature of the stakeholder involvement and the long-term objectives of the state and industry. As it stands, the REE value chain in Europe is centralised by nature, with few trustworthy actors, begging the question do Swedish REEs need blockchain to authenticate sustainability claims if the system is intended to remain ‘local’? However, if scale through international cooperation and perhaps a global collaboration and commitment to sustainability are on the horizon, then the value of engaging blockchain as an independent third party becomes clear. As a rule of thumb, to take advantage of the full suite of benefits that decentralisation and blockchain specifically has to offer, and thereby improve the business case for system integration, the system needs to eventually incorporate more than one central actor.

This study has found that physical tracking of REEs is not considered economically feasible in the short-term. Section 3.2 outlines what a blockchain-backed certificates trading model, capable of playing a catalytic role in the transition to sustainability in the sector would look like in the short-term. The challenges associated with the scale required to harness the benefits of decentralisation however require further consideration and study. Learnings from existing certificate trading models, such as the RSPO or carbon credits, need to be considered carefully to better understand the implications of a blockchain-backed certificates trading model on the REE sector. With the current systems involving extra due-diligence on top of market mechanisms , deeper insight into how to turn credits into commodities is considered particularly important.

Furthermore, to draw firmer conclusions we believe additional research would be required across the following three areas – sustainability standards, the role of the government and the roadmap for the certificate trading model. Firstly, the agreed sustainability standards will play a role in deciding which is the most appropriate blockchain-backed system for the sector e.g is it one which verifies claims at source or tracks sustainability claims through the value chain Secondly, the specific role of government in such a system, needs to be understood before trust can be established –– if the state is a buyer, certificate authenticator and controls auditing, even a blockchain system will not be able to guarantee trust. Thirdly, the exact role and roadmap that a certificate trading model can play in the long-term transition to a global, sustainable system requires additional attention –– specifically the question of if a physical tracking system is indeed a necessary component for long-term sustainability in the sector requires additional research.

To further knowledge on how blockchain can be utilised to bring transparency to the REE sector and support a long-term transition to more sustainable practises, we recommend additional economic analysis as well as appropriate pilot project(s) involving key stakeholders in the sector.

Interested in understanding how supply chain transparency could benefit your business? Get in touch here.

With thanks to contributions from:
Benjamin Clair,
Founder and Director, Better Sourcing Program
Sylvain Mignot, Transparency Officer, Fairphone
Martin Phillips, COO, Talga Resources
Mark Saxon, Director, Leading Edge Materials
Nathan Williams, Founder and CEO, Minespider

Definitions

Chain of Custody (CoC) – Chain of Custody (CoC) is the custodial sequence that occurs as ownership or control of the material supply is transferred from one custodian to another in the supply chain.

Chain of Custody (CoC) models – The CoC system is one of the key elements of most sustainability standards systems, the objective of which is to validate claims made about the product, process, business or service covered by the sustainability standard. ‘Chain of Custody model’ is the general term to describe the approach taken to demonstrate the link (physical or administrative) between the verified unit of production and the claim about the final product.

Certificate trading – Also known as ‘Credit trading’ or ‘Book and Claim’, a ‘Certificate Trading’ model is one of the four main CoC models, and is differentiated from the other three (mass balance, segregated, and identity preserved) as it allows for the sustainability claim to be completely decoupled from the physical product. In a certificate trading model, production is certified, and certificates are created for a quantity of certified material. Certificates are sold via an exchange. Buyers of certificates cannot guarantee that the physical material they have purchased contains the certified material, but can demonstrate that their purchase of certificates rewards certified producers. Certificate trading models are intended to reward responsible production where the physical supply chains make sourcing the actual product very difficult.

Double-spending – Double-spending is the risk that a digital token can be spent more than once. This is possible as a digital token consists of a digital file that could be duplicated or falsified.

Neodymium (Nd) – Neodymium (Nd) is a chemical element with the atomic number 60. It is one of the 17 Rare Earth Elements.
Rare Earth Elements – Rare Earth Elements (REEs) are a set of 17 chemical elements in the periodic table, specifically the fifteen lanthanides plus scandium and yttrium. They possess unique magnetic, phosphorescent, and catalytic properties, and make possible the high tech world we live in today – everything from the miniaturization of electronics, to green energy and medical technologies, to supporting a myriad of essential telecommunications and defense systems.

Traceability – The ability to verify the history, location, or application of an item or product by means of documented recorded identification. In the context of this report, traceability refers to following the trail of products along the value chain.

Transparency – Transparency within supply chains reflects the visibility that a company has into the practices of its immediate and extended supplier network.

Fungibility – Fungibility is the property of a good or a commodity whose individual units are interchangeable. For example, since one kilogram of pure silver is equivalent to any other kilogram of pure silver, whether in the form of coins, ingots, or in other states, silver is fungible. Other fungible commodities include sweet crude oil, company shares, bonds, other precious metals, and currencies.