Blockchain in Global Shipping!

"Blockchain" is now a familiar word, even if a large portion of the shipping industry are not actually using such technology yet. But, is this new concept will transform the shipping industry in the near future. 

What is blockchain technology? Blockchain is a new "distributed ledger technology" which enables information and transactions to be managed collectively across an entire network using a chain of blocks of data as a secured, decentralised and encrypted public ledger.

In many ways, the shipping industry remains rather traditional, with a number of the processes involved being time-consuming and document-intensive and the use of paper documents still prevalent – to name a few, memoranda of agreements for ship sale and purchases, charterparty agreements for ship employment, bills of lading, port documents, letters of credit and other documents for the carriage of cargo. The fact that these arrangements, at times, involve an extensive chain of parties only increases the risk of human error and very occasionally, fraud.

The key, as in so many other industries, from oil tankers to cryptocurrencies, is blockchain, the electronic ledger system that allows transactions to be verified autonomously. And the benefits wouldn't be confined to shipping. Improving communications and border administration using blockchain could generate an additional $1 trillion in global trade, according to the World Economic Forum.

The initial push into the industry has seen large operators collaborating with technology companies to gauge how blockchain technology can help them in the future. For example, Maersk has teamed up with IBM to set up a company to disseminate blockchain technology throughout the shipping industry by, for example, tracking freight and replacing all paperwork with digital records, in the hope that it will create considerable benefits for all stakeholders along the supply chain. MOL and Sumitomo Mitsui Banking Corporation are also collaborating with IBM and together they are trialling cross-border trading to see whether or not operations can be more efficient when blockchain encryption technology is adopted. The expectation is that blockchain technology will create a platform not anchored down by endless paperwork and complex transactions but instead fully digitalised thus enabling more fluid freight movement and reduced costs and resource waste. According to Tradewinds, in excess of US$4bn worth of goods are shipped yearly and the costs incurred by the documentation attributed to such goods is in the region of US$800m; it is this substantial cost that the blockchain ecosystem aims to erode. The potential savings will ultimately have to be weighed up against the potential risks in any digitalised system in relation to fraud or hacking. The shipping lines will also need to persuade the ports and other organizations involved in cargo trading to adopt their systems.

Moreover, The smart contracts, that comes from the increased speed, efficiency and trust that the contract will be executed exactly as agreed. In addition, such contracts can reduce certain transaction costs associated with contracting, since blockchain technology cuts out middlemen. In the shipping industry, ING and Société Générale are collaborating to develop a blockchain-based platform for the management of physical energy commodities trading. By moving away from traditional and cumbersome paper contracts and operations, to secure smart contracts and authenticated transfers of electronic documents, the aim is to cut administrative and operational risks for all participants in the supply chain, including shipowners, charterers and shipbrokers. The bill of lading evidences the contract of carriage between the carrier and the shipper and that the shipper has received the goods in the prescribed condition. Traditionally, the bill of lading is a paper document and it constitutes a document of title for the goods. Physical possession confers the right to receive the goods. That being said, electronic (or "smart") bills of lading have already been implemented successfully.

The potential use of smart contracts in shipping and other industries gives rise to certain legal questions, including as to (i) how smart contracts are executed, (ii) whether they are legally binding contracts, (iii) their enforceability and (iv) what dispute resolution mechanisms are most appropriate. These questions are beyond the scope of this Briefing and will be considered in more detail later in the series.

It will be interesting to see if other shipping industry stakeholders will follow. Widespread adoption of blockchain and smart bills of lading has the potential to replace the traditional work flow.