Blockchain in Shipping

Introduction

The advent of bitcoin in 2008 revolutionized the concept of money, transfer of value, and financial system. Throughout the years, this has captured the enthusiasm of futurist innovators and investors which saw boundless value in a peer-to-peer digital currency not subject to the control of entities such as governments, banks, or companies (Back, 2017). However, it did not take long to realize that the underlying technology bitcoin was running on could be designed for purposes other than digital payments. Said technology is known as blockchain and, similarly to when bitcoin was first introduced, it has recently been subject to a media-driven surge in popularity.

The International Maritime Organization (IMO) and UNCTAD estimated that in 2016 approximately 90% of world trade was transported by sea (van Kralingen, 2017). Moreover, another study by the World Economic Forum, World Bank, and Bain Capital found that the reduction of supply chain barriers to international trade currently caused by inefficient business processes, could increase world trade by 15% and world GDP by 5% (IBM, 2017; van Kralingen, 2017). In March 2017, Maersk and IBM announced the development of an industry-wide blockchain solution for the maritime shipping industry (Bajpai, 2017; IBM, 2017). The two partners intend to coordinate with a network of shippers, freight forwarders, ocean carriers, ports, and customs authorities to digitize the ocean shipping supply chain. Hyundai Merchant Marine (HMM) stated that it had successfully completed its first voyage using blockchain and aimed at having it fully implemented by the end of the year (Braden, 2017).

The Maritime Industry

The maritime industry consists of a wide range of actors performing different kinds of activities which may be divided into five distinct activity groups: shipbuilding, marine resources, marine fisheries, other marine activities, consisting mainly of tourism, and vessel operations (Stopford, 2009).

Shipbuilding is concerned with the construction of vessels, both vessels for transportation purposes and military vessels. Furthermore, it includes the construction of equipment for the offshore energy industry (European Commission, 2017). The construction of vessels takes place in a shipyard located close to a sea or river to provide easy access for vessels. In addition to construction, shipyards are also involved with maintenance, repairing, and scrapping of vessels, to recycle materials which may be used for other products (Kavussanos & Visvikis, 2016).

Marine resources are activities concerned with the extraction of resources from the ocean, mainly carbon based energy sources such as oil and gas, requiring significant investments into deep sea drilling and production rigs. The group also includes two relatively novel activities; extraction of sea based minerals used for manufacturing consumer goods and machineries, as well as offshore renewable energy production, mainly by ocean based wind farms consisting of several floating wind turbines (World Ocean Review, 2014).

The marine fisheries group is also significant and involves mainly commercial fishing, aquaculture, and seafood processing (Stopford, 2009). Commercial fishing, also known as wild-catch fishing, involves designated vessels of various sizes which serve as workplace for fishing and provide transportation to and from the fishing ground. Aquaculture is an alternative to commercial fishing consisting mainly of fish farming, it involves breeding, rearing and harvesting aquatic species in land based tanks or ocean based cages (NOAA Fisheries, n.d.). Seafood processing refers to activities ranging from the catching or harvesting of the fish to the final product delivered to consumers (FAO, 2017).

The other marine activities group mainly consists of marine tourism, which involves a wide range of actors, including both one-person operations such as sea-kayak tour guides and scuba diving instructors, as well as moderate sized private companies for example whale-watch cruise operators and charter yacht companies (Orams, 1999). In addition to tourism, this group also includes research activities, submarine telecoms, and various marine services. These services include insurance, shipbroking, banking, legal services, classification, and publishing (Stopford 2009).

The vessel operations group is directly involved with the operations of ships and accounts for the largest share of marine activity. Moreover, they can be further broken down into four separate sub-industries: naval shipping, cruise industry, ports, and merchant shipping.

Naval shipping is not directly involved in the transportation of goods but is performed for military purposes. However, it does support commercial shipping by protecting and preserving open lines of commercial navigation on the major waterways of the world (Stopford 2009).

Non-cargo transportation, on the other hand, is involved in the transportation of passengers, associated with ferries and ocean liners and also provides ocean transportation for recreational purposes associated with cruise ship operators (Stopford 2009).

The port environment is involved in the interaction with the merchant ships when reaching land, where the main activities performed include loading and unloading cargo from vessels and preparing goods for further inland transportation. In addition, port organisations also provide warehousing, storage, and packaging (Stopford, 2009; Lee et al., 2010).

Merchant shipping is the largest sub-industry belonging to this group and accounts for roughly one third of the total turnover of the overall maritime industry (Stopford, 2009). Companies within the merchant shipping industry provide transportation of goods services. However, due to the heterogeneous needs of customers and depending on a range of different factors such as, type of the cargo transported, parcel size, and type of service required by the customer, shipping companies perform various types of transportation services. The different kinds of transportation services further divide merchant shipping into three segments: liner, bulk and specialised cargo.

The Merchant Shipping Industry

The merchant shipping industry is truly global. In 2016 the industry transported 10.3 billion tons of cargo worldwide. To put this into perspective, the world seaborne trade volume accounted for over 90 percent of total world merchandise trade (UNCTAD, 2016). Therefore, it is safe to say that the shipping industry is the backbone of globalisation, performing a crucial role in cross-border transport networks, supporting global supply chains, and enabling international trade. Furthermore, the major shipping companies are globally dispersed, located in Asia, Europe, Northern America and the Middle East. Nonetheless, english is the predominant language used to communicate in the industry (Stopford, 2009).

Vessels are the industry’s main assets and the international flags displayed on them allow shipping companies to choose their legal jurisdiction, indicating which tax and financial environment they are associated with (Stopford, 2009). Moreover, according to Stopford’s (2002) “Global sea transportation demand model”, vessels play a crucial role in satisfying the demand for different types of transportations within the merchant shipping industry.

The Ports Environment

Bichou (2009, p. 2) defines the port environment as “the interface between land or sea … providing facilities and services to merchant ships and their cargo, as well as the associated multimodal distribution and logistic activities.” Furthermore, as noted by Stopford (2009), it is useful to define and distinguish between three entities that form the port environment, namely: the port, the port authority, and the terminal.

A port are the interaction point between land and sea, playing an important role for shipping operators. More specifically, a port may be defined as “a geographical area where ships are brought alongside land to load and discharge cargo” (Stopford, 2009, p. 81). The port authority is the organisation responsible for providing various maritime services related to facilitating the process of getting the vessel to the port. Port authorities may include public entities, government organisations or private companies (Stopford, 2009). Finally, the terminal is a specific location within the port, consisting of either one or additional berths where its operations are focused on handling a specific type of good, for example there are terminals dedicated for containers, coal, and liquid goods such as crude oil. These terminals are usually owned by a shipping operator or port authority (Stopford, 2009).

One of the main functions of ports is cargo handling and it is most crucial in improving shipping efficiency. To do so investments in shore facilities are required. For instance, in order to serve bigger ships, larger ports must be built. Moreover, the type of cargo which is handled requires constructing facilities targeted at handling a specific goods. Thus, a port with versatile ambitions must specialise in handling different cargos and providing specific facilities for it (Stopford, 2009).

Finally, ports also provide storage facilities for goods bound for further transportation and are also involved in facilitating the connection for further transportation. Indeed, roads, railways and inland waterways are usually linked with the port infrastructure (Stopford, 2009).

The Maritime Logistics System

The maritime transportation system which is deeply involved in the logistical flow is referred to as ‘maritime logistics’. Maritime logistics may be defined as “the process of planning, implementing, and managing the movement of goods and information involved in the ocean carriage” (Song & Panayides, 2012, p. 11).

There are three main actors within maritime logistics: the shipping company, the port/terminal operator, and the freight forwarder (Caliskan et al., 2016, p. 363), it is also important to mention the role of freight forwarders in maritime logistics. Lambert et al. (1998) defines freight forwarders as “companies that serve both to shippers and carriers by organising and coordinating the transportation of goods” (Caliskan et al., 2016, p. 363). Thus, their main activities include, to reserve a vessel on behalf of the shipper or to prepare bills of lading and other shipping documents required for insurance requirements and customs clearance (Murphy et al., 1992; 2001). Moreover, customs authorities play an important role in the clearance of goods entering and leaving a country. More specifically, they are responsible for enforcing the import and export regulations of the specific country, they may examine and verify the bill of lading, consequently denying authorization to release the goods if the document is missing or contains inaccurate information.

The bill of lading (B/L), is issued by a shipping company to the shipper, confirming that the goods have been received. Therefore, it serves as a proof of receipt obliging the carrier to transport the goods to the consignee. Moreover, it contains general information about the goods, the vessel, and the port of destination. Ultimately, it is considered a required export and import document by customs authorities (European Commission, 2017; Hinkelman, 2008).

The interaction and activities between the shipper, freight forwarder and shipping operator, as well as the value creation of the maritime logistics system is shown in Figure (1) below. This model is created by Lee & Song (2010) and is built on Porter’s famous value chain model (Porter 1985).

The model is divided into primary activities and secondary activities. Primary activities are the main functions of the maritime actors: shipping lines are transporting goods, port and terminal operators load and unload cargo from vessels, and freight forwarders facilitate the shipment of the cargo on behalf of the shipper. The secondary activities support the primary ones, ensuring they are run more efficiently. In addition, the actors’ organisational capabilities, including human resource management, information system, administrative skills and financial support, also play an important role in aiding the primary activities (Lee & Song, 2010).

Hence, it is evident from the model that the activities performed by these actors are inter-linked with each other as suppliers or buyers. The shipping operators are customers of the port, while freight forwarders, that provide services for shippers, are customers of the shipping operators. Ultimately, value is created within the maritime logistics system when customers consider the services provided by suppliers valuable enough to be purchased (Lee & Song, 2010).

The Blockchain technology

The first application of blockchain technology may be dated back to 2008 when bitcoin was first introduced by Nakamoto. However, the concept of blockchain is extremely broad so there is still no clear and commonly agreed upon definition. Nonetheless, Seebacher & Schüritz (2017) were able to define blockchain concisely and comprehensively as follows:

“A blockchain is a distributed database, which is shared among and agreed upon a peer-to-peer network. It consists of a linked sequence of blocks, holding timestamped transactions that are secured by cryptography and verified by the network community. Once an element is appended to the blockchain, it can not be altered, turning a blockchain into an immutable record of past activity.” (Seebacher & Schüritz, 2017, p. 14)

Hecnce, as mentioned by the definition, a blockchain contains a database, or ledger, in which all transactions are stored and recorded in a sequential manner. Furthermore, blockchain may be considered a “continually-growing digital register of transactions” (Condos et al., 2016, p. 6). Transactions are composed by a sender, transaction information, and a receiver. Each transaction is time-stamped and shared with the members of a peer-to-peer structured network.

In order to secure the blockchain and ensure the correctness of what is being recorded, processes are performed involving both cryptography and user verification. Furthermore, as prescribed by the system’s protocol, or rules upon which the blockchain was designed, once a certain number of transactions has been verified, a new block is added (Seebacher & Schüritz, 2017).

Technological foundations

According to Condos, Sorrell, and Donegan (2016) there are three main elements which constitute the technological foundations of blockchain. These elements include: system architecture, data encryption, and transaction verification.

System architecture

This section regards the typical design features of a blockchain system, these have been divided into three main sections, namely: decentralised database and digital assets, peer-to-peer network, and public or private network.

Decentralised database and digital assets

One key aspect in which blockchain differs from other currently established communication and data sharing technologies is that it is constructed as a decentralised database. The use of a decentralised database structure avoids the necessity of routing communication or sharing files through a centralised network or electronic platforms such as Google Drive, Facebook or Gmail. Moreover, through the use of decentralised and encrypted communication protocols, messages can be retrieved, stored and transferred at any time without the need of any form of intervention from trusted intermediaries or third parties. Decentralised database storage also enables both decentralised and secure manner of data exchange. Because of the distributed nature of blockchain, no single party controls the data or information stored (Morabito 2016).

A blockchain frequently contains assets which are digitally represented. In the case of bitcoins they are not stored as digital files, such as mp3 files, but rather as transactions. Transactions include information of who sent the money and who received it, as well as the value transferred. Moreover, anything of value may be stored on the blockchain as long as it can be codified (Morabito, 2016; Tapscott et al., 2016).

Peer-to-peer network

The decentralised database of the blockchain is shared among the participants in a peer-to-peer (P2P) network. As shown in Figure 7, P2P differs from a traditional client-server model where resources are stored in a centralised server and only shared with the client upon request. Indeed, a traditional client-server model functions as a one-to-many distribution model in the sense that information is stored at a central server (Badzar, 2016). In contrast, a P2P network is structured around many interconnected peers, or simply computers, which share information point-to-point without the use of a centralised server (Pandurangan, 2003).

Public or Private networks

Throughout the years since the invention of the bitcoin blockchain, two alternative kinds of networks have been developed. These different types of networks are known respectively as private or permissioned and public or permissionless. The two vary in the degree to which participants may access and contribute to data in the system, this will be explained further below.

Public networks are openly accessible to anyone who wishes to join and no restrictions on membership are present. Any data stored on a public network is visible to all network participants, in an encrypted form (Finra, 2017; Morabito, 2016).

Private networks, on the other hand, limit the users that can contribute to the system and view the data recorded. Private networks allow the operator of the network to restrict access to only trusted users. Hence, a private blockchain network may be constructed in such a way in which only known participants can include data, or transactions, to the blockchain. Moreover, permission levels may be differently assigned to the participants so that different participants have varying levels of authority to transact and view data. Therefore, unknown users cannot write or read data on private blockchains (Morabito, 2016).

Data encryption

Within the context of digital security, data encryption is considered a fundamental technology. Encryption involves translating one piece of information into another through a mathematical algorithm, obscuring the original data which can only be accessed by the intended recipients (Condos et al., 2016). However, while the explanation of the process of data encryption within a blockchain is too complex for the purpose of this thesis, it is important to distinguish between two different types of encryption techniques.

Among other purposes, a block also serves as a storage unit of verified transactions with a reference to the previously settled and verified chain of blocks. Furthermore, new blocks of transactions are added in an “append only” manner, meaning that no one can change or modify the data sets in the blockchain (Seebacher & Schüritz, 2017).

The first technique, simply known as encryption, is a one-to-one translation from one set of data to another. With this method, if data is encrypted with a mathematical formula it can be decrypted with knowledge of said formula (Condos et al., 2016).

The second technique, known as cryptographic hashing, is used in a blockchain system. If a transaction is executed within the system, its contents are cryptographically hashed, meaning that the original data is condensed through a mathematical algorithm. Hence, with this encryption technique it is not possible to decrypt a hash within a blockchain. This is because a hash within a blockchain is merely a condensation of the original data. Instead, it is possible to use the hash to verify the full contents of a transaction (Condos et al., 2016).

Verification of transactions

To verify that a transaction has occurred and is valid a specific process will occur.

Firstly, a blockchain user cryptographically hashes the record of a transaction. This hash is then transmitted throughout the peer-to-peer network as proof that a transaction has occurred or event has been logged. Single nodes within the network receive the transmission and once a certain number of them has agreed that a set of transactions is valid, also known as reaching a consensus, those transactions may be added as a block. Furthermore, future blocks can be added to form a chain where each consecutive block is linked with the previous one by building upon the information contained previously. This ensures that there is a continuity in the recorded history of transactions.

Moreover, three main security measures which may be used to verify transactions within a blockchain system: timestamping, proof-of-work, and proof-of-stake.

Timestamping

Timestamping enables the blockchain to record the timing of when the transaction was created. When a node verifies a transaction, it checks it against timestamps of previous transactions. Doing this helps identify double spending. Consider for instance if an individual decides to construct a transaction of 1 bitcoin unit at 12:00 and also constructs another transaction consisting of the same bitcoin at 12:01, the network will agree the second transaction is invalid. Furthermore, timestamping serves as a link tying individual blocks together. Indeed, a timestamp allows data stored in a blockchain to be placed chronologically by including a reference to the timestamp of the previous transaction, ultimately making a “chain” of transactions (Condos et al., 2016).

Although timestamping identifies the timing of the transactions, it does not address a method for establishing consensus on which transaction to be added to the blockchain. This issue is addressed by the “proof-of-work” consensus protocol.

Proof-of-work

As mentioned previously, each transaction is broadcasted throughout the network so that a certain number of users may verify the legitimacy of the transactions. On the one hand, this makes double spending attempts visible to blockchain participants but it does not make the system completely invulnerable to them. Indeed, an individual user could potentially establish several different identities which could in turn approve an illegitimate transaction, given this individual now controls the majority of the identities (B?hme et. al, 2015; Tschorsch et al., 2016). In the computer science field, this form of security attack is commonly known as a Sybil attack (Tschorsch et al., 2016).

The bitcoin blockchain makes use of a network security protocol known as ‘proof-of-work’ (PoW) making it invulnerable to a Sybil attack as well as making it difficult to tamper with data (Tschorsch et al., 2016; Morabito, 2016; Nakamoto, 2008). Before users share the validity of a transaction some work is required to prove they are the ‘real’ identities. More specifically, this work consists in solving a cryptographic puzzle, which requires a certain amount of computational power.

Proof-of-stake

In order to reduce the computational resources necessary to validate a transaction, a consensus protocol known as ‘proof-of-stake’ (PoS) was developed as an alternative to the PoW. With the PoS protocol in order to verify a transaction a user must own some of the assets on the blockchain. Hence, in this case, the amount of assets owned increases the probability of successfully adding a new block to the chain. As a result, since computing power is not used to validate transactions, energy cost is significantly reduced. However, undermining the integrity of the system will still be costly since one would have to own more than 50 percent of the assets in the network (Farell 2015; Morabito 2016). However, an issue that may arise is that if a user owns a large enough stake in the blockchain there is the risk that he or she might attempt to dominate the entire network (Morabito 2016).

Blockchain technology characteristics

Blockchain is a relatively new and emerging technology and it is expected to undergo further developments in the near future. However, the main characteristics of this technology have already been identified by several authors (Seebacher & Schüritz, 2017). In this section we will use as basis the work of Seebacher & Schüritz (2017) which consists of a comprehensive list of characteristics which have also been mentioned by several other authors. The authors begin by identifying two key features of blockchain technology, namely its decentralised nature and its trust enabling feature. These are then further divided into three characteristics per feature, as shown in Figure 2s.

Decentralized nature

According to Seebacher & Schüritz (2017), the blockchain’s decentralized nature facilitates the creation of a private, reliable, and versatile context in which users operate.

Privacy

As previously mentioned, the interaction between the users of a blockchain system takes place in a peer-to-peer network. Furthermore, the combination of the ability to secure these interactions by utilizing cryptography and the fact that the users’ identities are covered by pseudonymity, enables a high degree of privacy for users (Nakamoto, 2008; Seebacher & Schüritz, 2017).

Reliability

Two main reasons may be identified regarding why the blockchain’s decentralized nature facilitates the creation of a reliable environment for users.

Firstly, within a blockchain information is stored in multiple locations, more specifically in different network nodes. This means that if a failure in a single node occurs, it would not hamper the entire system, hence, securing the availability of data for its users. (Beck et. al., 2016; Sharples & Domingue, 2016).

Secondly, since blockchain technology is built on data and computer code, it is feasible to apply automation in the form of smart contracts, which automatically enforce the conditions defined in the transactions, like for example enabling conditional payment (Weber, et. al., 2016). This might reduce individual mistakes as there is little room for manual interventions by, for example, employing smart contracts to digitize procedures that rely heavily on paperwork (Guo & Liang, 2016).

Versatility

Blockchain is a relatively new technology whose full potential has not yet been identified. Therefore, most blockchain projects are based on open source code which encourage collaboration in order to fully embrace this potential. Currently, the major blockchains are open source and they include Bitcoin, Ethereum, and Hyperledger (Tapscott & Tapscott, 2016; ?lnes, 2016). Thus, because of it’s open technological architecture, any participant can integrate their own programs as well as develop and distribute their own code. This ultimately enables them to shape their own environment, facilitating the creation of versatile system (Seebacher & Schüritz, 2017; ?lnes, 2016).

Trust enabling

Moreover, the second key feature of blockchain is that it enables trust. According to Seebacher & Schüritz (2017), this is due to: the shared transparency it provides on transactions, the integrity of data present within the system, and the system’s immutable architecture.

Transparency

In the blockchain, a shared and publicly displayed relationship between the interacting parties is established. Through a shared view on all past transactions, participants have full disclosure on all activities in the system (Seebacher & Schüritz, 2017). All new verified and approved transactions are publicly broadcasted throughout the network, allowing users to interact directly with each other, without the presence of intermediaries (Beck et. al., 2016; Sun, Yan & Zhang, 2016).

Integrity

The interactions in the blockchain are secured through cryptography and, thanks to its transparent nature, anyone in the system can verify the transaction based on a consensus protocol. Moreover, these predefined rules ensure that there is no double spending and invalid signatures, thus guaranteeing the validity of blockchain data (Delmolino, et. al., 2016; Seebacher & Schüritz, 2017).

Immutability

Once a new transaction has been added to the block, no party can modify or change the data (Cucurull & Puiggalí 2016). This is further verified by the blockchain’s consensus mechanism. As previously mentioned, the two types of consensus mechanism mainly used are, proof-of-work and proof-of-stake, in addition to a combination of the two (Morabito, 2016). For instance, when a proof-of-work scheme is used, the users participate in the verification by utilizing computing power to find the solution to the computational puzzle. Once the solution is found, it is shared with the remaining participants which are able to verify its correctness, hence, reaching a consensus on the solution. Furthermore, the puzzle that a user will try to solve depends on the previous blocks of the blockchain. Therefore, if one or more blocks are tampered with, the solutions to the computational puzzle will vary from user to user alerting all the participants that changes to the blockchain have been made. This means that the users will be prompted to revert back the changes caused by the manipulation, therefore, preserving the immutability of the blockchain (Seebacher & Schüritz, 2017).

Blockchain in the shipping industry

Blockchain and its potential solutions have just recently gained interest in the shipping industry. In March 2017, the shipping giant Maersk partnered with IBM to develop its own blockchain solution aimed at digitizing global trade. Furthermore, inspired by this initiative, other established industry actors have also begun to form partnerships of their own or join industry wide consortiums hoping to reap the promised benefits of blockchain technology (Bajpai, 2017).

The IBM’s press release for the announcement of their blockchain initiative stated that the solution had the potential to “vastly reduce the cost and complexity of trading ” (IBM, 2017). Indeed, the processes involving international shipments of goods by sea are complex since they involve a large number of organisations and people, including a network of shippers, freight forwarders, ocean carriers, ports, and customs authorities. Moreover, this results in a substantial amount of physical paperwork since the procedural requirements related to the movement of goods across the world may vary greatly from country to country (Bajpai, 2017). In turn, this causes the costs related with processing and administration of physical documents to be extremely high since they are estimated to be 1/5th of the overall physical transportation costs (IBM, 2017).

To illustrate the sheer amount of physical documents needed in a typical shipment, a team of Maersk IT specialists tracked the shipment of avocados and roses from East Africa to Europe. The project found that the shipment involved 30 organisations and over 200 interactions between them, this formed the basis for their blockchain project (Bajpai, 2017). Moreover, it is estimated that documentation, customs clearance, and handling for sea shipments from various emerging markets to the US, are the cause for 17 to 33 days of additional transportation time (United States Department of Commerce, 2017).

In addition to the greater administrative costs and shipping times caused by the complexity of international trade, the maritime supply chain is also susceptible to fraud, especially in emerging markets, as well as being vulnerable to cyber attacks (OECD, 2014; Allianz, 2016). Indeed, the World Economic Forum estimated that corrupt practices increase the cost of doing business up by 10%, consequently reducing foreign direct investments (FDI) in corrupt countries (OECD, 2014).

Maersk and IBM claim that their solution can digitize the end-to-end supply chain processes and help “manage and track the paper trail of tens of millions of shipping containers across the world” (IBM, 2017).

Firstly, a blockchain system has the ability to place shipping documents on a shared ledger which enables the parties involved in the transportation process such as the: exporter, importer, freight forwarder, carrier, port, and customs authority, to view the entire progress of the shipment. Furthermore, blockchain’s inherent immutability allows the real-time exchange of documents while making sure that they have not been tampered with (Bajpai, 2017). Consequently, Maersk and IBM claim that this new degree of transparency in operations would speed up the industry’s business processes and improve inventory management, further cutting down frauds, costs and delays (IBM, 2017). Moreover, blockchain, is also thought to reduce the threat of cyber security since it is extremely resilient to hacking (Fürstenberg, 2017; Seebacher & Schüritz, 2017).

Finally, a more ambitious and far reaching promise from the IBM-Maersk solution is for a greater inclusion of developing countries in global trade. This is because the solution would lower the cost of transportation, which is already claimed by the World Bank to be a more binding constraint to trade than tariffs or other trade barriers. (Bajpai, 2017; IBM, 2017; World Bank, 2002).

Inspired by Maersk and IBM’s partnership, several other established shipping industry actors and trade related organisations are looking into blockchain solutions of their own.

South Korea formed a government backed shipping and logistics consortium focusing on developing and testing blockchain solutions in order to strengthen its national shipping industry. In a similar fashion to the IBM-Maersk solution, the aim of the project is to share data securely between all its participants and reduce the massive amount of administrative paperwork. The consortium consists of 15 members including shipping giant Hyundai Merchant Marine (HMM), Samsung SDM, IBM Korea, the Ministry of Oceans and Fisheries and Busan port authority (Kang, 2017; Zeng, 2017). Furthermore, in September 2017, HMM announced a successful pilot voyage to test blockchain technology along with other members of the consortium, and a second test is set due in October.

Looking to Japan, a similar consortium has been set up to develop and test a blockchain enabled data sharing platform among Japanese shipping giants Mitsui OSK Lines (MOL), Nippon Yusen Kaisha (NYK Line) and Kawasaki Kisen Kaisha (K Line), in addition to other Japanese trade related companies (Hadhi, 2017; MOL, 2017). Another initiative was recently formed in Singapore, where shipping company Pacific International Lines, port operator PSA International, and IBM Singapore, signed a memorandum of understanding (MoU) expressing their intention to jointly develop blockchain-based network solutions to reduce fraud and documentation errors (Zhe Tan, 2017).

A common objective among these previous initiatives is to digitize the bill of lading (Fürstenberg, 2017). Although digital versions of bill of lading have existed for many years, they haven’t been successful. Sofia Fürstenberg, Maritime director at Blockchain Labs for Open Collaboration (BLOC), points to the fact that currently, there is no guarantee that the document has been handled confidentially and it is also prone to unauthorized replications. These two issues would be successfully addressed by blockchain (Fürstenberg, 2017).

Blockchain regulatory compliance

The shipping industry is heavily regulated by both the EU and the International Maritime Organisation (IMO). In July 2016, the IMO implemented the Verified-Gross-Mass (VGM) regulation as part of the SOLAS treaty (International Convention for the Life and Safety at Sea), requiring shippers to report a container’s VGM to the terminal operator or carrier before loading it onboard a vessel (Hellenic Shipping News, 2017). Furthermore, the EU recently implemented the Monitoring, Reporting and Verification (MRV) protocol attempting to reduce the industry’s massive carbon dioxide footprint. The protocol requires every major vessel entering a European port to report its emission in a standardised way (Fürstenberg, 2017; European Commission, 2017).

Although new regulations commonly result in added complexities and cost, the logistic technology company Maritime Transport International (MTI) saw the opportunity to develop a blockchain-based solution to facilitate the compliance to the new VGM requirement. The company is using blockchain technology in its pilot project named Solas VGM for processing information that is required by the new regulation. MTI claims that, with the help of the digital ledger, their solution will enable all participants to interact on a common system regardless of their current legacy systems. Consequently, this creates “a streamlined, visible and verified data flow between all parties required to report and send this data” (Baker, 2017). In addition, BLOC is currently investigating the plausibility of putting MRV data on a blockchain to be shared with the regulatory authorities (Fürstenberg, 2017).

Blockchain in ports and government authorities

Blockchain technology has also caught the interest of government bodies as well. Indeed, the Danish Maritime Authority is currently attempting to digitize its entire ship registration process and has recently launched a project looking at utilising blockchain to “help bring an open, secure and more efficient approach to the date recorded in the registers of shipping” (Chambers, 2017).

In addition, various port authorities in North Europe have already begun work on developing their own blockchain-management platforms (Alper, 2017). These initiatives involve the port of Rotterdam and the port of Antwerp, considered respectively the largest and second largest European ports. The port of Antwerp, together with the logistics technology start-up firm T-mining, is working on removing physical paperwork and improving operational efficiency, similarly to the IBM-Maersk initiative (Zhe Tan, 2017). In addition, the Malaysia Institute of Supply Chain Innovation (MISI), together with Shanghai Jiaotong University, formed a joint research project developing a blockchain solution to improve the Less-than-container-load (LCL) market in China, an area faced by fragmentation, low level of information sharing, and frequent delays. MISI proposes three advantages blockchain may bring to the LCL market: build trust among the participants by improving the flow of information; remove intermediaries, consequently reducing both cost and time; and speed up transactions as all required information and trade documents will be available for all participants (Tan, 2017).

Cryptocurrency initiatives

Hence, most initiatives in the shipping industry have centred around information-sharing, enabling digitization of processes, and facilitating compliance to regulations, ultimately avoiding the cryptocurrency realm. However, Hong Kong is aiming to remove the lack of contractual discipline between shippers and carriers with the launch of a cryptocurrency for the shipping industry called TEU. The cryptocurrency will serve as a deposit during the booking process for container shipping, where the deposit is lost for the shipper if it does not show up with the cargo to ship and similarly, lost to the container line if it fails to load the cargo according to what was previously booked and confirmed (Baker, 2017).

Blockchain relative advantage

blockchain is not the type of innovation which replaces current technologies or legacy systems, it is not easily comparable to existing technologies due to its uniqueness and currently immature state. The shipping industry consists of many legacy IT systems, which are not interoperable with each other, as a result, this creates massive amounts of data silos which isolate organizations. This inherently creates a loss of competitive advantage for the SMEs in the industry, since they are not able to fully participate in the market and also their processes are more cumbersome and expensive compared to the big blockchain is not the type of innovation which replaces current technologies or legacy systems, it is not easily comparable to existing technologies due to its uniqueness and currently immature state

the shipping industry consists of many legacy IT systems, which are not interoperable with each other, as a result, this creates massive amounts of data silos which isolate organizations.

“blockchain is already taking advantage of other existing technologies and thus combining them in a certain way. Incumbent systems would not disappear because of blockchain. What we are building is interoperable systems, something that you can plug into the existing systems … So essentially, I think that in many ways blockchain will be able to bring a common infrastructure underneath the current legacy systems so that everybody is contributing to the same information[, therefore overcoming data silos].” (BLOC rep. 1)

In addition to overcoming data silos within the maritime supply chain, the immutability aspect of the technology was stressed. Information on the blockchain cannot be deleted and this is believed to have an impact within the industry as now actors within the ecosystem could be held accountable if they provided wrong information, which is difficult with current practices.

Furthermore, again, its ability to overcome data silos and make different legacy systems communicate and contribute information over a shared ledger on the blockchain would not make it difficult to implement. In addition from a developer perspective, it is possible to create blockchain solutions which use well known programming languages such as JavaScript, instead of having to learn new languages, which is the case of the Ethereum blockchain.

The immutability, transparency and decentralised aspect of the blockchain creates advantages for business processes in the shipping industry. For instance, Morley (2017), mentions that blockchain would enable users to access information individually since it is decentrally stored across several computers, in addition providing a fixed and secure record as the information cannot be modified or deleted. For instance the technology may enable the use of a digital bill of lading “which cannot be secretly altered … because the original is always visible” (Morley, 2017). A fully digital bill of lading would allow to speed up current cumbersome processes and reduce cost, as it would remove the large amount of paper documents associated with current business practices (Lehmacher, 2017). Furthermore, the World Economic Forum describes blockchain as a trust enabling technology due to the immutability of its records and the greater visibility it provides within the supply chain (Lehmacher et al., 2017).

Trials of blockchain solutions are possible. Indeed, they often referred to the various proof of concepts currently in progress which are showcasing the technology’s value propositions. Indeed, we have recently seen several consortiums have been formed in the shipping industry to test the value propositions of blockchain, including the South Korean government backed blockchain project with the carrier Hyundai Merchant Marine, which recently announced its first test successful proof of concept (Alper, 2017).

Blockchain relative disadvantage

The complexity related to the understanding of blockchain technology. At this stage, the technology is still considered relatively immature causing the creation of different definitions which are leading to misrepresentations and misunderstandings and being unique in terms of traditional IT system, developers would need to adopt a different way of thinking, also Blockchain technology was argued to be complex to adopt today because it is lacking a sufficient number of industry users in order to create value. However, some argue that blockchain as a technology is not very complex since it is a combination of existing technologies: database, peer-to-peer network, and cryptography.

The concept of blockchain is broad and does not refer to a single technology since a blockchain system can be designed in many different ways depending on its degree of decentralisation, consensus mechanisms, and specific business application. Therefore, it is not possible to attribute a specific cost to the technology.

the cost of a specific blockchain application depends on a range of different factors in addition to its design: the size of the enterprise adopting it, the specific problem it will solve, and the type consensus protocol being used. For instance, the proof-of-work protocol would entail costs deriving from hardware investments in order to provide computing power to maintain the network, while the alternative proof-of-stake protocol requires significantly less computing power. However, it is possible to integrate blockchain solutions into legacy systems, the implementation cost would not be of a greater magnitude compared to most other existing technologies, such as cloud computing. The general consensus which was evident from the interviews is that the shipping industry has a low degree of IT sophistication.

Furthermore, the immutability aspect would enable specific parties in the ecosystem to be held accountable in case they fail to provide accurate information, for instance when booking a container, something that is hard with current the processes in the industry. However, the automation of business processes provided by blockchain, is believed to create conflicts with part of the existing workforce since it would have to be repurposed for other jobs.

The absence of regulatory frameworks for important aspects of a blockchain system might slow down the adoption of the technology since authorities may impede companies from using blockchain-based solutions before these issues are successfully addressed. Moreover, the initial slow progress of the ISO in the creation of standards, blockchain standards are still not available. The lack of standards combined with the presence of extensive misinformation on blockchain technology, caused major problems for legislators. Indeed, the common fundamentals between blockchain applications are still extremely unclear, eventually forcing legislators to abandon any attempts in creating legal frameworks for blockchain or severely hindering blockchain’s development due to imposition of inadequately restrictive regulation.