Ice Chain: the better approach to temperature-sensitive cargoes #2
See the first part here.
To prevent financial losses, the parties usually appeal to such instruments as a bank letter of credit (if there is no trust among them) and cargo insurance (if they beware of damages while transportation).
Letter of credit (LC) is extremely common within international trade and goods delivery, where the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as underwriting the credit risk of the buyer paying the seller for goods.
It is particularly useful where the buyer and seller may not know each other personally and are separated by distance, differing laws in each country, and different trading customs. LC works by ensuring that the seller is paid for presenting the documents, which are specified in the contract for sale between the buyer and the seller. The bank will pay the seller the value of the goods when the seller provides negotiable instruments, documents which themselves represent the goods. The seller is confident due to bank guarantee of payment. This guarantee is provided by the buyer’s advance payment made to the special account or by the loan to the buyer. At the same time, the buyer feels confident as he knows that he gets his money back if he doesn’t get goods.
Ice Chain offers a solution, which is based on traditional LC scheme but also rectifies its common deficiencies.
Ice Chain solution
First, the buyer and the seller create a smart contract. They set all the basic terms such as the exact date of delivery and temperature range. Then, the buyer (B) places the value of goods on the account of smart contract. The seller forwards goods by the carrier. While transportation, the temperature data loggers (TDLs) measure temperature in the batch and record measures to the log. When the goods come to the buyer’s warehouse, a warehouse worker uses the special mobile application to automatically get the logs and send them to Blockchain. Smart contract checks the temperature logs and searches for deviations. If there are no deviations found, smart contract transfers the payment to the account of the seller. Otherwise, the payment goes back to the buyer.
Necessary to say that this scheme is particularly actual for many types of temperature-sensitive cargoes such as vaccines. For this types of goods, even single deviation from the required temperature range leads to total perishing and devaluation.
Compared to LC, Ice Chain system provides the ability to avoid the following disadvantages.
Longtime paperwork.
It takes to work for 5–10 days with the bank to apply for an LC and nearly the same time for the seller to get his payment. With Ice Chain, it takes a few minutes to create a smart contract, and the payment will be transferred immediately after the cargo got the buyer’s warehouse.
High expenditures.
For international LC, the additional costs may estimate up to 3% of the goods’ value. In Ice Chain, the smart contract fee is no more than 0,3%. Including the cost of TDLs, the total costs of risk management via Ice Chain may estimate no more than 0,6%. Given that TDLs may be reused or sold back to Ice Chain for 50% of their price, these costs should be much lower.
When the parties beware of damaging, they appeal to insurance companies to reduce their risks. The problem is that most the companies avoid insuring temperature risks as too special. Moreover, the Institute of London Underwriters (the most influential organization in the field, which elaborates the standards for insurance business) offers the so-called Institute Cargo Clauses. According to these rules, temperature risks shouldn’t be insured, as they lie close to force majeure circumstances. Therefore, there are serious obstacles for those companies who operate with temperature-sensitive cargoes and want to insure their risks.
To solve this problem, Ice Chain offers another use of its smart contract
The transport operator (A) places the insurance deposit to the account. Then, the process goes as described before. Finally, in case of success, the deposit goes back to A. Otherwise, it goes to B (Buyer, or Cargo owner) as a compensation.
To make the conclusion, Ice Chain helps to solve the actual problems of the market by its key features:
- Smart contract replaces the bank letter of credit and cargo insurance
- TDLs provide temperature measurement while in the cargoes boxes
- Ice Chain builds strong interrelation between the fact of successful delivery and payments.
