Blockchain in Shipping
Blockchain as a secured, decentralised and encrypted public database has been explored as a disruptive technology which revolutionises the way trades, transactions and payments are performed.
The major positive benefit of blockchain implementation include efficiency gains, speed and reduced cost in value transfer and transactions. When applied to the ‘process heavy’ shipping industry, there are several potential areas which can benefit significantly:
- The application of blockchain technology in the shipping industry has the potential to cut administrative and operational risk for shipowners, charterers and brokers, by bringing more transparency and efficiency.
- Smart contracts to replace the traditional bill of laden and other documentation.
The Current Status of the Shipping Industry
Technology has been central to the development of the shipping industry where we have seen bigger, faster vessels, automation through robot-operated ports and an increasingly sophisticated database for cargo tracking. Yet one glaring area which still needs to move into the new technology era is the reliance of paper documents.
In this aspect, the shipping industry remains traditional, with a number of time-consuming and document-intensive processes — all based on paper records such as memoranda of agreements for ship sale and purchases, bills of lading, port documents, letter of credit and charter agreements to name a few. The fact that these arrangements may involve extensive multiple parties also increases the risk of human error and fraud.
Blockchain and Shipping — Digital Systems
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 (source: Tradewind). Blockchain implementation is intended to create a fully digitalised system which enables more fluid freight movement, reduce resource waste and allow for substantial costs savings.
Major shipping players, operators and financiers have teamed up with technology companies to upgrade their complex logistic network, for example:
- Maersk has teamed up with IBM to set up a company to disseminate blockchain technology throughout the shipping industry by tracking freight and replacing all paperwork with digital records, with an aim to generate benefits for stakeholders across 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.
- South Korea’s Hyundai Merchant Marine has held trial runs using a blockchain system developed with Samsung.
The potential savings will ultimately have to be weighed up against the potential risks in any digitalised system in relation to fraud or hacking.
Blockchain and Shipping — Smart Contract and Bill of Laden
Smart Contract
A smart contract is a self-executing application or program which runs on Blockchain. It facilitates, verifies and executes an agreement such as the transfer of digital currencies or assets once predefined conditions are met.
The major benefit of smart contracts is the decentralised nature meaning cutting out intermediaries and increases speed and efficiency. The smart contract also reduces the possibility of downtime, fraud and third-party interference and thus increases trust that the contract will be executed exactly as agreed.
On the other hand, the benefit of smart contract will depend on the extent to which current contractual clauses can be made partially or fully self-executing and/or self-enforcing. Whilst payment mechanisms can be automated under a smart contract, contracts with more commercial judgement such as determining Material Adverse Change may be more difficult to implement.
Smart Bill of Laden
Traditionally, the bill of lading paper document constitutes a document of title for goods and evidences the contract between the carrier and the shipper and that the shipper has received the goods in the prescribed condition. One area where smart contracts have been implemented successfully is electronic or smart bills of lading.
Israeli container shipping line Zim recently transported a shipment of containers from China to Canada using an electronic substitute to the traditional bill of lading.
This seeks to give stakeholders complete visibility of their shipments from collection all the way through to delivery and reduces overheads drastically.
Conclusion
There is definitely major focus and investment in the implementation of blockchain technology from leading shipping players. Although there are significant roadblocks such as regulation, security and practicality of implementation, the financial and human capital investment will likely grow in the next few years.
