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Can blockchain technology revolutionise the shipping industry?

Details

This article first appeared in Maritime Risk International on 15 September 2021.

Shipping. Blockchain. The two words do not traditionally sit easily together - or at all. The shipping industry has a proud history of several thousand years. Blockchain technology goes back only 12 years. However, in IT terms, blockchain technology is old technology. And its potential ‘glory days’ in terms of revolutionising the shipping industry are still ahead of it explain Hill Dickinson’s Mark Weston, partner, and Michael French, associate.

What is blockchain?

Blockchain is a type of database technology where a database is made up of records stored, updated and accessed simultaneously across multiple locations in real time. 

Traditional databases are centralised in one place and run by a single person or organisation. But a blockchain database decentralises all the data in the database so that there is no single master copy of the database, no single authority who authorises changes to it and, most importantly, no possibility of anyone changing information in it. 

Each member with access to the database has a complete, accurate version of it. No-one can change their ‘copy’ of it without red klaxon alarm bells going off in every other copy of it. The database is completely impossible to hack in terms of changing anything in it once a record is written to the database. Like any database, it can be completely public and open, or only accessible (in terms of reading and/or writing to the database) by those with approved credentials.

It works through automated rules built into the fabric of the database when it is first set up – and those rules govern everything about the database. Its distinguishing feature is that every entry on the database is mathematically linked to every other entry by a mathematical calculation which acts as the verification method used by the blockchain to verify the information in the database. If the information in a ‘block’ of data in the database is not properly verified, then it cannot connect to the chain of data and become a permanent part of the database. 

Smart contracts

Data in a database can be anything. For example, it could be the size, weight and content details of a particular shipping container; or the arrival of a ship at a particular time; or the weather at the time the ship arrives and the seven days beforehand; or the salinity of the water. 

It can also be a set of auto-executing instructions known as a smart contract. A smart contract on the blockchain (ie in the database) can run processes and procedures based on other information in the database.   

For example, a smart contract might be: ‘When ship X arrives (a piece of data on the database perhaps inputted as a camera image) and is carrying container Y (a piece of data on the database perhaps inputted by a barcode scanner automatically reading the side of a shipping container) then, if the date is after Z (a date), a demurrage is payable of £500 per day after Z (actioned by an automatic transfer of funds from Account A to Account B).’

A smart contract is essentially a program that automatically runs ‘on the Blockchain’ (ie in the database) to automate something. It will usually be based on a series of IF-THEN statements, such as if ‘a’ happens then ‘x’ happens, but if ‘b’ happens then ‘y’ happens. Each ‘then’ statement is executed automatically on either ‘a’ or ‘b’ occurring on the database without further authorisation or approval needed or possible.  

Essentially, the smart contract removes the need for intermediary involvement by running when the predetermined conditions are met, thereby removing the need for further processes, cost or uncertainty for the parties. 

What are the benefits of a blockchain?

Blockchains have a number of benefits:

  1. Security – a blockchain uses encryption technology to verify, record and share information. Due to its decentralised nature and the mathematical linkage of every piece of data to every other piece of data, it is impossible to hack from outside of the network and it is protected from bad actions by those inside the network by the consensus algorithms (the rules to be able to write new data) built into the blockchain during its creation.
  2. Distribution of information – the information on the database is synchronised and can be seen by all on the network (if they have authority), creating transparency and allowing the database to be see in real-time.
  3. Immutability – once the information is entered on to the database, it is recorded permanently and cannot be corrupted or changed. If someone attempts to change the database, the changes will be rejected and the blockchain can be programmed to notify all users. To fix an error in data block 7, you would need to write a new piece of data in a later block saying ‘The info in block 7 is wrong, it should read [whatever]’. But there is no way of changing block 7 once it is written.
  4. The whole process requires zero trust – the data is self-validating and there is no single gatekeeper or authoriser that needs to be trusted – because all those rules were created when the blockchain was created; the so-called ‘consensus mechanism’. The process is validated automatically allowing for secure peer-to-peer transactions. The fact the process is self-validating removes processes, expense and delays.  

All this makes for an easily accessible, decentralised database that is efficient, secure, resistant to mistakes and fraud and is completely auditable. When used correctly, a blockchain can improve collections, maintenance and sharing of data, while doing so in a way that is more efficient and frees up administrative operations. 

Are other industries using blockchain technology?

A number of industries are already using a blockchain to assist them with the creation, management and record-keeping of data. Use cases include: 

  1. Property – to process property transactions and registers of ownership
  2. Health – as a viable method of managing patient records
  3. Business – as a means to manage supply chain information
  4. Legal – to create, execute and maintain legal documentation and contracts
  5. Intellectual property – to track intellectual property rights and registers of ownership
  6. Insurance – to make applications and claims more efficient 
  7. Finance – to record financial transactions
  8. Cryptocurrency and NFTs – cryptocurrencies use blockchain technology to keep a record of transactions of the particular currency and blockchain is used as an easy way to verify ownership of non-fungible tokens (NFTs) 

Each use case uses one or more of the above-described benefits of a blockchain. 

Can blockchain be applied in the shipping industry? 

The shipment of goods by sea requires the input and co-operation of a number of organisations and people (the shipper, ports, logistics, authorities, rail, carrier, and consignee to name a few), all of whom are usually in different locations around the world, facing the geographical and language barriers that come with this. In addition, it is well known that the shipping industry relies heavily on a paper-based system. Therefore, can blockchain technology really be applied to the shipping industry? 

Well, the short answer is ‘yes’ because it already is. 

Since 2018, a number of parties in the container, bulk, oil, and gas industries have all separately been using this technology for the seamless and secure transfer of data between relevant parties. One example of this is the collaboration between IBM and Maersk called TradeLens. 

TradeLens is a blockchain platform that allows for the digital processing of customs documentation between all parties involved at both import and export. The documents are visible to everyone, have guaranteed immutability, privacy and full auditability. The platform supports fast and secure end-to-end supply chain information in a single source, with trusted and cross-organisational workflows. The reported result is better risk assessment with fewer processes and barriers, which has led to lower administrative expenses. Further, the cost of moving physical paper across international borders has been removed completely.

There are innumerable other use cases for blockchain from cargo and logistical tracking to dispute resolution to demurrage claims to automated contracts to… well, many, many more.

Conclusion

Given the complexities of international and global shipping, the number of parties involved and the current reliance on paper documents, it appears the shipping industry has a lot to gain from use of blockchain technology. When the cost of trade documentation is estimated to be one fifth of the cost of transportation, the saving that can be achieved appears to make the use of blockchain technology worthwhile in itself, although there is an upfront establishment and implementation cost, of course.  

Blockchain technology could also increase efficiency with all parties having the ability to track the shipment in real-time and can reduce risk (and costs) by automatically (and securely) issuing and tracking the necessary shipping, finance and even insurance documentation in a secure manner. It becomes even easier to see benefits in the shipping space with increased acceptability of e-bills of lading. 

There are real opportunities for the shipping sector if it is able to implement blockchain technology on a large enough scale and across enough of the many organisations involved in the industry. With the large-scale implementation comes reduced processes, barriers and costs. This could make shipping a more viable option for more consignments, which could increase demand within the industry by up to 15%.

It would be nothing short of a revolution in the shipping industry.

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