July 2019
Video article
The potential impact of blockchain technology has been described by some commentators as the biggest revolution in shipping since the introduction of the container in the 1950s. It may be a while yet before there is widespread adoption – or even interest – but the technology is already being used in shipping as well as other industries, and has already proved to be a success.
This article will provide a basic overview of what blockchain is and how it promises to benefit the world of shipping. It will also highlight some of the potential issues raised by the nascent technology.
What is blockchain?
Blockchain as a database
A blockchain is essentially a decentralised digital database (or ‘ledger’). Data is stored in “blocks” that contain information about a transaction. These blocks are then “chained” together to form a record of the information, hence the name "blockchain”.
In order for one block to be added to the next, it has to be validated by all the participating computers or nodes in accordance with mutually agreed conditions. Once a block has been confirmed in this way, it is uniquely identified and cryptographically connected to the one before and after it, thus creating a permanent chain that can be traced all the way to the origin and that is updated in real time.
All parties have identical copies of the whole ledger (though individual elements of the transactions are encrypted and not publicly visible), and this ledger provides an accurate record of all the information contained on the blockchain, and of the history and validity of all the transactions. This record cannot be amended without permission of the participants, thereby creating a system of trust based on proof of validity.
Blockchain as a platform for ‘smart contracts’
As well as acting as a database that records transactions, blockchains can also process transactions, by acting as a platform on which code can be executed: so-called ‘smart contracts’. A smart contract is essentially a self-executing contract. It is a computer program that contains coded instructions about what the parties have agreed, and then automatically executes those instructions on the occurrence of an event (if ‘x’, then ‘y’) without the need for any human involvement.
How could blockchain benefit the shipping industry?
Blockchain as a database
One of the most significant potential benefits of the ‘database’ function of blockchain is that it promises to streamline the current paper-based trade processes, thereby generating considerable efficiencies in time and money. Current paperbased trade processes are slow and cumbersome because of the sheer volume of different documents generated by any shipment, which all need to be forwarded to and approved by a long chain of different parties. This necessarily costs money, takes time and can lead to to delays. It is not uncommon, for example, for a vessel to arrive at the discharge port before the Bills of Lading, and Members will be aware of the issues this causes.
Blockchain could go a long way to tackling these problems. It is estimated that blockchain could eliminate up to 80 percent of the paper documents currently used during the shipment of goods, which would instead be stored digitally on the ledger. This would mean that procedures that currently take weeks could be completed in mere minutes, and the costs related to those procedures would fall away.
We remind Members of Club Circular L262 of November 2015 about Electronic Trading Systems with FAQs , where the Club provided guidance on the International Group’s position with regard to paperless trading and the scope of potential liabilities and Club cover arising therefrom.
Enhanced security is another potential benefit of blockchain. All information stored on the blockchain is encrypted, which makes it more secure. As only the participants have access to the blockchain – and even they cannot amend the information without the notification and agreement of the other participants – the risk of fraud and documentary manipulations is reduced.
Blockchain as a platform for smart contracts
The ability of smart contracts to immediately and automatically perform a set of instructions on occurrence of a given event – and without human intervention – has significant ramifications.
Compare the position of a simple contract between a buyer and seller for the delivery of goods, where the contract stipulates that payment is to follow immediately on delivery. Under a traditional contract, it might be in the buyer’s interest to delay payment and he could simply choose to breach the contract and take the consequences. If, however, the transaction were governed by a smart contract, the seller would be paid automatically once the goods were delivered to the buyer. Smart contracts therefore reduce both the risk of noncompliance, and also the need to spend time and money (e.g. lawyers’ fees) enforcing compliance.
Whilst the same principle could also be applied to charterparty obligations, there are limits to the usefulness of smart contracts in this context. Firstly, the “if x, then y” logic of smart contracts leaves no room for complexity or flexibility. Blockchain is therefore more suitable for executing basic transactions and obligations that are binary in nature, and is less suited to situations involving ambiguity or a more complex interdependence of facts. Secondly, the self-executing nature of smart contracts can be both a blessing and a burden in that it denies the parties the freedom to resolve a matter commercially by negotiation. Moreover, the inability to interfere with the blockchain means that any special charterparty terms that the parties wish to include must be incorporated into the blockchain from the outset.
Potential issues surrounding the use of blockchain
i. Dispute resolution
The fact that blockchains are decentralised – i.e. no single entity controls it – is one of the features that makes blockchain attractive as a technology. However, the flip-side is that this lack of regulation raises tricky questions about what happens in the event that something goes wrong. How do you determine the jurisdiction and choice of law for a dispute where the transaction could theoretically fall under the jurisdiction and be subject to the laws of each node on the network? If no one controls the blockchain, who – if anyone – is liable in the event that the system fails, or if a smart contract self-executes wrongly?
ii. Security
Does the fact that information on the blockchain is publicly available to all the participants raise potential issues in relation to confidentiality and privacy in light of regulations such as the GDPR?
If more and more information is shared digitally more and more parties are connected digitally, does that increase the susceptibility to cybercrime? And would the consequences of a cybercrime event be all the more catastrophic for that reason?
At present, these issues pose more questions than answers. However, this reflects the fact that the law invariably lags behind technological change. There is no reason why, in time, both the law and commercial practice cannot develop to accommodate the new technology.
Conclusion
Blockchain is a revolutionary technology, but it remains unfamiliar. It is no surprise that both the shipping community and the wider public remain ambivalent and even somewhat sceptical of it. However, the technology has the potential to bring about significant efficiencies and other benefits to the shipping industry. As these benefits become more apparent, it is likely that the technology will become more pervasive in the shipping industry – and indeed the world in general.
In this way, blockchain is perhaps not dissimilar to the Internet. After more than 30 years, who really understands how the Internet works? Yet we all know how the Internet has changed the world. Maybe one day we will look back on these pre-blockchain days in a similar way to the days before the widespread use of the Internet.
