Blockchain Technology: The Future of Shipping
October 28, 2022 Industry-Related News
Blockchain technology has entered the scene across scores of industries and could potentially be a powerful game-changer for shipping and logistics.
Most companies within the industry do not understand what blockchain is, how it works or how it is already working in several corners of the industry today. The international blockchain market may be worth over $39.7 billion by 2025, so it is important for importers, exporters and parties in the supply chain to understand its potential.
So, if you’re looking to learn more about blockchain technology, you’re in the right place. Below, we’ll explain what blockchain is and how it can be integrated with the global shipping industry. This includes through the digitisation of documents, smart contracts and consignment tracking.
What is blockchain?
Blockchain is a new form of digital ledger technology that forms a completely decentralised way of storing data. It is a ‘distributive’ (as opposed to ‘central’) ledger – meaning it is a distributive database shared amongst various participants.
All transactions in a blockchain network are linked together through ‘blocks’. As data is added to each block, a new block is then formed to create a chain. You can close and lock certain blocks and add new ones, which are then stored sequentially with certain numbers.
There is no central database when it comes to the blockchain. Blocks are distributed across a network of different computers. Each block contains data and is timestamped, and also has a so-called ‘cryptographic key’; to the previous block.
Blockchain is a secure way of managing data and, in theory, minimises the risk of fraud and data breaches. As the system is distributive rather than central, any attempt to edit data will occur across various computers within the network simultaneously. It would therefore be very difficult to hack into the network and change transaction data.
The entire system is built on trust. Banks do not need to oversee transactions under blockchain technology because each block contains the timestamps and ‘cryptographic keys’ within a network. This creates a safe and effective way to underpin those transactions.
How could blockchain be integrated within shipping?
Blockchain can offer a unique solution to many of the problems faced in the shipping and logistics industries today.
Due to the COVID-19 pandemic, the sector is facing a wave of unprecedented issues. Shipping capacity has been massively stretched due to surges in demand for food, medicine, medical equipment and other goods. Shipping congestion at the world’s ports has increased, causing delays, unexpected costs and an international container shortage.
It’s therefore increasingly important to have a digital platform streamlining logistics and creating an ecosystem, whereby parties in the supply chain can seamlessly interact.
Fifty Cargo and Container ships anchored close to port due to worldwide Maritime congestion crisis, Aerial view.
Digitisation of documents
There is a massive amount of documentation in the shipping process. This includes charterparties and commercial invoices to bills of lading and letters of credit. These documents pass through the hands of several parties, including shippers, exporters, banks, ocean carriers, truck companies and freight forwarders. The processes are long, expensive and can get delayed.
Many of these shipping documents, especially bills of lading, are primarily paper based. This creates an inherent risk of documents being easily misplaced, damaged or even destroyed. Only 0.1% of bills of lading are issued electronically. The consequences of a misplaced BoL can be disastrous, especially since they act as the document of title.
But the groundwork has been established in some countries for blockchain to incorporate the bills of lading framework. In 2021, Singapore became one of the few countries to create such a framework through changes in legislation. They created a system to recognise electronic bills of lading, with the aim of smoothening trade flows with international partners. The changes would “ensure that our legal and regulatory infrastructure keeps pace with international trade law and the latest technological developments,” said Singapore’s Communications Minister.
Ocean carriers are also beginning to utilise the technology. In April 2021, leading shipping company MSC announced its decision to adopt WAVE BL. This is a “document courier platform” that electronically transfers paper using blockchain technology. MSC stated that the platform is the only solution “mirroring the traditional paper-based process”. Bills can be digitally encrypted and signed. They’re then transferred between parties on an encrypted Peer-to-Peer (P2P) network.
Another example is Trade Lens, a blockchain-operated system developed in 2018. This system’s process is designed to link brokers, customs authorities, terminals, freight forwarders and transportation companies to completely replace traditional manual document exchange. Maersk joined in 2018, stating that Trade Lens intends to replace “unreliable information exchanges” with digital connections and information sharing through the supply chain.
The Digital Container Shipping Association estimated that blockchain-powered electronic bills of lading could generate savings of over $4 billion per year.
Blockchain has also given rise to ‘smart’ contracts, a contract that exists essentially as a computer program. These programs are self-executed in blockchain technology and automatically create terms and conditions in existing agreements. Documents such as bills of lading and charterparty documents are standard parts of these blockchain-driven programs.
When the smart contracts are written into the blockchain, the network is able to execute specific actions when certain preconditions are verified. This could include releasing funds, issuing a ticket, registering a vehicle and sending notifications.
Transactions in the maritime industry are slow and generally expensive, but blockchain could potentially improve their efficiency through the use of smart contracts. Payments, for instance, could be held in escrow until a delivery is validated or cargo is released. Payments could involve cryptocurrencies in place of the current systems.
Safety is one of the most important issues in the supply chain, and it’s critical that importers know precisely where their cargo is at every stage. There are a number of inherent risks in international shipping ranging from theft and improper handling to container collapses and damage arising from poorly designed packaging.
The digital tracking of cargo – especially through blockchain technology – has the potential to lower costs of transactions, reduce theft opportunities and also track the conditions of temperature-sensitive goods.
As we outlined above, blockchain offers a method of recording transactions and allowing for the seamless interaction between parties in the supply chain. But it also, has the potential to provide complete visibility of products from the start to the end of their life. Data can be exchanged on a decentralised ledger for businesses to see where a consignment is at any point in time and all documentation relating to the consignment.
Blockchain can do this by interacting with a separate technology, known as the Internet of Things (IoT). IoT permits companies to monitor the location of their cargo, such as through GPS and temperature sensors. But through blockchain, which can create a smart contract and smart bills of lading (as outlined above), IoT can work to share these documents with all parties simultaneously. Every party can verify if the terms and conditions in the bill of lading are adhered to. The data (collected by IoT) cannot be manipulated once entered into the blockchain, which is decentralised and distributed across various computer networks.
Zeryth is an example of a company driving this type of platform. By combining blockchain and IoT, suppliers – the platform says – can use smart contracts to store data from shipments and adjust the value of assets in those shipments based on the cargo’s handling conditions. The company says the system can monitor cargo’s environmental conditions and adjust the process in real-time.
Combining blockchain with IoT is forecast to grow to USD $302 million by the year 2024.
Parties in the supply chain have been taking advantage of blockchain to track cargo. In 2018, a U.S. based company completed its first ever freight shipment driven by blockchain technology. The platform allowed for consignees and their carriers to connect, negotiate price and arrange for pickups and deliveries.
What is needed to create this new future?
Shipping internationally is problematic in that every business invests in its own systems and processes. Blockchain is only being used in a handful of companies that decide to invest in the technology.
The technology is slowly making its way into Australia. The Commonwealth Bank of Australia has facilitated blockchain-enabled shipments. PWC and the Port of Brisbane have also worked to develop block chain technology by introducing the Trade Community System.
But Australia does not have any specific regulations to deal with distributed ledger technology such as blockchain. Although, smart, self-executing contracts are permitted under federal and state laws.
For blockchain to truly be fully embedded into the supply chain, we do require an industry-wide approach to the new technology. The very essence of blockchain is that it is based on trust and transparency with other people in the shipping process. It is therefore good news that the Australian Border Force (ABF) is also now partnering with Singapore to complete a blockchain trial of international trade documents. The Director-General of Singapore Customs stated that:
“Singapore Customs appreciates the close collaboration with Australia in this aspect, and looks forward to further collaboration in promoting paperless trade”.
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