This article is written by Vamsi Krishna, pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.com. Here he discusses “How can Blockchain and Smart Contracts help the Shipping Industry”.
Introduction
Shipping tends to be a very complicated and protractive process where goods from every nook and corner of the world pass through several hands in order to reach the final consumer. Shipping is considered as the backbone of the global economy as it makes up over 90% of the World Trade. It encompasses intercontinental trade, import and export of raw materials, edibles and manufactured goods. Without these, the global economy would come to a halt.
Shipping has been in existence since time immemorial and had played a vital role in the lives of many people. But despite recent technological advancements, the shipping industry doesn’t seem to have taken advantage of it and is very resistant to change. It is believed that reliance on conventional and archaic methods by the shipping industry does not meet the demand of the companies involved in the supply chain and is not conducive to the modern world.
In order to eliminate all the traditional processes, The shipping industry must take advantage of Blockchain technology which has the ability to revolutionize this industry and can help facilitate the companies involved in the shipping business.
Before delving deep into the ways by which Blockchain can impact the shipping industry, it is highly imperative to understand what Blockchain is?
What is Blockchain
Blockchain, as the name, suggests consists of a series of encrypted blocks connected by a chain. It works by way of a peer to peer online distribution system that contains records of information which is known to the public.
In other words, Blockchain can be referred to as a shared digital ledger which is Decentralised i.e. it can enable people to verify their transactions without having to rely on a central authority. It is to be noted that Blockchain, being independent of a single governing body comes with a lot of other advantages. To further simplify, Bonds issued by a company needs to be rated by a credit rating agency so as to enable the investors to purchase it. It is to be noted that in most circumstances, companies need to pay rating agencies in order to get their bonds. With the advent of blockchain, the existence of central authority gets eliminated, Considering the fact that Blockchain has a public record of a company’s entire transaction history, investors need not rely on credit ratings and in addition to that companies forgo the amount paid to rating agencies. Hence, it can be said that Blockchain enables people to transact without a central authority like Banks, Payment Gateways and Rating agencies.
The aforementioned digital ledger, apart from being decentralised is also Immutable i.e. any data recorded in the ledger cannot be altered or tampered with. It is a well-known fact that we are used to a business environment wherein the course of entering into an agreement, let’s say that A wants to buy a house from B and A insists B to share the records pertaining to the House. It is to be noted that A, a rational person would verify the records presented to him as there’s a good chance that the traditional form of ledgers can easily tamper. But Blockchain consists of an encrypted ledger which keeps all the information secure and the users cannot alter any information recorded in the ledger and this keeps a check on embezzlement and other fraudulent activities.
In addition to that, the digital ledger is Distributed i.e. any information stored in the blockchain is synchronised and shared by users all over the world. In layman’s terms, if the information recorded in the ledger is subject to any alterations or changes, the same will be reflected upon all the users instantaneously. It is to be further noted that information stored in the blockchain is not prone to any cyber-attacks and does not need a central governing body to have a check on it.
What are Smart Contracts and How is it related to Blockchain
Smart Contracts or Crypto Contracts are self-executing agreements between the parties which are made by way of computer code. Smart Contracts, like its traditional counterparts, not only enshrines terms and conditions related to an agreement but it can also automatically execute the same. In addition to that, it regulates the transfer of digital currencies and assets between the buyer and the seller.
Smart Contracts runs via Blockchain, i.e. it is stored in an online distributed database which functions without a third party and is tamper-proof. As it is processed by Blockchain, Smart Contracts takes full advantage of it and can execute contracts from Insurance Premium to Financial Derivatives to Crowdfunding Agreements. The merits of Smart Contracts can be illustrated with the following scenario
Let’s assume that a Product Team goes to a fundraising platform like Kickstarter. They can create a project, set a funding goal and can collect funds from people who are willing to invest in the project created by the product team. It is to be noted that Kickstarter acts more like an intermediary between the product teams and investors. If the project is successfully funded, Kickstarter is expected to give the collected money for the project to the product team and upon successful funding, Kickstarter also takes a cut on the collected amount (usually 5%). If the project is not funded, all the collected money should be returned back to the Investors.
While in the case of Smart Contracts, the function performed by Kickstarter in its capacity as an intermediary is eliminated. In addition to that, usage of smart contracts would make the transactions between the parties more secure and the product team doesn’t have to spend on Intermediary costs and due to its self-executing nature, the chances of clerical errors and disputes arising out of such contracts are quite low.
Current State of the Shipping Industry
It is a well-known fact that the Shipping Industry has been in existence for quite a long time and has played an integral role in connecting people from all over the world. But throughout its course of existence, the shipping industry has failed to keep pace with the world and has overwhelmingly relied on outdated and traditional methods.
It is to be noted that the Shipping Industry is burdened with the excessive use of Paperwork and it is believed to be one of the primary reasons for the entire industry being held back.
In addition to that, mailing paperwork to different parties who are involved in getting good in the hands of consumers. The process of sending all the required documentation to the relevant parties is time-consuming and expensive. In certain cases, the required documents need to be sent manually to the parties and there’s a good chance that the same will be subject to delay’s, tampering and clerical errors. By sticking to the conventional mode of maintaining huge records of documents and paperwork, the chances of the same being stolen or misplaced are quite high.
So it is not difficult to understand that the current state of the shipping industry is plagued by outdated and conventional processes and has failed to leverage its full potential by not taking advantage of recent technological developments.
How can Blockchain and Smart Contracts be Beneficial to the Shipping Industry
Improved Security and Transparency
It is to be noted that various paperwork and documents pass through several hands but during the course of transportation, the chances of documents running into wrong hands are very high and it might be subject to manipulations or tampering which would compromise the security of the documents. But with the advent of Blockchain, documentations need not be transported manually since information pertaining to the documents can be sent to the relevant parties by way of encrypted code which ensures the security of the documents. With the help of Blockchain, the shipment or a package can be tracked throughout its course of transportation and cases of theft or fraud are easily eliminated.
Reductions in Trade Finance Costs
Incurring of Trade Finance Expenditure by Shipping Companies can be largely attributed to clerical errors, excess documentation, delays and other operational discrepancies. Shipping Companies, by taking advantage of Blockchain Technology can reduce the costs associated with the aforementioned factors. Owing to the advent of Blockchain, Physical documentation has been proven to be futile as Blockchain can drastically minimise the trade finance costs of various shipping companies all over the globe which has a lot to do with the immutable, trackable and decentralised nature of the Blockchain Technology.
Faster Processing and Real-Time Tracking of Cargo
With regards to the conventional mode of mailing documents from one place to another, there is a huge loss of time which sometimes leads to the delay of Packages and Shipments. But if Smart Contracts are used, any function for which the documents are made can be instantaneously executed. This dilutes the use of an intermediary, prevents adequate consumption of time and with the help of Blockchain, Shipments, which are to be transported can be tracked easily. In addition to that, Updates and Statuses of the shipments can be brought to the notice of the shipping companies to prevent any operational discrepancies. It also offers further insight into the logistics of the supply chain where in the event of any operational failure, it would enable companies to identify and solve such issues.
Real-Time Tracking enables Shipping Companies to have active supervision over the Shipments during the course of delivery. It prevents shipments from being stolen or damaged; even if a shipment is subject to any delay or damage, steps can be promptly taken by the shipping companies to get the same replaced. If a customer decides to cancel his order, shipping companies can easily cease the shipment of the package by notifying to all the relevant parties in the supply chain with ease.
Easier Entry to Markets
By leveraging Smart Contracts and Blockchain, the shipping market would witness a drastic increase in new entrants which can be attributed to the absence of hindrances which would be plaguing the shipping industry if it weren’t for the advent of Blockchain. Infrastructure powered by Blockchain, if successfully imported into the current supply chain would reap a lot of benefits to the industry like the elimination of middlemen, less processing costs, lesser chances of disputes and a user-friendly environment. This would enable and spur a lot of people and firms to enter the shipping industry which would be a great addition to an already booming market.
It should also be noted that the shipping industry was once heavily regulated owing to its strict requirements which include the usage of manual documentation and other conventional methods. In other words, firms have to work in a way so as to comply with a lot of convoluted laws which inevitably would lead to a lot of disputes. By way of importing Blockchain Technology into the supply chain, the issue of non-compliance can easily be overcome.
Recent Developments in the Shipping Industry
Marine Insurance Blockchain
Ernst and Young and Guardtime, in collaboration with various service organizations around the world, launched a Marine Insurance Blockchain Platform which began its operation in late 2018. This platform was built on Microsoft Azure Cloud Services which is deemed to be very economical and user-friendly for the Shipping Companies. In addition to that, this platform will help several parties including insurers, third parties, brokers and clients to do away with excess documentation, duplication, breach of security and legal disputes.
Blockchain Platform for Global Shipping
A.P Moller-Maersk and IBM, in early 2018, announced the creation of Tradelens- a global trade platform built on IBM’s blockchain technology. This platform envisions the following: to reduce the cost of shipping, improving transparency, ditching manual documentation and other conventional practices. As of now, Tradelens has on-boarded over 100 organizations, including inland carriers, ocean carriers, ports, harbours, terminals and freight forwarders spanning across three continents- Asia, Africa and Europe.
Blockchain Platform for Document Workflow
The Antwerp Port Authority, in collaboration with Belgium, based start-up T- Mining have developed a Blockchain Program to facilitate the unrestricted flow of documents to all the relevant parties across the supply chain. This program seeks to digitise shipping documents like certificate of origin, Invoice, Bill of Lading, Packing List and Physiosanitary certificates which in turn would help the shipping companies to reap benefits in the form of low processing costs, improved security and faster transportation.
Blockchain Consortium for Bunkering
The Blockchain Labs for Open Collaboration(BLOC) by way of its subsidiary Maritime Blockchain Labs would establish a consortium to improve transparency and traceability across the supply chain with regards to marine fuel. This consortium envisions to bring various bunkering organization on board. This consortium, apart from pushing for transparency, improved governance and compliance also seeks to use the Blockchain Technology to vouch for a tamper-resistant, efficient and digested way of measuring the quality and quantity of fuel to facilitate the consumers.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.
