Blockchain and bills of lading

In January this year it was announced that Maersk had joined with IBM in a project to introduce blockchain security technology into the logistics supply chain. The project builds on a collaboration began in 2016 and several companies have been involved including the likes of DuPont, Dow Chemical, Tetra Pak, Port Houston, Rotterdam Port Community System Portbase, the Customs Administration of the Netherlands, US Customs and Border Protection and more.

In its announcement of the latest development, Maersk said the joint venture will now enable IBM and Maersk to commercialise and scale their solutions to a broader group of global corporations, many of whom have already expressed interest in the capabilities and are exploring ways to use the new platform, including: General Motors and Procter and Gamble to streamline the complex supply chains they operate; and freight forwarder and logistic company, Agility Logistics, to provide improved customer services including customs clearance brokerage.

Additional customs and government authorities, including Singapore Customs and Peruvian Customs, will explore collaborating with the platform to facilitate trade flows and enhance supply chain security. The global terminal operators APM Terminals and PSA International will use the platform to enrich port collaboration and improve terminal planning. With support from Guangdong Inspection and Quarantine Bureau by connecting to its Global Quality Traceability System for import and export goods, the platform can also link users to important trade corridors in and out of China.

The list of organisations is impressive but in reality, it represents just a very small fraction of the organisations that Maersk or its customers come into contact with. For every typical shipment of goods across international borders there will be at least two banks involved in letter of credit processes, insurers, the shippers and receivers and any middlemen, freight forwarders, haulage operators, port agents, customs clearance agents and more.

In an article on the IBM blog linked to the Maersk/IBM announcement, Bridget van Kralingen, Senior VP, Industry Platforms, IBM made the point that a single shipment of goods from East Africa to Europe can require over 200 unique interactions with 30 individuals and organisations, generating a four-inch stack of paper records. “In some instances,” she wrote “it can cost as much in paper and administrative flow as it does to pay for the shipping itself”.

That may well be true, but the volume of documentation needed for international shipments and the organisations involved is not under the control of any single party to the contract for sale of goods or carriage. For blockchain transactions to become acceptable there must be agreement between all of the parties. If any or all of them insist on things being done tomorrow as they are today, the whole project could fall down.
It may be easy to get major shippers onboard and several major banks are already partners in projects but while those signed up may be high volume users, it will be the far more numerous small organisations that will need convincing. In addition, Bills of lading play a unique role in shipping and virtually all states have reference to them in statutes. While some states may recognise electronic bills of lading as being equivalent to paper documents this may not always be the case.

Re-inventing the wheel

International trade is very much dominated by paper-based systems even though many of the processes such as customs clearance have been digitised in some states since the last decades of the 20th century – Electronic Data Exchange (EDI) has been used since the 1970s. Efforts to make electronic transactions possible beyond that have not been the success that many predicted, and it has taken a long time for them to have reached where they are today.

The BOLERO electronic bill of lading dates back to the late 1990s and was approved by the International Group of P&I Clubs in 2010 along with another electronic bills of lading platform essDOCS. Five years later the e-title system was similarly approved. Yet even with three rival systems operating, the volume of marine trade covered by the systems is still only a fraction. BOLERO is currently working on developing and rolling out a blockchain version of its system.

The process of amending bills of lading in a paper-based system can be slow and the method allowed by the electronic bill of lading is indeed much faster although whether the shipping industry as a whole is badly affected by this is open to question. Stacks of imported containers awaiting collection at discharge ports are as likely to be due to the receiver taking advantage of free storage at the port as the non-arrival and presentation of bills of lading.

For other parties involved in international trade, the issue has less to do with presentation of bills of lading than receiving rapid payments from the banks involved as the bill progresses along the chain. The paper system quite possibly suits some banks as it allows them to hold on to funds for longer. But whether a paper or an electronic system is used, the checking of any amendments or changes will require human oversight and approval as well as transfer of funds at each step of the chain. For a shipowner accepting a contract of carriage on a freight collect basis, there will always be delays while the receiver waits for funds from his own customers.

Since electronic bills of lading and other digital process have been around for several decades but have not yet begun to dominate shipping documentation it would seem to some that expecting blockchain to take off is just another attempt at re-inventing the wheel.

Stumbling blocks

The biggest stumbling block for electronic bills of lading is that there must be agreement between all parties to accept them. Under the current systems, users agree to treat electronic documentation within the systems as the functional and legal equivalent of paper documents and undertake not to challenge the validity of any transaction or communication made on the ground that the same was not in paper form and/or that it is not signed or sealed.

However, because goods are frequently traded while at sea, it cannot be known at the outset if some buyer along the chain will refuse to accept these conditions. Under such circumstances, the transaction will need to revert to a paper-based format mid-way through the shipment’s journey from origin to destination.

In common with all digital systems, electronic bills of lading be they the existing systems of something based on blockchain are vulnerable to different threats than paper-based systems. There is no doubt that fraud can be a problem for paper-based documents which can in some cases be easily forged or criminally altered but will blockchain or any other system resolve this?

As an example, if a container that is said to contain washing machines and white goods is opened at the destination and found to be full of bricks, what difference is there between a paper and an electronic bill? Or if a consignment of steel is marked on the mate’s receipt as being rusty but clean bills are issued against a worthless Letter of Indemnity handed over outside the documentary credits system who will be liable?

Blockchain is claimed by proponents to be free of risk from cyberattack but this has yet to be proven. Cyber criminals have so far managed to defeat most if not all of the safeguards put in place over time so while blockchain might currently be secure, it would be a brave man who would say that it would always be so. One thing that it can manage is the passing of title along the supply chain in a way that all parties can see.

Another issue with any computer-based system is what contingencies can be put in place in case of network failures or power cuts? With a paper-based system these are not a problem unless the location of a particular container in a port cannot be ascertained.