International trade is about to change forever, thanks to blockchain.
In international trade, the shipping documents that accompany the goods carried can weigh as much as 40kg per vessel and cost up to 10% of the value of the goods. What’s more, paper can be easily forged or mislaid. Now, for the first time, it looks as if a viable electronic alternative to paper Bills of Lading is available.
Blockchain technology was originally developed to create Bitcoin in 2009, but its applications go far beyond cryptocurrencies and have the potential to disrupt a myriad of industries.
In essence, a blockchain is a computer protocol that enables the storage and transfer of digital assets on an immutable digital ledger, which is maintained across a network of peer-to-peer computers without being routed through a central server. Each new transaction is secured by a digital signature and validated using cryptographic technology by all the computers in the network before being added to the shared ledger.
Solving the problem of double spending
Before the invention of the blockchain, digitisation of currencies and other assets that need to be “originals” was unfeasible due to the relative ease with which digital information can be copied. This is known as the “double-spend” problem, where each transaction carries a risk of the holder sending a copy of the digital coin or asset to a counterparty while retaining the original. The conventional method of mitigating this risk has been to have a trusted third party, for example a bank or government registry, acting as a centralised authority keeping track of all transactions. Blockchain has, for the first time in history, made centralised databases unnecessary and solved the problem of double spending.
One of the most promising use-cases for the new technology is its potential to digitise Bills of Lading, which would revolutionise international trade.
Around 90% of international trade takes place by sea and, in this context, one of the vital documents will often be a Bill of Lading. Bills of Lading have been used since the 16th century (at least) and have gained a somewhat hallowed role in the shipping and trade industries. This is due to their unique ability to act as a negotiable instrument that allows for the ownership title in the cargo to be transferred without physically delivering the goods themselves. That negotiability is created where a Bill is made out “to order”; the Bill may then be transferred to another person by way of an endorsement by the existing holder. This effectively means that the Bill can be regarded as a symbol of the goods themselves and also that there is potential for ownership of the goods to change multiple times during the voyage.
It is this property, negotiability, which sets the Bill of Lading apart from other shipping documents such as waybills. The Bill of Lading is issued by the ocean carrier and, in terms of its contract with the shipper (sender), the carrier may only release the cargo to the consignee upon presentation of an original Bill. Copies are generally not accepted unless the shipper has agreed otherwise. Furthermore, where payment for the goods to the seller is to be effected by the buyer’s bank in terms of a letter of credit, the bank will usually refuse to make payment to the seller until presented with an original Bill.
Given the continued importance of presentation of original Bills of Lading, the usual modus operandi is to separately courier these paper Bills from point A to B as may be required. There are many issues with this situation, to mention a few: on a global scale it is time and labour intensive and very expensive, especially considering that the cargo may be sold several times during carriage and will need to be endorsed and couriered to each new consignee. In fact, it has been estimated that the average weight of shipping documents can be up to 40kg per vessel, and the cost up to 10% of the value of the goods carried each year! A paper Bill may be forged with relative ease, and carriers are generally liable for misdelivery against a forged Bill, not to mention the often disastrous consequences which can ensue when original Bills are lost.
Why previous attempts have failed
Since the mid-1980s there have been various attempts to introduce electronic Bills of Lading which could solve these issues, but none of these initiatives found much support in the shipping industry, and paper Bills are still the order of the day. The major shortfall of the available electronic Bill systems is that they do not replicate the negotiability function of the paper Bills. All attempts to create negotiable electronic Bill systems, such as Bolero and SEADOCS, have failed and no longer exist. Their collapse lies in the fact that, unlike paper Bills, electronic Bills are afflicted by the double-spend problem, and therefore electronic negotiability required some form of a centralised registry to which parties involved in the transaction had to register.
A 2003 survey conducted by the United Nations (UN) concluded that this requirement of membership to a registry was the major obstacle to the use of electronic Bills, as none of the existing systems succeeded in reaching a critical mass in their membership, resulting in insufficient trade partners using compatible systems. Blockchain-based Bills have the potential to address this issue.
Unlike the systems based on the centralised registry model, blockchain technology has made the guarantee of digital originals possible in a decentralised system. Transactions take place peer-to-peer on an open platform where no prior subscription to membership is required. This openness ensures universal reach and compatibility with all trade partners.
Blockchain could succeed with sufficient support
However, for any digital Bill of Lading to be successful, it is imperative that it enjoys sufficient legislative support, just as a paper Bill of Lading would merely be a piece of paper without the empowering legal infrastructure it has enjoyed for centuries. We therefore eagerly await the next developments from the UN Commission on International Trade Law (UNCITRAL), which is set to promulgate the final draft of the Model Law of Electronic Transferable Records in the upcoming months.
The Model Law will regulate international trade, and will be instrumental in shaping the development of the domestic legislation of UN Member States. On 24 April UNICTRAL closed its public consultation process on the draft Model Law, and is currently collating the responses received. Finalising the Model Law to be compatible with blockchain technology will ensure that blockchain-based Bills of Lading can take up their mantle as the new industry standard they are primed to be.
By Virusha Subban and Yonatan Sher