Blockchain: Is shipping prepared?

Transformative technologies such as blockchain are revolutionising global industry
Transformative technologies such as blockchain are revolutionising global industry

Working towards a more efficient future consumes many of those in shipping and trying to predict it is essential, particularly as vessel construction can have a two-year lead time.

As the shipping industry appears to be at another technological crossroad, efforts to predict the future are reaching obsessive levels.

Blockchain is one such technological system that has industry leaders at odds. Some believe it will revolutionise the supply chain, while others argue it will not be straightforward to adapt the supply chain to accommodate blockchain and that it has inherent security risks.

Advocates for the software predict that, once implemented, it will ‘hardwire’ trust from users by providing an open, secure, quick, and cheap solution to the mass of documents that accompany each containerload of goods.

Last year, Vinay Gupta, the founder of Hexayurt.Capital, a fund that invests in creating the Internet of Agreements and the person who project-managed the Ethereum blockchain platform release, wrote in the Harvard Business Review, “Predictors usually overestimate how fast things will happen and underestimate the long-term impacts. But the sense of scale inside the blockchain industry is that the changes coming will be ‘as large as the original invention of the internet,’ and this may not be overstated.”

Technological aftershock

The feeling is that inevitable change will come at breakneck speed, driven by new technology that will transform society. Anyone not ready will be left standing on the starting line.

It is widely accepted that robots, powerful artificial intelligence, and 3D printing will cut human workload, while maintaining productivity levels, reducing errors, and preventing fraud.

Fears that jobs will be lost to this high-tech wizardry, and that the infrastructure to support it is lacking, remain ever-present.

Even so, there is a lot of hot air surrounding the latest raft of technologies. Blockchain is expected to revolutionise the supply chain, and trying to predict the speed and direction of change will be difficult.

Lars Fischer, managing director of Softship Asia and a shipping veteran, told IHS Markit, “If you want to know if blockchain will be successful, you need to look at how technology is applied in the [shipping] industry; and it’s not applied.”

Fischer said much of the hype is driven by technology companies that are seeking to acquire funding for their projects from venture capitalists.

He acknowledged that there are a few major companies looking to use blockchain technology that have the capability to develop a workable system, such as the recent Maersk/IBM joint venture, as well as another IBM project with Port of Rotterdam. In Asia, the Port of Singapore Authority and Samsung Heavy Industries are also investigating the use of blockchain within the supply chain.

However, while Fischer acknowledged that cargo shipping is “overwhelmed by paperwork” and that “blockchain can help”, he also pointed out that “shipping companies should not be the inventors – technology should be applied if it cures a pain point”.

Blockchain can resolve significant difficulties in the paperchain for those in the supply chain. There are “massive advantages to automation”, he added.

However, Fischer cautioned, “If blockchain is to solve [the problems within the paperchain], it depends if all the parties are ready to adopt it. My experience is that adoption of automation [within the supply chain] has been very slow.”

According to Softship, there is a small applicable area in shipping for blockchain, because only the larger companies can provide the level of technological knowhow that is needed to support it.

“There was an expectation that [the cargo booking portals] INTTRA and GT Nexus would mean that all cargo would be booked online, but this did not happen and this could happen with blockchain too,” Fischer said.

Shipping has traditionally underinvested in new developments and technology, and not all carriers will have back-end systems capable of supporting blockchain. Consolidation also means many shipping companies have multiple and fragmented systems, many of which are aged and incapable of supporting a sophisticated distributed ledger system, Fischer said.

The cost of putting blockchain in place may prove too much for smaller companies, he explained. If that is the case, then the technology could act as a catalyst for greater consolidation within shipping or create a two-tier system in which some lines operate outside the virtual world.

Furthermore, the system has been successful only in trials; so far there have been no heavy loads.

“IBM trials appear to have been successful, but they are [only] trials. What if the system has a heavy load, when there are [too] many users? What happens then?” Fischer asked.

This was an issue touched on by Filip Koscielecki, claims executive for the UK P&I Club. “It is hard to talk about the security limitations of the shipping blockchain, as we are just witnessing limited proof-of-concept deployments and sandbox operations. Security will be truly tested when the industry increases the volumes of operations and this technology is upscaled globally, ie, exposed to real risks,” he said.

Both IBM and Maersk willingly address such concerns. The new joint venture will have an open platform that all other lines can use.

“The technical requirements to be able to participate are the same as for any other industry. Presently, the commencement of operations of the joint venture is pending regulatory clearance. As development work progresses, the scope of the platform will be expanded to include a wide range of digital services and solutions, supporting efficient and safe trade,” Richard Stockley, head of blockchain – UK & Ireland, IBM, told IHS Markit.

“In the coming months, Maersk and IBM [will work with] onboard ecosystem partners for testing purposes. After the joint venture begins operations, solutions are expected to become available in a limited capacity within a few months, and both parties will be inviting their customers to get involved.”

The Maersk/IBM joint venture certainly sees some inherent value to blockchain in the supply chain. Michael White, Maersk’s former North America president, who has been appointed chief executive officer of the joint venture, said, “A vast amount of resources are wasted due to inefficient and error-prone manual processes. The pilots confirmed our expectations that, across the industry, there is considerable demand for efficiency gains and opportunities coming from streamlining and standardising information flows using digital solutions. Our ambition is to apply these learnings to establish a fully open platform whereby all players in the global supply chain can participate and extract significant value.”

Concerns over technology are not new. Similar discussions took place following the introduction of diesel engines in the early 20th century, mirroring the current debate around liquefied natural gas propulsion and low-sulphur fuel, with the barriers and benefits that technology and to some extent, blockchain, dominating maritime headlines.

Just as there were fears about job losses, as diesel-powered vessels required about half the crew of the steamers of the day, there are also concerns that blockchain technology could affect employment. Commentators are quick to point out that jobs may be created, and like 100 years ago, costs will be cut, as will total transportation times with safety being improved.

Blockchain, in the form of the as-yet-unnamed IBM and Maersk joint venture, is about to storm shipping’s barricades. The current paperchain that comprises the bureaucratic side of commercial shipping has remained essentially unchanged since the days before diesel engines made their first epic voyages, whether in French inland barges in 1903, submarines a year later, or on board commercial ocean-going vessels in 1911. An overhaul of this paperchain system is well overdue.

At last there is a technology that will replace the paperchain with a more secure, significantly faster, and substantially cheaper system. Shipping is moving fast towards the year ‘1BC’, the first year of blockchain.

Improving the supply chain

According to White, blockchain will “open up an entirely new set of possibilities and a unique opportunity to engage [with] the entire global shipping ecosystem. It provides a single shared view of the state of global trade transactions and uses smart contracts to ensure authorisations are in place to improve efficiency”.

He believes that all traders will be able to benefit from an efficient supply chain that will allow “greater predictability, early notification of issues, and improved inventory management”.

There is no doubt in the collective minds at Maersk and IBM that shipping and the global supply chain will benefit from blockchain technology.

“The previous global trade digitalisation pilot with Maersk, announced in March 2017, has provided evidence of the significant benefits of digitising existing paper-based processes and the potential to speed global trade by hardwiring trust into business with smart contracts run on blockchain,” IBM’s Stockley said.

Confidence in the technology is boosted by the fact that a blockchain system established by IBM’s leasing division, IBM Global Financing, has been operational since September 2016 and this group finances IBM’s shipments to business partners.

“Results already seen include a reduction in dispute resolution from more than 40 days to less than 10, which has led to a 40% increase in capital efficiency,” Stockley said.

Other estimates of the potential savings range from 20% of the total physical transportation costs, calculated by the World Economic Forum using estimates on reducing trade barriers that will increase global trade by between 9.4% and 14.5%, to USD38 billion a year for the industry, with the average saving estimated at 15–20% per container shipment.

These numbers have been cited in a paper by Koscielecki, who told IHS Markit, “I believe that these figures were calculated [using] one of the proof-of-concept tests deployed by one of the major container shipping lines. Presumably the ‘global saving’ was extrapolated from the test, although the public sources did not reveal this.”

In addition, Maersk cited a National Bureau of Economic Research paper from 2004 that found that border-related costs exceeded transport costs in international trade.

“If you think about a supply chain in shipping, goods are subject to numerous [custom] approvals, certifications, sub-routines, and changes of custody, all of which are handled by various parties and a substantial papertrail. This has the potential to become a very inefficient process, subject to tampering and fraud. The most recent implementations of blockchain are trying to address these challenges and introduce substantial savings to the entire process,” Koscielecki explained.

In the wider shipping context, there are processes that allow for the transfer of value, but that could be independent of the supply chain, “but without their completion the supply process cannot be resolved,” he said. The gradual, modular implementation of blockchain can include all the ‘value’ transactions that run parallel to the supply chain but still depend on it.

Risk assessments on the use of blockchain are not so readily available, with the shipping industry seemingly more eager to promote its benefits than warn against the possible pitfalls. For insurers, however, the risks are a key element of the system that they must understand fully.

“At least conceptually, the risks that could be identified are the ones associated with the differences between the so-called ‘private’ and ‘public’ blockchains,” Koscielecki said. “The former is diluting the ‘democratisation’ by introducing a gate/network-keeper who controls the rules in the network and access to it. This is meant to provide additional security but at the same time, the supervisor becomes an identifiable attack target as it can control/certify trust between the users in the network.

“The public blockchain, on the other hand, echoes the advantages of higher levels of security typically seen within open-source communities, where every user develops and matures the network’s resistance but at the same time allows any participant, even a malicious one, to enter the network. Of course, both types of blockchain, as an underpinning technology, would provide the same guarantee of integrity of the ledger, even if [some] users are malicious.”

Security risks

Another weak spot for blockchain could be user credentials, because if stolen or compromised, the partners in the blockchain may remain unaware of the problem. “Hence, the end-user credentials security remains the most exposed component of the network, but that is no different from the already-known cyber-security concerns,” Koscielecki added.

Blockchain brings the probability that electronic bills of lading (EBOL) will be developed, with the obvious benefits to the shippers and the shipping lines as the EBOLs will speed up the process, provide certainty, and deliver greater security.

“The [P&I] clubs’ concern would be to ensure that any new electronic bill system can replicate the legal features and functions of a paper bill as this could be an issue that arises in terms of cover. Laws and regulations do not always keep up with the technological changes, and it is not always clear whether the existing law on bills of lading has addressed the electronic age sufficiently,” Koscielecki explained.

Insurers remain sanguine about the risks of fraud around new technologies, mainly because criminality is not limited to the virtual space but remains a threat in the physical world too. Blockchain may bring some solutions to the question of fraud, and the advantages of the electronic system will mean it is likely to appear in the supply chain sooner or later. But that question of ‘when’ is a testing one.

“We expect it will take a couple of years for the solution to [gain traction],” White said, while Koscielecki believes, “this question cannot be answered with any certainty”.

Time will tell in the end, or as Albert Einstein said, “I never think of the future, it comes soon enough.”