Malta: Blockchain: The Potential To Change The Entire Economic World

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The shipping industry has been given a fresh opportunity to strengthen the security of their data that could spell the end of paper documentation.  Blockchain technology promises to revolutionize container logistics by connecting the supply chain in a way the industry has never seen before. Should the technology enter operation it could also bring annual cost savings, eliminate time-consuming processes, as well as create trust and partnership to all parties involved. Blockchain establishes a shared, immutable record of data which is encrypted and inherently resistant to modification, requiring confirmation from all participants in the network before any changes can be made.

What is blockchain?

A blockchain is a database that is used to store digital assets or transactions which is then replicated and shared across a network. There is now wider interest from the maritime industry in the potential uses of this technology to streamline maritime transactional processes.

Its ability is to create "mutual distributed ledgers," which are self-governing, tamper-free, online databases that no one owns but that everyone has access to and can trust. It promises the potential of mass disintermediation of trade and transaction processing.

Container logistics is rooted in a byzantine world of legacy IT systems, massive amounts of data-entry-type paperwork and milestone management processes. Each process requires a different set of documents, typically done by humans interacting with multiple parties, whether that's with legacy computer systems, email, phone calls or sometimes even faxes.

Each of these interactions represents a potential point of failure, vulnerable to illicit manipulation or simply human error.

The money spent on processing documents that are not digitized is astronomical.

The introduction of blockchain in the marine shipping environment eliminates much of the problem in today's cargo logistics process. Each blockchain consists of records, called "blocks," which reference and identify the previous block using a cryptographic function. This forms an unbroken, verifiable chain of custody. Old transactions are preserved forever and new transactions are irreversibly added to the ledger. The beauty of this process is that it's distributed, meaning it can live on multiple computers at the same time, accessible to anyone with an interest in that particular transaction. So it literally could enable smaller companies to be more agile within the global trade environment.

Blockchain Benefits

A blockchain has three main characteristics that lend itself to improving transactions. It is distributed, immutable and permissioned. As the information within a blockchain is duplicated throughout a network it is not stored in a centralized location, which allows anyone to access an up-to-date version of the information (distributed). The information is protected as old blocks cannot be tampered or altered, and new blocks of information must be verified by consensus of other members in the network before it is appended to the previous block (immutable). Which, in the maritime example as it uses a private blockchain, can only be done by those within a set network that have the correct read/write approval (permissions). This creates a tamper-proof and time-stamped digital paper record of the origin and journey of all the transactional documents.

For the maritime industry, the cost and efficiency benefits of blockchain technology are noticeable in the context of cargo management, as the safety of cargo transportation requires considerable logistical and administrative investments. In the case of paperwork, these include Bills of Lading, Letters of Indemnity and Charters. To complicate matters, cargo, like oil, can be sold multiple times in rapid concession during short voyages. The final paperwork must be signed and approved by a multitude of entities within the transaction before the cargo can be discharged. This, in turn, would mean it must be couriered between these entities, which is both time-consuming and expensive. With the adoption of blockchain technology, it could create a more efficient and secure platform for transactional demands.

Blockchains would also help replace the typical transactional paper documents with digital forms. By allowing IoT (Internet of Things) port infrastructures to automatically update cargo information it would also allow for the tracking of containers from boat to stack, or verifying the weight of goods during discharge.

Blockchain in the Real World

The main attraction of blockchain as an efficient platform is to reduce the instances of an criminal or terrorist activity.  Two examples of document fraud for criminal gain that blockchain could inhibit are Forged Bills of Lading and the "Trojan" Container.

In the first instance, an attacker creates a fake set of Bills of Lading (acknowledgement of receipt of cargo) to allow the discharge of cargo in advance of the intended receiver. To create these 'documents', it requires specific "insider" knowledge of the cargo. Blockchain technology can limit viewing rights to specific documents within the transaction to the multiple entities that require it. It also would create a log every time a document is viewed and by whom. This digital verification of paperwork would mitigate against the acceptance of forged Bill of Lading by local shipping agents.

In the second scenario, the spectre of the "Trojan" container is becoming more common as vessels are able to carry a far greater number per voyage than ever before.  With the turnaround times in ports kept to a minimum in order to reduce downtime of vessels, it is impossible to rigorously check the manifests and contents of all containers. Therefore, containers carrying cargo different from that of the official documentation is a genuine possibility.  Incorporating a blockchain system into the customs processes would reduce the required time for the verification of documents to occur.

In both of these examples, there is potential for terrorist groups to utilise these attacks. By being able to hide cargo in containers and circumvent the port security, it can allow the movement and trade of weaponry or explosive materials used to fund terrorist activity.

Risks and Challenges of Blockchain

Blockchain technology facilitates customs clearance processes through integration of electronic processes.

There are potentialities for an attacker or hacker to manipulate the transactional system. This highlights the human oversight that should remain in order to verify the accuracy of inputs.

There is also an interest in the possibility of implementing smart contracts, which would allow the automation of parts of the transactional cycle, including the ability to issue a refund if cargo verification fails. Currently, within transactional documents, there are a wide range of clauses, including force majeure (unforeseen circumstances affecting charter) or demurrage (failure to meet contractual agreements). This makes it difficult to build these into an automated system as insurers rely on their claim adjusters to make a fair assessment of the facts pertaining to the loss. An automated database would not be able to account for the ramifications of breaches due to the type of transaction, the vessel classification and the route for example.

Also, there needs to be a system of governance and consciousness that we apply when determining whether the technology should be deployed.

Relationships that are valued in the market today will look completely different in the future. Today it's human-to-human selling or interaction, whereas tomorrow most of this information or the ability to create those relationships will be managed more by technology and by processes rather than human beings selling to each other. Blockchain would dehumanize the process of buying, selling and perhaps operating.

At the same time, there's a duty of care to ensure this technology is implemented in the right settings. For example, we don't need to go and create social-economic issues in developing countries where jobs might be replaced by automation. But at the same time, in European and Western countries where we have a higher head-count cost, the technology can enable us to reduce those costs.

 The Future of Maritime Blockchain

If successful it could lead to the reduction of paperwork required per transaction, in turn, reducing overall costs and improving efficiency. A trading platform based on blockchain technology could create an auditable and tamperproof paper trail which in turn will improve overall confidence in the transactional security and reduce the scope for criminal and terroristic activity.

Blockchain will also allow humans to collaborate with each other and create the trust that has never been created before. It has a very wide-reaching potential that, if applied in its most holistic sense, would be extremely beneficial.

Wide-scale adoption of the technology could be hampered, however, if large industries and the people involved in supply chain management don't move beyond the current "proof-of-concept" trials out of apprehension over sharing data. Or worse, from fear about how it will change their business models. And that's the biggest risk of all: that the technology won't be used.

The beauty of the technology is that no one needs permission to implement the use of blockchain; there are no regulations—the field is wide open—we can simply go ahead and do it. But there's an inherent lack of understanding of the technology that is inhibiting a more widespread use.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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