TM Law’s Alexis Cahalan looks at the opportunities, implications and potential hazards of Blockchain for transactions in the marine and transport sectors.

The transport sector is known for the complexity of its contractual transactions. Sales contracts, charterparties, bills of lading, letters of credit, commercial invoices, import and export documentation are integral components of the international supply chain. This regime has continued to exist while the internet and eCommerce have become critically intertwined in global trade. It is not difficult, however, to envisage how the transfer of goods and associated documentation could be transformed by seamless access to a decentralised digital platform, allowing contractual obligations to be recorded and visible and for payments to be securely exchanged. The shipping and logistics industry is constantly on the alert for ways to improve efficiencies along the global supply chain. The take up of Blockchain as a trusted open database has the potential to deliver efficiencies across the transport sector.

Blockchain is built upon the premise of recording and verifying transactions between two or more parties in a permanent way. in other words, it is  a platform for providing consensus in a transaction as well as providing a digital history throughout the course of a transaction. It was inspired by a method of special mathematics known as “cryptography” developed by Satoshi Nakamoto, which led to the introduction of the Bitcoin payment system in October 2008, the first digital currency payment system into financial markets.

Demystifying blockchain

A feature of blockchain technology is that it is a decentralised system for the management of transactions. To explain this in more practical terms, take the analogy of paying an invoice via a bank’s internet platform. The role of the bank sits at the heart of this process. The bank, as enabler of the transaction, is the key to executing complicated and sometimes time-sensitive and multiple international transactions. Likewise, its role as the middle-man can make it a visible target for those who may wish to breach the security of a transaction (UKP&I Club, Safety4sea.com).

If blockchain distributed ledger technology is implemented, the bank’s role changes from being the focus of the transaction to one of many participants in the life of a transaction. Triggers for events tailored to a transaction enable a transaction to be progressed down the line rather than remaining within the purview of the main facilitator, such as a financier who may in fact be a bottleneck for facilitating transactions. How is this so?

Blockchain technology creates a chronological digital ledger of transactions enabling all participants in the transaction to have visibility over the digital ledger itself. In a sense, it creates a chain of users who are required to validate transactions to enable a subsequent participant to do the same according to the rules governing that particular blockchain. Contrast this with the role of the bank in the analogy just described, which controls the process from its own domain. The language required to participate in the blockchain is encrypted and time and date stamped, thereby giving security and meaning to the description, digital ledger.

The emergence of any type of disruptive solution present risks and well as opportunities. The permanency of the data must inevitably result in cost efficiencies in terms of speeding up the flow of information between parties in any one transaction. The flip-side of this is, that there is the potential for lack of confidentiality. The data is publicly available to those with access rights to the blockchain and the permanency of the data means that it cannot be erased or amended without the consensus of other users. One of the key features of blockchain is that data is stored in an encrypted fashion. While the transactions on the blockchain itself are readable to enable the transactions to be verified, the participants are not so readily identified because a crucial component of the system is the use of private cryptographic keys to identify users and control access (Data61, CSIRO, 2017). This creates a level of privacy and confidentiality, but also can create issues where the identity of the underlying participants is masked. In the trade economy, much can depend on the development of a trust between the parties to a transaction. There is an expectation that secure digital verification will generate a level of trust in the blockchain environment. Therefore, the increased security brought about as a result of the repository for information and its encryption, has the potential to reduce fraudulent behaviour and manipulation of documentation.

Some legal and regulatory issues which also need to be considered are:

  •     the level of identity verification required and unknown susceptibility to cyber risk;
  •     oversight over the intellectual property in software solutions;
  •     the ability to cope with high volume demands;
  •     the lack of international regulation and the lack thereof especially across jurisdictions;
  •     what mechanisms exist for the resolution of disputes;
  •     whether data input would be regulated to minimise inaccuracies or whether it has the potential to perpetuate errors; and
  •     the potential disconnect for participants in the global economy who are unable to access digital platforms.

Blockchain in the global supply chain

Like any innovative technology, the development of blockchain requires considerable investment and a combination of interest at a government and private stakeholder level The Australian government has commissioned the CSIRO to investigate the plausible implications of Distributed Ledger Technology.  Sweden, Brazil and Georgia, for example, are investigating the use of blockchain for centralising land registry information.  Other uses have been touted in the finance, insurance, health care and agricultural sectors. Melbourne University is trialling blockchain to store student records and make them available to third parties for verification purposes. (Financial Review, 27.04.17). Chinese state-owned enterprises such as the Bank of China and privately-owned companies including Ali Baba, the large online retailer, are investing in the development of blockchain technology.

 

This article was first published in Daily Cargo News, 9 November 2017

Author: Alexis Cahalan, Principal Lawyer

+612 (0)2 8262 5851

alexis.cahalan@tmlawltd.com