Dispute Resolution

According to the UK Government’s Office for Science, 80% of world-wide trade is carried by maritime transport. UK ports handle 5% of total world maritime trade. A new change is coming to this integral part of the British economy…

We are at a new era. Digital information, computer coding and new technological infrastructure are the new drivers of the future world. It is inevitable that these drivers will innovate and change the shipping industry. Many of the commercial contracts in the world may become smart contracts coded by computers. The application of blockchain technology is particularly beneficial in digitising “smart shipping”.

Blockchain and smart contracts

What are distributed ledgers?

Distributive ledger technology consists of a distributed database, a ledger, shared among participants in a network. The ledger is simply a digital file system which grows and becomes larger with every transaction. Rather than having a single database held in one place, identical copies of the ledger based on mathematical algorithms are held on multiple computers in the network, creating a circle of trust. All network participants have a full copy of the ledger for full transparency.

What is a blockchain?

Blockchain is a specific form of organised distributive ledger technology. All transactions in the network are linked in a sequence of blocks. The blocks can be closed, locked and new blocks can be added to the chain through digital coded transactions. The blocks are stored and recorded in a sequential manner with fixed, specified numbers.

Blockchain algorithms can add subsequent blocks using public and private key cryptography. It is a self-governing system where cryptography verifies information in permanent blocks of data. This is therefore a secure process of verification of transactions, which records the timing of the transaction and ensures that only the intended recipients get access to the information.

What is a smart contract?

Blockchain is capable of moving digital assets. For example, in cryptocurrency, the asset is a digital coin. However, blockchain can be used to allow you to move any asset that can be represented with a digital token – for example, registration of land, intellectual property rights or contractual obligations. You can also attach rights to it and put in place coded protections while moving the asset. The rights operate automatically through coding. This is how you create a smart contract. A smart contract is a programmed code which is made out of a network of blockchains containing data.

Advantages of using the distributive ledger technology in the shipping industry

Speed & lower costs

Handling trade on paper and manual handling of documents, even when sent by email, fax or post, slows down logistics and facilitation of trade. Blockchain technology enables the automatic operation of a maritime smart contract, with events triggering actions that would otherwise require manual intervention or processing. Digitisation of the paperwork exchange process is a cost effective mechanism, which will provide savings in transaction costs.

This means that you will not need to take any decisions in relation to the smart contract because the decisions will be taken automatically. The automation will enforce conditions coded into transactions, e.g. enabling a conditional payment in relation to the shipment. This reduces the scope for individual mistakes, removes the role of intermediaries and can improve operational efficiency of port and terminal operators.

Privacy

Blockchain is a distributive ledger technology which means that every party to a shipment has access to their information and a secure audit trail of all shipments. The peer-to-peer network has secure interactions thanks to cryptography. The users’ identities are safely protected by crypto-programming and permission-based sharing. Each party has the right to protect sensitive information, such as customer data.

Reliability

The blockchain-based tracking system is more accurate because it enables all members of the platform to see the ledger at the same time, and have access to secured data in real time. This means that the port authority, carriers and freight forwarders can improve their logistics by viewing the whole progress of the shipment.

Security & Immutability

All records are individually encrypted. All nodes, which are comparable to small servers, contain a copy of this record. Any validated record in a blockchain is irreversible and cannot be changed. The documents exchanged in real-time on the blockchain cannot be altered, which reduces the risk of fraud. For example, a Bill of Lading is exchanged between participants in the network, whose rights are coded. Each transaction is encrypted using a key which links relevant participants. This reduces the risk of an unidentified number of copies of a Bill of Lading circulating between parties. This Bill of Lading cannot be misrepresented to avoid import taxes.

Key players

These benefits of distributive ledger technology have not been unnoticed. In 2017, Maersk and IBM developed the supply chain called TradeLens, which is run on blockchain. Some of the largest carriers, port operators, for example the Port of Rotterdam, and industry actors in the global shipping supply chain have joined this digital shipping network. In March 2020, Standard Chartered joint TradeLens as the first banking and financial services institution, which demonstrates confidence in this blockchain-enabled digital container logistics platform.

IBM stated that TradeLens platform will reduce the cost and complexity of trading. IBM and Maersk want the blockchain technology to manage and track the paper trail of millions of containers in the world. It is a neutral platform, accessible to all stakeholders, which moves the technology and the shipping industry forward by cooperative data-sharing.

In my next blog, I will discuss the role of Dispute Resolution in Smart Shipping and the role of lawyers in this new era.

Sylwia Jakuczun