Switching up the supply chain

It was announced in November 2016 that 16 public and private sector companies in the Netherlands would be taking part in a new blockchain consortium focused on logistics under the direction of TKI Dinalog, the Dutch Institute for Advanced Logistics.

The Netherlands-based effort includes support from several local and regional institutions, including the Port of Rotterdam, ABN Amro, Delft University and the Netherlands Organisation for Applied Scientific Research, among more.  

Over the next two years, consortium members will test applications for sharing logistical and contractual information between parties. The goal is to create an open-source infrastructure to serve as the basis for testing among the other companies and institutions involved.

In particular, the project will focus on developing the contours of a new information infrastructure based on blockchain technology, uniting operational information, financial flows and contracts. 

The project, worth approximately €2.2m, marks the first time anywhere in the world that a concrete blockchain project of this standard has been launched with various partners in the logistics chain.

In other industries, however, blockchain technology has been on the rise all around the world in recent years, and has even been heralded as one of the most disruptive technologies to hit the business landscape.

It has had a particularly big impact in the financial services industry, where it has been touted as having the potential to reshape the face of the landscape on the back of its technological edge vis a vis existing solutions. But the question remains: how will it fare in the logistics industry?

Power of blockchains

Blockchain technology was initially developed to handle the shared accounting ledger of ‘Bitcoin’ but is now a standalone technology that can be applied within any network of users. The technology requires three key components: a transaction, a transaction record of the transaction and when each transaction happened in chronological order, and an application to verify and store the transactions.

The result is a chain of information, stored as a ‘block’, with each block ‘attached’ to the block before it, identifying any data conflicts. ‘Smart contracts’ are attached to transaction records as calls to action.

Records are logged across users’ computers that operate in tandem and, once entered, information cannot be erased. Therefore, data storage is decentralised and visible for all parties involved.

At the same time, network users are able to access a blockchain via a web interface and use a digital ‘wallet’ to communicate with other parties.

There’s no doubting the power of blockchain technology. Its benefits include added transparency, traceability and security, which, down the line, has the potential to make the supply chain much more reliable and efficient.

For the financial routes in logistics, blockchain technology could be just the beginning – a stepping stone towards a logistics sector with improved collaboration throughout the entire chain.  

Daniel Perera, of counsel at global law firm Norton Rose Fulbright, says that electronic ‘smart contracts’, involving commodity sale and purchase agreement terms and payment mechanisms, could be increasingly broadly adopted within the commodities industry, which drives shipping.

Speaking to Baltic Briefing, Mr Perera says that smart contracts typically operate over blockchain technology. In combination with such technology, smart contracts may make possible live monitoring of cargoes and transmission of data and documentation in electronic format, rather than the traditional reliance upon pieces of paper being couriered around the world and manually processed at various stops along the way.

When adopted in conjunction with other electronic solutions such as Electronic Bills of Lading (eBoLs) and Electronic Letters of Credit or the Bank Payment Obligation payment mechanism, Mr Perera predicts that blockchains and smart contracts could facilitate “the evolution of a seamless end-to-end electronic solution for producers, traders and end users”. This could result in a multitude of efficiencies, while reducing the risks of physical document fraud, he says.

Realising its potential

In order for blockchains to deliver on such potential, Mr Perera says there will need to be support from all aspects of the industry including shipowners, for whom, he says, reducing the risk of claims under Letters of Indemnities would be one reason to adopt this technology.

With electronic end-to-end contracting, Mr Perera adds that eBoLs would arrive very quickly after they are submitted electronically, with bank processing times of Letters of Credit reduced and courier time eliminated.

“As such advantages are likely to appeal to producers and traders, they could well demand electronic capabilities of their vessel owners, and perhaps even to favour those who are able to commit to providing an electronic solution,” he says.

In terms of what the introduction of blockchain technology will mean for brokers and charterers, Mr Perera says: “It is possible that brokers will be increasingly asked to source vessels that are capable of issuing eBoLs and, eventually, of monitoring cargoes electronically.

“We can probably expect charterers, depending on their broader role within the industry, to drive these changes as they are likely to be the producers, traders or end users who will ultimately benefit from the efficiencies and productivity gains which would ensue from the technology.”

Risks to consider

Despite industry enthusiasm, Mr Perera says that it is important to bear in mind that, along with the benefits, blockchain technology may bring with it some risks that will need to be mitigated or otherwise addressed operationally.

For example, whether a smart contract is a legally binding contract will need to be addressed in the model of smart contract deployed, as some models simply automate processes in the absence of contractual terms and conditions. Subsequently, “templates for standard transactions might need to be developed for industry-wide acceptance”, he suggests. 

Also, Mr Perera says that liability will need to be allocated where, for example, a smart contract performs in a way that is not expected or does not perform at all, perhaps due to other factors unrelated to the parties involved, such as data corruption during transmission.

Further, Mr Perera highlights further risks relating to electronic fraud and cybercrime: “Blockchains rely on public key infrastructure cryptography, and a hacker might gain possession of a participant’s private key, perhaps to misappropriate or redirect payments.”

Governance relating to participation in a blockchain solution will also need to be agreed and receive industry-wide acceptance so that the rules relating to participating in the solution and not just in particular transactions are understood, he adds. This may require adoption of common operating and security standards by those participating, he continues. “A degree of industry cooperation would therefore be required.”

 End of paper

Mr Perera concludes that blockchain technology working in combination with smart contracts could eventually be broadly adopted across the commodities industry. Perhaps the consortium’s project will be crucial to that happening.

There will certainly be interesting and sometimes unforeseen legal issues arising along the way. However, as times progresses, Mr Perera says that it is likely that the benefits of moving towards an electronic end-to-end solution, rather than the heavy reliance on physical paper documents, will be “clear for all to see”.

Daniel Perera is of counsel within Norton Rose Fulbright Singapore’s dispute resolution team, focusing on risk management and disputes at international arbitration. His experience is industry-focused, and he regularly manages both contentious and non-contentious matters within the commodities; mining; oil and gas exploration and production; offshore; shipbuilding; and dry bulk shipping sectors. He can be contacted on +65 6309 5395 or daniel.perera@nortonrosefulbright.com.