A recent news article about an oil commodities transaction sparked considerable interest in the maritime transportation sector when worldwide commodities trader Mercuria announced it would employ “blockchain” technology to carry it out. Previously, blockchain technology served as the foundation to secure bitcoin transactions. Now, this technology promises to supersede hundreds of years of maritime commercial practice by replacing bills of lading and attendant transactional documents and substituting a secure online mechanism to buy and sell goods. IBM CEO Ginni Rometty, in an opinion piece in the Wall Street Journal on November 7, 2016, wrote that “[t]oday, blockchain—the technology behind the digital currency bitcoin—might seem like a trinket for computer geeks. But once widely adopted, it will transform the world.”
Blockchain in the World of Maritime Transactions
Currently, and depending upon their complexity, maritime transactions involve a litany of paper documents, including multiple bills of lading, letters of credit, contracts of sale and/or charter agreements, and the transmission of those documents and payment proceeds by various means among myriad parties. Whether those documents are received or presented in a timely fashion may implicate indemnity obligations set forth in the underlying sales contract or charter. Until present day, good reason existed for these multiple transactions and the obligations they imposed. Each party in the transaction chain wanted assurance of payment for its performance, and protection against the unauthorized delivery of the goods being transported. No foolproof mechanism existed to ensure that the carrier could deliver the goods to the authorized recipient without error.
Blockchain technology, also known as distributed-ledger technology, may sweep these documents into history’s dustbin. The implications are profound given that the World Economic Forum estimates that trade finance constitutes a $10 trillion annual market. The technology’s cryptographic protections make it virtually tamper-proof. Each transaction must be signed using a private key, which prevents access by unauthorized third parties, and the transaction requires several independent confirmations during the process. Blockchain technology logs every participant in the process, which supporters hope will preclude money laundering activities and create greater transparency. The technology provides for a revision-proof, public timestamp for each transaction.
While this new technology may result in a new way of doing business, it would seem that the underlying protections afforded by contract terms and conditions must still be part of the process. Blockchain technology may be able to provide a secure mechanism to pay for the goods and transfer title, but absent incorporating contract clauses into its architecture, it cannot address the vagaries of what happens during the actual physical transportation (for example, the vessel is delayed due to weather at the destination port, berth congestion occurs, the cargo is damaged during offloading, the vessel allides with the dock causing damage, port officials quarantine the port, etc.). Addressing these potential eventualities is the fundamental purpose of the charter and contract of sale terms and conditions. Engaging blockchain technology to buy and sell goods without including clauses addressing force majeure, lien rights, demurrage and its exclusions, notice of arrival, speed and consumption, and dispute resolution provisions, among many others, would leave the contracting parties exposed to a wide variety of potential liabilities. Moreover, each seller and buyer, and each charterer and owner, typically has its own terms and conditions that apply to each peculiar type of transaction. How do these parties preserve their terms and conditions in the new arena created by blockchain technology? The technology employed must somehow be configured to include the parties’ terms and conditions at inception, failing which liability exposure will be wide open.
Blockchain on the Internet
Presently, there is no universal blockchain technology that governs Internet transactions. A variety of companies, including IBM, Bosch, Microsoft, Samsung, Toyota, Visa, and others, are developing applications to implement the technology and expand its global reach. Nasdaq employs blockchain technology in its Linq system. To date, more than 2,500 blockchain patent applications have been filed. Other companies, including Thomson Reuters, are forming consortiums to create a broadbased blockchain structure that serves a variety of industries. For example, the Linux Foundation Hyperledger consortium is drawing hundreds of companies and organizations to create standardized blockchain software. In 2016, the European Union created a regulatory task force to study blockchain technology, which may transform EU financial transactions, and earmarked €1.1 million for a 12-month pilot project to explore the scope of regulatory technology (“regtech”). If impervious to hacking, the technology may bolster financial stability, and open more avenues for government oversight of financial transactions. Standardization of blockchain tecnology could foster the development of far more “smart contracts” (that is, computer protocols that facilitate, verify, or enforce contract performance), ease intellectual property transfers, expedite government contracting and supply-chain services, and reduce infrastructure, compliance, and auditing costs. Couple blockchain technology with artificial intelligence and quantum computing as the years go on, and online contractual transactions may become completely self-executing and enforcing.
The impact on intermediaries in the supply chain could be staggering. Seemingly, blockchain technology will reduce the need for middle men, which would adversely affect the role of commodity brokers and traders. How they will market their services when online access is readily available to create direct links between buyer and seller will make their task of creating value in the marketplace even more difficult.
Blockchain is not the only transactional technology under development, and we can expect that it will compete with other technology and perhaps morph into variant structures as the years progress. It is, however, the current wave of the future, and its implementation in a wide array of industries, including the maritime sector, appears just over the horizon.
For naysayers in the crowd, we should point out that the maritime industry has by no means embraced blockchain technology at this stage of its development, and whether entrenched and time-honored commercial practices will willingly give way to online-based technology is not at all certain. As of today, the technology is not widely available or commonly leveraged into usable applications beyond bitcoin, and whether regulatory authorities will approve of this technology and its security protections in less than a glacial age is problematic. Moreover, there are those who believe that blockchain technology advocates are a long way from proving its viability in commercial scenarios that involve identity authentication, or the protection of financial or privacy data.
Consider, though, that when 9/11 occurred, presidential lieutenant Ari Fleischer first learned of the incident via pager and President Bush spoke to his secretary of state via landline from an elementary school; 16 years later, the nation reads tweets from President Trump almost daily.