Despite the recent technological revolution, shipping still remains a traditional industry and the processes the parties follow, in many cases, are almost archaic. Currently, most of the shipping transactions involve a big number of papers, such as sales contracts, charter party agreements, bills of lading, port documents, letters of credit and others related with the vessel and the cargo. All these documents may need to pass through a long chain of parties since their importance remains high both for various payments to be effected as well as the carriage and delivery of the cargo to take place. Look, for example, into the bills of lading and the long way they follow: Starting from the shippers at load port, they pass through several banks until they reach the receiver. This procedure can be so lengthy and time-consuming that it is very common the vessels to arrive at the discharge port before the bills of lading.
In an effort to simplify the current procedures, the shipping industry has been inspired by the way that the bitcoin payment system works, namely – “Blockchain”. The bitcoin, which was introduced in October 2008 by Satoshi Nakamoto, was the first digital currency/ payment system that brought the revolution to the financial markets. Blockchain tech is based on an open-source peer-to-peer software which is totally decentralized and the management of all transactions or the issuing of new currencies is taking place collectively by the network. For the management of all these transactions, the Bitcoin or any similar software uses a chain of blocks which is cryptographically secured and which is used as a public ledger that records all the bitcoin transactions; this is the “blockchain”. Each of these blocks include a timestamp and a link to the previous block of the chain and the transaction is processed only after several confirmations of the network, so as to ensure that every transaction follows the rules of the network. After the information is stored in the block, it cannot change or be deleted unless the subsequent blocks are also changed and the majority of the network accepts the change/deletion. Therefore, user’s interference in the blockchain looks impossible and the system becomes completely waterproofed.
Blockchain technology was initially used to enable trusted financial transactions between the parties without the need for any intermediary, such as a bank. The use of blockchain, as a secured, decentralized and encrypted public ledger, could be used in various applications in shipping and bring a revolution on the way the trade is performed, almost similar to the evolution that OpenSea brought in the industry on the way that ship chartering takes place. Blockchain could turn the whole processes into a paperless paradise by which all the related parties in each transaction (i.e. sellers/buyers of cargo, shipowner, charterer, banks, agents, customs, port authorities etc.) with the use of public and private keys could come in contact with each other, perform physical transactions, exchange and store information in encrypted format and perform their contractual obligations, give and accept instructions and securely exchange payments.
Except of its use as a public ledger, one of the biggest revolutions that the blockchain could bring in the shipping industry is the “smart contracts”. These are contracts in the form of a computer program which is run and self-executed in blockchain and which shall automatically implement the terms and conditions of any agreement between the parties. These charter-party and bill of lading terms and conditions will be standard part of the software and will not be able to change by the parties. This way, we are moving to a digital market where a contract will be published by the Owner or the Charterer and the other party will negotiate the price/freight directly via the blockchain network. Then, the smart contracts will be executed by a computer network that uses consensus protocols to determine the sequence of actions which result from the contract’s code and this way to automate calculations, approvals and other transacting activities.
Before the use of blockchain, this type of smart contract was impossible to happen because parties to an agreement would maintain separate databases. With a shared database that runs a blockchain protocol, the smart contracts auto-execute, and all parties validate the outcome instantaneously, without wasting time on further exchanges and without the need for a third-party intermediary.
Adapting a blockchain technology, such as the Smart Contracts, could have the following advantages for the shipping industry.
— Quick processing time and real-time updates: Instead of mailing the documents to various parties, the exchange of information can become instantly and procedures which currently take weeks to be completed even within a few minutes. The software code of blockchain will also automate tasks that are typically accomplished manually.
— Higher accuracy: Since all the execution of contracts and other processes are automated, the errors are much less possible.
— Full Transparency: The information is stored in a place where everyone can have access provided that he has the required access key. This gives full transparency to market participants and also the counter-party risk is easier evaluated when anyone can have access to the transactions previously performed by each party.
— Increased security: All information is encrypted, something which adds security by its own. Also, the fact that the users can not interfere with the system and change the information stored in the blockchain protects the market from fraudulent activities and various documentary manipulations.
— Cost Saving: A big part of the trade financing costs is related to documentation, procedural delays, discrepancies or errors. These costs can be omitted and total cost currently spent to various intermediaries will be avoided and replaced by a much cheaper cost of the blockchain.
— Easier access to the market: Everyone can have access to the blockchain technology and therefore the entry barriers will be less and the market will become more competitive. Furthermore, the parties will be able to develop direct communication without the need of intermediaries and the overall chain will become lighter.
Notwithstanding the advantages of such a technology for the shipping industry, there are a few issues which should be addressed before a full blockchain system is established in the dry bulk and tanker shipping.
— Special contractual terms: The contractual terms of the ship chartering and the sale & purchase of commodities are unique and very specific. These terms should be adapted by the blockchain network which should be able to recognize, for example, what the lien is and how it works, the laytime and demurrage and their exceptions, the Notice of Readiness and when the vessel is actually considered arrived at port etc.
— Higher flexibility: It is very usual in shipping, the parties to come across situations where they can only solve through a commercial approach. This will not be easy to take place when the transactions are taking place through a sealed system which does not allow any interference from the parties. Furthermore, it is very usual the parties involved in a transaction to have their own contractual terms which are usually subject to the negotiation of the parties. Will it be possible in a universal system? So, the blockchain technology must be configured to include special terms and conditions at inception, otherwise the parties’ liability exposure will be even higher than the liability saved by the system’s use.
— Global adoption: The blockchain is not adapted or it is not yet allowed by all jurisdictions around the world. However, since various governments and agencies are involved around the globe, in order for such technology to be used in trading and shipping services, all these parties should be brought into a common platform and a universal adoption should be achieved.
The shipping industry has not yet adopted the blockchain technology and whether its traditional practices will be replaced within the next years from such a technology it remains to be seen, however the first steps have already been made:
Earlier this year, Mercuria, a shipping and trading conglomerate, announced that they are working with their two financial institutions, ING and Societe Generale, so as to adopt a blockchain technology for its trading and shipping business. According to Mercuria, the current process followed in shipping is archaic and it is expected that the trading and shipping industries will be digitalized more and more within the next couple of years.
Another large shipping company which explores the possibility of investing into the blockchain is Maersk who have commenced a cooperation with IBM in order to build a blockchain system utilized in the container market, where Maersk maintains a leading position. In this case, the blockchain will be used to manage and track the millions of shipping containers, by digitizing the supply chain process to enhance transparency and security of sharing information among the company’s stakeholders. According to Maersk, the software is expected to be online by the end of 2017 and could save the industry billions of dollars each year.
OpenSea is a leading company in the digitalization of shipping services and we closely follow all the recent developments in this field so as to continue offering unique services to our clients and make the shipping industry more transparent, technologically advanced and more efficient. If you are involved in the ship chartering process, then you are welcome to register in our marketplace and take advantage of the new technologies today.