Press Releases

Blockchain in shipping: what is it and are we ready?

19 September 2018

There is no arguing that the concept “Blockchain” once only voiced in cryptocurrency circles is now transitioning to many industries, shipping being one of the largest, and perhaps the one that will be most impacted by the technology as well. According to the World Shipping Council, Cargo transported by the liner shipping industry represents about two-thirds of the value of total global trade, equating to more than 4 trillion US dollar worth of goods.

Understanding the sheer size of this industry is one thing, getting one of the oldest and traditionally more conservative industries in the world to embrace change is certainly another. The large-scale logistics industry trend toward “digitization” is the subject of many headlines of late, but the underlying technology behind the move towards digitization is multi-faceted and complex, and Blockchain is certainly one of the key areas which will be employed by the industry during this transformation. More than a buzzword, the details of Blockchain are not widely understood by many in our industry, so before discussing benefits let me just provide a quick layman’s summary.

What is Blockchain?

Most people, including this author, first heard of Blockchain along with Bitcoin, the first and still most popular form of cryptocurrency, and often controversial. So how does this apply to shipping? Blockchain is a database that holds data, events, or agreements between stakeholders in a more hacker resistant and secure way. Bitcoin was just the first use case of Blockchain technology but there are many others. Blockchain can most easily be explained as a distributed, digital ledger, much like a ledger in accounting. All transactions in the network are recorded in efficient and scalable blocks, each one linking to its predecessor and successor block to form a chain. However, there is no single or “centralized” copy of the ledger, but many (or distributed”) copies on computers (or “nodes”) located across a large network making up the Blockchain, each node performing a crypto algorithm on each block.  So, it is highly secure as a hacker would not just need to corrupt just one copy of the ledger, but the majority of computers on the Blockchain (commonly referred to as a 51% attack) thereby increasing the difficulty of a hack almost exponentially.  The Blockchain is also highly transparent and transactions are irreversible.

Why is Blockchain useful for Shipping?

To summarize the key take-aways for implementing Blockchain technology in logistics and supply chain, here are some of the benefits:

·     Reduced paperwork – Paperwork is the necessary evil of the global supply chain, where stakeholders including beneficial cargo owners (BCOs)/shippers, ocean lines, ports and terminals, 3PLs, customs brokers, and other logistics organizations still rely on large volumes of paperwork to be generated, authorized, and distributed to a number of different global locations across the trade lane. In a 2017 study noted in Seatrade Maritime News, Maersk Line findings when analyzing a shipment of avocados from Mombasa to Rotterdam, involved 30 parties, 100 people, 200 information exchanges (of which some were electronic, others on paper, some were hand-written delivery notes). This can in many cases more than double the physical transport costs of a shipment. Distributed ledgers all authenticated digitally allows to significantly reduce the bureaucracy and complexity of the shipping process. The Maersk and IBM Joint venture is one of the most recognized and mature initiatives in this field. In early 2018 a consortium of several organizations including AB InBev, Accenture, Kuehne & Nagel among others tested a Blockchain solution in the ocean shipping industry. Real shipments were used and the group concluded that Blockchain maritime solutions reduce the need for printed shipping documents by up to 80%. So not only can Blockchain streamline and automate the distribution of shipping documents drive better efficiency, but a secondary benefit is to create a more green and sustainable supply chain.

·     Visibility and Efficiency – The idea of transparency in the shipping industry is a widely discussed topic and the number of advocates is certainly increasing but there are still many critics that see transparency as something that will both impact their operational procedures and in the end profitability.   The idea that everyone in the supply chain will be able to look at data that cannot be altered and is fully transparent will definitely be a significant competitive element in the years to come. In addition, because Blockchain is transparent it has the opportunity to improve efficiency through the real-time monitoring of cargo capacity and bottlenecks in the supply chain. First adopters and first movers like Shipchain (shipping process optimization) and Blockshipping (container transaction optimization) are already making this possible.

·      Traceability of High Value Goods – Food, Pharma, and More – Blockchain records the journey of goods across the supply chain from origin to destination, and everyplace in between. This will facilitate compliance with standards and laws and increase consumer trust. The ability to trace food and especially pharmaceuticals back to point of origin, many would argue is one of the most logical uses of Blockchain technology.  With increasing government regulation and end customer demands on transparency of the origin of food in the supply chain it is not a surprise that Walmart would be involved in such solutions with IBM.  Enter Food Trust – being tested by Nestle, Driscoll’s, Dole and others this application shows great promise. Adopting Blockchain traceability can reduce food spoilage by reducing transit the time, better controlling First-In-First-Out (FIFO) and Last-In-First-Out (LIFO) to maximize shelf life and freshness, or early identification of spoiled or contaminated food in a recall, reducing the need to overcompensate and destroy the entire inventory of a product for safety precautions.

·     Smart Contracts - Once of the most innovative features of Blockchain is the ability to have “Smart Contracts”. The cryptocurrency Ethereum introduced the idea of software embedded in certain Blockchains implementing Smart Contracts, so the benefits extend just beyond database like features such as network security, cargo tracking, and traceability, but some legal and financial transactions as well. Smart contracts have the potential to significantly reduce costs and reduce or eliminate intermediaries. Smart Contracts can be automatically validated, signed and enforced through rules on the Blockchain. In the future if Blockchain is combined with other technologies such as Artificial Intelligence (AI) or robotics, it has the potential to allow a high level of automation in our industry.

·     Reduction of Fraud and Theft - All transactions on a Blockchain are immutable and transparent to everyone on the network. This transparency is a deterrent to unlawful fraudulent acts such as product diversion, or fraud such as double brokering plaguing certain industries. These same features tend to improve security and reduce load loss and theft. A Blockchain also enables the secure transfer of titles or Smart Properties which may be part of the Smart Contract.

·     Counterfeit Reduction and Authentication - Blockchain could be a very useful technology to not only trace the origin of goods, but also to help solve the global counterfeit dilemma, costing companies billions of dollars each year and more important, risking brand integrity. From high-value items like pharmaceuticals, electronics, to fashion and designer items, Blockchain is an ideal solution to the traceability problem since it enables the existence of a single version of the truth, an immutable database of goods from product through distribution. Imagine not only authorities being able to enforce compliance of to human rights abuses such as child labor, or the use of raw materials from embargo areas, but it may allow consumers to validate authenticity of high value goods or freshness of produce as well.

·     Enabling Performance and KPI Measurement - By having an open, comprehensive, and transparent record of shipping history, organizations will have the capability to measure the past history of logistics service providers.  Though the use of analytics operating on the Blockchain data, over time the performance of all logistics service providers can be more accurately measured and will drive accountability and improved supplier performance.

·     Secure Payments and Will There Ever be a Global Currency?  –  On average a U.S. Fortune 100 company has more than 60 days in outstanding payments, when the majority agreements specify payments within 30 days. This results in cash flow implications associated with these payment delays. While most of the payments themselves are electronic, the delays are a result of intra and inter company manual processes, many which require human verification.  Smart Contracts and the premise of visibility and an unalterable distributed ledger allows for risk free transactions and secure exchange and payment through Crypto Currencies, thereby greatly speeding up payments. Bitcoin inventor Satoshi Nakamoto had a vision of a global currency, not backed by any national government, not subject to political factors or manipulation, and immune to fluctuation in exchange rates.  Rapid settlement of payments is a key feature in a secure Blockchain, and transaction information is transparent and accessible by both buyer and seller.  However, Bitcoin as well as other cryptocurrencies have not been adopted as a common global means of B2B financial transactions. Instead, the popularity to date of these cryptocurrencies has been more driven by crypto enthusiasts, market speculation, capital controls avoidance, and persons seeking “anonymous” transactions in gray markets (even though to their surprise the Blockchain is the perfect record keeper of transactions). The result has been unprecedented volatility which is not good for crypto as a useful trading currency. In addition, needless to say this would also disrupt major industries such as banking as well as raise government concerns relating to national monetary policies and economics, so there is considerable resistance. However, there is still good hope that a global trading currency may someday become a reality, but we have yet to see a cryptocurrency appropriate for this use.  Specific to ocean supply chain, progress in this area has been made by companies such as 300Cubits and their TEU token used as a deposit to book space on shipping line vessels – its concept of having the lines use a token for free that then generates value on the secondary market is quite an interesting idea. Nevertheless, the benefits of the Blockchain in most of areas of the supply chain are independent of the currency used for actual payments, and in fact greatly facilitates efficiency for the traditional payment systems.

Roadblocks and Barriers to Adoption

So, with all of these great benefits of Blockchain, what is stopping everyone from jumping on board?  As is often the case with any new and disruptive technology, there are barriers for viral adoption. Some of these are listed below:

·      The Need for Standardization - For the adoption of Blockchain implementations to be successful, stakeholders will need to agree on standard and open APIs for their data interfaces. One such initiative is Blockchain in Transport Alliance (BiTA) which was formed to create a forum for the development of standards and education for the logistics industry. As of this writing thousands of companies have applied for membership in BiTA. Brian Reed, executive vice president of supply chain and global strategy for FreightWaves, who was among the founders of BiTA stated "Like EDI [electronic data interchange], everyone has to speak the same language. With all different technical standards, without an underlying agreement on the standard message, we’re no better off than today". Time will tell if large organizations such as Maersk and IBM, founders of the Blockchain venture TradeLens, or industry organizations such as BiTA, or a collaboration of both types, will drive the much-needed standardization required for industry adoption.

·      Hope or Hype: wait and see – There is no doubt that Blockchain is a disruptive technology, but it is also in its infancy of adoption in its life-cycle. It would not be the first time in history that companies were skeptical about the longevity and sustainability of an emerging technology.  Especially of late, for every article about how Blockchain is the greatest invention since the Internet itself, there are people that note the real-world challenges of the scalability of huge Blockchain data structures and other constraints, to suggest that we may be in a “Blockchain bubble”. While first movers are eager to tout benefits and make substantial investments, the conservative nature of the shipping industry may decide to let some time pass to see how things shake out first before jumping in head first.

·      Implementation Cost, ROI, and Legacy Integration - Blockchain implementations may require large scale developments and many companies are reluctant to make these investments without seeing proven ROI first. Experienced Blockchain software developers command a huge premium in the market, and memories of the 2008 shipping downturn are still quite vivid for many to take the recent prosperity of our industry for granted. In addition, organizations will not replace their legacy systems, but Blockchain systems must be integrated into these ERP platforms. Finally, there will be a recurring cost for post-implementation change management and training as well.

·      To Decentralize or not to Decentralize? - A great deal of the value of Blockchain comes out of the idea to decentralize the networks, however many of the early implementations by large corporations still propose centralized architectures. There may be economic, competitive, and loss of control challenges for these organizations to agree to decentralize their networks, and at the same time make them transparent to the public.  Unfortunately, decentralization is one of the core benefits at the very root of Blockchain. At the same time there will be a plethora of smaller and more agile organizations who have nothing to lose and everything to gain though a distributed and decentralized architecture, so over time the market will decide if the trends of the establishment will outweigh the benefits of implementations truer to the original vision proposed by Satoshi Nakamoto.

Blockchain Integration with other Emerging Technologies

Blockchain will not be the only technology to reinvent the next generation supply chain, but will be a critical capability dovetailing with other emerging tech such as e-platforms, advanced analytics, IoT, AI, autonomous vessels, robotics and delivery automation, and cybersecurity to enable the supply chain of the future. In a 2018 study by Boston Consulting Group (BCG) referenced here, Blockchain was among the “Seven Digital Trends which will transform Container Shipping”. When Malcolm McLean invented and patented the first global shipping container in 1956, it is unlikely he envisioned the impact of his idea. In the same way it may be difficult for us to understand the potential impact of the fusion of Blockchain with other key technologies to create a futuristic supply chain. In the BCG study, Blockchain was projected to have a disruptive impact in operations, commercial, and support functions – more impact areas than any of the other technology areas.

How will the Market Develop and Shake Out?

How real is a future where all the use cases are tackled with a single platform? If so, could a platform owned by a technology company or a shipping line really gain wide use due to the competitive nature of business?  To what extent will data be shared and how quickly this will happen remains to be seen, but competition will definitely move transparency in the right direction.  Blockchain is still in its infancy and there is lots of room for more players with more novel approaches to utilizing the power of Blockchain. What seems to be a prerequisite is that in order to gain further traction once the concepts have all been proven out is to have more neutral parties run the Blockchain. Only then will enough supply chain stakeholders join enabling a standard platform. Notice I said A standard, not THE standard could result in multiple competitive standards, just as Bitcoin and Ethereum. There is far too much at stake in Blockchain for there to only be a single dominant player.  In this case there could be several platforms that will battle it out for the next decade until a few victors emerge with enough market share to take a significant piece of the industry solving different deficiencies in the supply chain today.

So What’s Next?

In spite of all of the barriers, almost none of these are unique to Blockchain and history shows that the companies who embrace the vision and are agile enough to implement new technologies to improve their businesses will be the winners in the end. Blockchain is no exception - the benefits are real and here to stay.  In the shorter term it appears that shipper-based applications may emerge first as they are faster to adapt due to their competitive environment and may require less standardization.  Shippers will also be the ones paying the bills and putting pressure on the rest of the ecosystem.  Blockchain applications in cold chain including food and pharma, and reduced shipping paperwork will have more traction earlier as the goal has very tangible benefits and quicker return on investment to participating stakeholders.On the other end adapting crypto currencies as methods of payment, especially because of the perceived volatility, will require much more trust and stability before adoption will take place at any significant level. Still it is very intriguing to think that in ten years from now… there could be a global standard for financial payments in shipping in a currency or currencies that likely don’t even exist yet.The global supply chain has been one of the last frontiers of digitization and virtualization - and Blockchain is the dream that we need to chase!

via Don Miller