Blockchain – panacea or red herring?
In 2017 the logistics and transport industry was awash with predictions of the advances that a myriad of new technologies were going to bring. One of the major predicted advances was the use of blockchain technology to enhance communication and transparency across the supply chain, to effectively deal with the current fragmentation across the industry and to make traditionally paper-based trade processes more efficient.
Here in Hong Kong, the government has recognised the potential of blockchain and the need for further research into its practical application1. In a whitepaper published in October 2017, the Hong Kong Monetary Authority identified a number of legal and compliance issues with distributed ledger technology. It also set out the results of proof of concept tests in trade finance, digital identity management and mortgage loan applications2, demonstrating the benefits and challenges of the practical applications of the technology in its current form.
What problems might blockchain solve?
The results of a JOC survey issued in December of the major complaints of shippers in relation to containerised cargo demonstrate shippers’ frustrations with the current system, and the types of issues that blockchain technology could be used to address3. The major complaints included:
1. No real-time visibility at any point in the supply chain and particularly during transhipment and intermodal transport;
2. No centralised means of allocation, with space allocated via local offices;
3. A need to quickly adjust supply chain routes when disruption was encountered at one point; and
4. A desire for continuously updated ETAs.
Yet increasing transparency is not just a customer-driven requirement; with the renewed focus of regulatory authorities globally on eliminating corruption, slavery and environmentally adverse practices from supply chains, it is also a legal and reputational concern.
The promise of blockchain is that it can provide a model for a decentralised and immutable shared ledger, which all parties in a transaction can access. This provides real-time, indisputable information about a consignment, its provenance, location, condition and history. With higher transparency comes higher accountability, with information no longer passed along a chain from one contracting party to his immediate counterparty, but shared with all participants simultaneously.
Whilst many technology companies have recently sprung up with the promise of delivering an entire, integrated blockchain solution for logistics and supply chain management4, these are nascent and leave many practical and commercial questions unanswered, such as:
1. All parties in a transaction will need to use the same platform, much like with the current e-bill of lading technology. As it’s likely that a number of competing blockchain solutions will come to market, will participants in a transaction have to subscribe to a number of different blockchain solutions, with the associated duplicative costs of doing so?
2. With the creation of overlapping blockchain models comes a growing need for some form of international standardisation to promote interoperability. Those signing up to blockchain model before the standards are set may find themselves having to adjust their practices later on, to meet the new standards.
3. The proliferation of blockchain solution means that some platforms will not survive in the competitive marketplace. How will this be managed? And what if a party to the blockchain transaction goes out of business, is bought or becomes insolvent before the transaction is completed?
4. The widespread adoption of blockchain aims to cut out brokers and forwarders altogether, by giving direct and open access to carriers. How will they and other intermediaries fit in to the new model?
5. Not all parties in a transaction, particularly intermediaries, will feel comfortable with all other parties seeing their contracting / pricing data, meaning that some way will need to be found to accommodate certain data / transactions outside of the main ledger, whilst maintaining the integrity of the distributed ledger model.
6. The availability and reliability of internet services and electricity is not universal – not all stakeholders involved in a supply chain will have a stable energy and internet supply to fuel electronic processes.
As is often the case with technological advances, the legal framework has been slow to catch up, with the limited regulation in place aimed at cryptocurrencies rather than the underlying technology. Nevertheless, the use of blockchain technologies raises a number of legal issues:
1. As a decentralised system, with no single fixed location, under what jurisdiction does the technology and the data stored on it, fall?
2. Linked to that, as the system is designed so that no single entity controls it, who is liable in the event the system fails?
3. Whether the applicable legal regime recognises electronic contracts and digital signatures and permits transactions to be carried out digitally. Taking e-bills of lading as an example, under English law, electronic documents do not come within the definition of “bill of lading” under COGSA 1992 meaning the rules governing transfer of title to sue would not automatically apply. In addition, the Hague / Hague Visby Rules have the force of law in relation to “documents” only. Further, under HK law the Electronic Transactions Ordinance allows private parties to agree on the validity of digital signatures, but certain transactions (e.g. any assignment, mortgage or legal charge) are excluded and must therefore be carried out on paper.
4. Additionally, whilst promoters of blockchain technology claim it is unhackable, cybersecurity issues will still need to be addressed including ensuring insurance policies provide coverage for data loss.
5. Linked to the use of blockchain is the idea of a “smart” contract, a coding solution for managing self-executing contracts. Participants in such contracts will need to ask whether it qualifies as a “contract” for the purposes of applicable current legislation and will also need to consider issues of liability (if, for example, the contract self-executes incorrectly, who is responsible for the resulting losses?).
6. The distributed nature of blockchain inevitably requires the electronic transfer of data across international borders. That is becoming the subject of increasing regulation and restrictions, most notably in China and the EU.
7. Linked to that is the protection of personal data and liability for its loss. How is personal data going to be protected? In Hong Kong, under the Personal Data (Privacy) Ordinance, companies must take steps to protect personal data that they hold. The Ordinance places limits on the use of that data and the period of time it can be held. Similar principles apply in other major jurisdictions, not least the EU with the General Data Protection Regulation coming into force later this year.
8. Competition and anti-trust – how will the sharing of pricing information be treated by competition authorities? If a “permissioned” blockchain is used, how will access be regulated? Could the regulation of access amount to behaviour that is considered anti-competitive?
9. Compliance with regulatory and reporting requirements – with fast changing export / import prohibitions, sanctions etc. how can automated self-executing contracts keep up? Will data stored in the blockchain eventually be made available to reporting authorities to prove non-compliance?
10. Evidence - whilst it is hoped that the transparency in the supply chain can either prevent disputes from arising altogether or limit the breadth of a dispute once it arises, the existence of “immutable” evidence as recorded in the blockchain could present new challenges to the defence of claims against carriers. Will courts accept the information on the ledger as “immutable” and thus non-rebuttable evidence?
Many companies and governments, including that of the HKSAR, are focussing on the potential of blockchain to revolutionise business processes. There are many start-ups and established businesses offering blockchain solutions for the logistics industry, but it remains to be seen exactly how widely-adopted these solutions will be or whether a modified version, that deals with the various legal and commercial issues identified above, takes precedence.
Companies are already seeking to identify the potential and applicability of blockchain in the logistics industry by running “demonstration tests” with a single shipment5. We will be monitoring the results of these tests and the implementation of blockchain closely, with follow-up articles to come in future editions.
1 See the Budget from 2016-2017 and 2017-2018, in which the government pledges to continue to encourage the development of the FinTech sector - https://www.budget.gov.hk/2017/eng/budget17.html
4 For example, ShipChain and SmartLog.
5 See for example, the announcement by a Japanese consortium, including MOL, of a demonstration test to “verify the applicability of blockchain technology as a way to streamline and upgrade cross-border trade operations” - http://www.mol.co.jp/en/pr/2017/17090.html; and Maersk’s collaboration with IBM: https://www-03.ibm.com/press/us/en/pressrelease/51712.wss