The age old problem of low levels of trust between importer and exporter when it comes to payment looks set to be alleviated by the adopting of “blockchain” technology in the banking system.
Blockchain is the revolutionary concept behind the global sensation of the cryptocurrency, Bitcoin, and is the current darling of fintech. A growing number of start-up companies from around the world are vying for attention in the race to develop practical applications across a variety of industries ripe for disruption. Barclays Africa created a stir after it recently announced its successful completion of the world’s first trade finance transaction using blockchain technology.
The crux of the technology is the transfer and storage of electronic data via a distributed ledger (where the digital record of transactions is not stored in a central location), instead of in a single database under the control of a central authority susceptible to external security threats or internal manipulation. The record of transactions in the distributed ledger is stored chronologically in a blockchain, consisting of virtual “blocks” of data each linked together by a sequence of complicated code called a “hash”. Because each hash is a product of the code and data recorded in the preceding blocks in the chain, the theory is that it would be impossible (or at least very difficult) to manipulate any transactions without throwing the entire “blockchain” out of sync. As the system is decentralised, a multitude of different parties have access to the blockchain in order to verify and authenticate transactions.
International trade stands to benefit significantly from blockchain, as it is a very time and document intensive process involving a number of different parties (to name a few: the importer, the exporter, the banks, port and customs authorities, the ocean carrier, the insurer, cargo inspectors, and various agents on each side). There is usually a low level of trust between importer and exporter when it comes to payment: The importer will want to protect itself by delaying payment of the goods for as long as possible until it is satisfied that they will in fact be delivered as agreed. The exporter will require payment as early as possible so as to avoid the nuisance and expense of an aborted shipment should things not go according to plan. This is where trade finance comes in: the importer’s bank might agree to finance the trade by issuing a letter of credit to the exporter. This letter acts as a guarantee and comfort that payment will be made by the importer’s bank upon the presentation of certain original documents by the exporter evidencing that the goods have been shipped in good order.
In many trades (especially commodities trades) the most important shipping document is the bill of lading. The real beauty of the bill of lading lies in its function to traders as a document of title to the goods in certain cases, which can be negotiated by physical endorsement on the bill itself plus delivery. Bills of lading, said to be symbolic of the goods themselves, are particularly well-suited to trade finance given that they can be endorsed in favour of the buyer’s bank, or the bank can simply exercise a lien over the original bills delivered by the exporter, as security for financing the trade.
There are many practical difficulties with the current paper-based bill of lading and letter of credit system, including risks of fraud, as well as the costs and delays associated with manually checking original bills and couriering them from person to person. The use of electronic bills of lading (e-bills) has been explored for many years, but the shipping industry has been slow off the mark in making the leap to e-bills. One issue is whether whether e-bills can replicate the most important legal function of a paper bill of lading as a negotiable document of title governed by the rules of endorsement and possession. While South Africa has sophisticated legislation in place which recognises electronic data messages as “documents” for purposes of law, the question still remains as to whether an e-bill can be considered to be a “document of title” in the absence of it being physically delivered, possessed, or endorsed. Digital exchange has always been perceived as problematic given the ease with which data can be replicated and manipulated. Blockchain offers tangible benefits in this regard as the distributed ledger would serve as a sufficient checks and balances system.
The increased use of blockchain-based technologies in international trade has the potential to transform the industry by facilitating speedy, paperless and secure trades. Major Swiss bank, UBS, has recently announced that it is collaborating with IBM on a blockchain project to simulate a complete international trade transaction incorporating stages such as trade finance, cargo inspections, bills of lading, customs inspections, release and payment. A similar “end to end” solution is being developed by Blockfreight, which has already launched an initial token sale to the public.
While most of the finance-related applications of blockchain are still being explored or tested in pilot projects, a growing number of companies are in the process of incorporating practical blockchain applications in their day to day operations. It has recently been reported that Marine Transport International (UK) Limited, an international freight forwarder, has started to use a public blockchain to store data recording the verified gross mass of containers, creating a permanent record which can be accessed by port officials, cargo owners and shippers. Keuhne & Nagel, the largest freight company in the world, intends to use blockchain as a means to prevent theft and verify the genuineness of products. The world’s largest mining firm, BHP Billiton, has announced it intends to use blockchain to improve its supply chain processes and record movements of rock and fluid samples as well as delivery data, as opposed to using the traditional spreadsheets.
All indications are that blockchain technology offers exciting new opportunities to streamline existing shipping and logistics operations. It remains to be seen how the legal and regulatory environment will need to evolve in order to keep up with the changing face of this industry.
Nicola Nel, associate in the Shipping & Logistics Practice at Bowmans law firm, Durban South Africa