With the effect of the pandemic, the issue of digitalization of documentation was even more heated. However, I think none of them were as interesting as the bill of lading, which is a negotiable commercial paper. The reason is; it was the beginning of a new story, where this valuable document, which has been used in world trade for centuries, will now continue its journey in a different format.
This article has been written with the aim of informing the sector players by benefiting from the experience of the parties involved in this transition process.
Business Review – André Simha / Chief Digital & Information Officer of MSC Mediterranean Shipping Company and Chairman of the Supervisory Board of Digital Container Shipping Association
M.H.: What kind of necessity brought the use of this solution? What has been pushed to use blockchain technology while there were other technologies?
A.S.: There are two main reasons. First of all, we have been working with DCSA (Digital Container Shipping Association) for two years to create the shipping industry standards. When you begin to create standards and go into, you start to look at all the shipping processes and each category that the number of people gets involved in. When you look at documentation processes there are multiple parties and people work on entering data, printing documents, etc. DCSA has started to work on electronic bill of lading (eBL) standards with the data elements first of all, not the technology. Because it’s the foundation if you would like to build on top. Because we have been always interested in new ideas, we thought blockchain technology could be used essentially transferring documents without sending them or print them.
The pandemic came at those days. We have started to get several calls like China, India. Since they are huge countries, they were (even domestically) not able to send any documents in any other way than plane, but there were no flights. We had a problem to solve how you move documents without having any courier, even the post was closed completely. The containers arrived at ports and importers haven’t got the documents because they haven’t arrived yet. As a shipping company, we had a problem because containers would stay stuck. Besides, the customers were not happy because they couldn’t get their shoes or whatever in the container. People were trying to find solutions by taking pictures of the bill of lading (BL) with the phones to prove that they have BLs. The customers were asking us to solve the problems on the documents. A good business case came up on agenda and we had a solution. This is the second reason how we have started.
There was a good opportunity to look at the documentation processes and we picked the most important document at the first phase. We found a way to issue the BL in one place and receive it in another place with different actors. We used blockchain technology which is a good opportunity to protect the sources of the documents. Then people started to realize that this could be an opportunity. That was accelerated the usage and adoption of blockchain.
A few years ago I was at a conference at the United Nations with UNCTAD. We were all talking about blockchain and there were undeveloped countries. Although they don’t have sufficient infrastructure, all they have smart phones. There is a lot of developments that have been done using the blockchain thinking of those countries. This is another reason that this technology makes sense although the technology complex but people don’t need to see the complexity.
There were couple of companies have tried to do this in the past. But they have never found the right business cases. In addition to this, we don’t want to have to install software, deploy certificates, have dongles or two factor authentications on the smart phone. We just wanted something simple. If you look at the computer systems, they have always been relatively centralized. We said no to put everything on the database. We want everybody to retain.
The concept of Wave is more like ‘creating network’. I become a member, my customer becomes a member, need to invite your partners and we can exchange the information. The blockchain insures that the information is immutable. You could pass the documents somebody else and also pass on property of the document. Transferring the ownership of the documents while having decentralized option was interesting product also from security perspective, because if you put everything in a central database you make one change nothing to compare with. At the same time, we really liked the approach of the network and being able to exchange other documents than BL as well. Because there are many documents that some of them we don’t really keep as we are shipping line, but you still need to provide to customers. Once the customers began to try, we have issued 15.000 eBLs in a month.
The other advantages we saw may be people expect to pay less on documentation and get them electronically. This was an advantage for customers more than us, since they are the ones they take the documents they have to send, organize, pay for all the courier service. Another benefit is streamlining the process. It means the user who has the application and just need to push the button to send it were needing to print the BL, go to manager/boss to get sign, putting envelope etc.
Also from a sustainability perspective, we have to stock with all those paper. Countries want to eliminate even the paper currency and like to convert everything electronically. Cost of producing papers, complexity of the process directs them to rethink about business models. The next step in the documentation what we are trying to do within DCSA very complicated is to bring standards. Because standards will help companies to able to build software solutions efficiently. Then it will gain momentum. By removing complexity, making it simple, having integration into ERPs, the companies will take advantage of the blockchain technology.
M.H.: What were the points that you saw as disadvantages? Has the acquisition of a new technology worried the company or customers?
A.S.: I don’t think there is any disadvantages. We may say difficulty or challenge, because still there are a lot of countries want to have original documents by customs authorities or banks of the customers when they have letter of credit. The biggest challenge is always the changing the mindset of the people.
There were always scam on BL. We get quite a lot of scams, quite a lot of fraud of this document. There are always people making copies and changing with the original. The claims teams remarked that is much better than having the documents as a piece of paper. Because it can not be changed until somebody finds a way to break the blockchain but this almost not possible and more secure than a piece of paper. From security point of view, it is easy to demonstrate that document is not being changed. It’s going only to one person it supposed to go, because you decide where it goes. It’s not a document stands on someone’s desk.
We had to go through and due diligence of the company make sure we had the approval of P&I Club, because we wanted to be ready immediately as soon as the customer request. Internally, we gathered info about the blockchain, processes like where the documents going to be etc. Legal is the always biggest difficulty and challenge, but there weren’t big barriers to break.
Ofcourse as another international trade actor, the banks earn money in the credit letter, since therefore they keep your documents for a certain period. From efficiency point of banks, using blockchain technology is much more efficient, because the banks have a lot of people doing all documentation process manually for BL, certificate of origin, so on. However, because of the current business models we are not moving as fast as we want in international finance system, you have to an adaptive business model. It’s the only way to survive.
The only thing I am concerned about is interoperability. But this is like first period of credit cards that every shop had different machines. Today they have one machine for all.
M.H.: There is a definition of bill of lading in the Hamburg Convention. Does this definition change when it becomes eBL?
A.S.: That concept will remain, but along the years with the younger generation of workers in the companies, it will become natural. Many paper transactions have been replaced by technology. That’s a natural revolution.
We have to adapt to adopt.
Legal Review – Barış Soyer / Professor at Institute of International Shipping and Trade Law at Swansea University
M.H.: Could you please evaluate the digitization of bill of lading, which is accepted as a valuable paper in international trade, and its transfer to the blockchain, according to current and ongoing studies, in terms of international law and trade?
B.S.: I do not see any problem technically moving the bill of lading onto the blockchain. Using this technology in the bill of lading seems to be very easy in practical terms.
Under current trading system, in order to deliver the cargo belonging to a bill of lading given to a person’s order (to order), when the carrier brings the cargo to the port of discharge, the legal holder of the bill is expected to present this to the carrier and/or his employees to facilitate delivery. If the cargo is sold during the transit process, the bill of lading must be handed over to the relevant persons and the final buyer must have and present the bill of lading to the carrier. Of course, in oil-type cargoes, the goods can be sold 25-30 times while in transit. It is highly unlikely that the carrier will know who is the legal owner of the bill at the end of these transactions. Therefore, one of the biggest problems in the current system is that when the goods arrive as the carrier, someone brings the bill of lading and says that I am the current holder of the goods, it was transferred to me the carrier will not know for sure whether this transfer is legitimate or not. It is possible that the person presenting them has stolen them from mail. Put differently, the carrier will not know whether the person who presents the bill of lading is indeed the person authorized to hold it in the legal sense.
The second problem is that sometimes when the cargo arrives at the destination port, the bill of lading does not arrive on time. In other words, the ship has arrived, but the bill of lading has not arrived. The cargo should not be delivered without a bill of lading (otherwise the carrier is responsible if he ends up delivering to the wrong person). This causes significant delays. For that reason, the carrier will only agree to delivery without bill of lading only if he gets a promise of indemnity from the charterer or third part. In reality, the value of such indemnity given might be restricted (put differently it is as good as the person who gives it)! Again, the carrier would not want to be in this position.
In the 90s Bolero developed an electronic bill of lading system. This is how it would work in Bolero, and it made a lot of sense for computer scientists: when the bill of lading was first issued, it was being issued in the Bolero system. In the Bolero system, the person who was issued the BL had a private key and could access it. Private keys were given to the people that the customer agreed to give access to. Bolero’s problem was in order for the bill of lading to be transferred in the Bolero system, the person to be transferred had to be a part of the Bolero system. So, for example, that as a trader, a cargo was received from China, it has a bill of lading. It was necessary to find a buyer who would be a member of the Bolero so that the item could be sold to him. There is a public key and then you give it a private key, but in order to have a public key, it must be a part of the system. Therefore, this severely restricted the people who would export and those who would import.
Of course, there was a legal problem. Even if you are part of Bolero, let’s assume that the cargo is delivered, and a problem arises at a later stager, will we consider the transfer made through Bolero a valid transfer, can you legally bring it to court when a problem arises? It was transferred to me by showing the transfer via Bolero and I might be the actual transferee I am endorsee. In the context of English law Carriage of Goods by Sea 1992, it might be possible that you can claim that you are legal holder of the bill but this is far from certain. In the 90s, no one could be sure whether different legal systems would recognise the endorsee under Bolero system as teh legitimate holder of the bill. Actually, Bolero’s system was a very rational system because as you could see in the system to whom the bill of lading was transferred. There was no transaction before the relevant transfer was approved, thus it was eliminating fraud completely. It completely eliminated the risk of the bill of lading not arriving at the port on time. In theory, it solved all the problems, but in practice there were problems.
This kind of system (what Bolero intended to do) can now be built on an open yet hybrid blockchain platform that anyone can join with no membership fees. Of course, there is still a need for a completely independent operator to operate the blockchain. This is not something that can happen entirely between the parties (exporter/importer). As a service provider, I need to sign an agreement with everyone who agrees to use the system. There must be a platform that builds trust that can fix any system-related problem on the platform or compensate when a legal problem occurs.
For instance, when firm X sells the goods to Y, the bill of lading is created on the blockchain. When Y sells to Z, possession of BL is now on Z. The system facilitates it. The ship owner (carrier) can also see them on his own screen at that moment. Finally, at the port where the goods arrive, you see who is the rightful owner of the bill of lading and you can deliver it to Z. It also eliminates the possibility of wrong delivery. Another advantage is to show the bill of lading to the port authority at the arrival port. The port authority can do all its checks in advance if it trusts the infrastructure of that bill of lading.
What we call a bill of lading is a paper, a proof of the contract, not a contract. In conclusion, whether the Rotterdam Convention or The Hague Convention, they have no grounds to stop such development. The point of interest of these conventions is the carriage contract, which is the subject of the bill of lading.
The problem may be here. Let’s say the goods arrived are defective. As the cargo owner, I claim that the goods were not handled well by the carrier. When a similar dispute arises between us, we have to fill out a court file when we go to the court and when we give the bill of lading details according to the information obtained from the blockchain, will the legal system accept it? So will the court accept the bill of lading created on the blockchain? I don’t think there is any reason why it shouldn’t be accepted. But the legislation will be needed. That’s what the Law Commission is trying to do right now. The Law Commission and similar legal bodies need to add a very basic clause such as we accept blockchain and electronic documents as original, they are transferrable like paper, or we accept that electronic documents reflect the relevant contract. Of course, you need to make sure that every legal system will do this. It is not difficult to do this.
A 3-point law can be enacted. It is technically said that hacking is difficult, but in case it does happen, I should be able to sue or have the possibility to be compensated for my loss. As a company, I will need such a guarantee, if there is a problem in the system, can I compensate for my loss or can I get it from the service provider. The legal liability here must be resolved.
That is user error when s/he accidentally sends BL as a user to company Y instead of company X over the system. There is a difference, if the user sent it to the wrong person, it will be the responsibility of that person, not the system’s fault. What the system does is to continue the current user error, however.
Since the transfers can be seen by everyone, each party can have access, everyone will be pleased because they know that they have the opportunity to take the disputes to the court. Everyone will trust the bill of lading on the blockchain. As a bank, if you know that the bill of lading comes through a blockchain platform and is legal, you will be more inclined to accept that system, if you know that there will be no problem in going to court even if there is a problem.
For the smooth functioning of derivatives such as to order, to the order, bearer, switch BL, the transfer issue must be gathered on a platform. So you can’t leave the transfer completely to the individuals. There has to be a system in which we make the transfer, the person authorized to do so gives an order to the system. After the system determines that the information received is sent to the right person, it performs the transaction and the possession passes to the other party. The straight bill of lading does not make much sense as it will be like a non-transferrable bill of lading. It will have the most meaning in more ‘to orders’ or derivatives.
In order to implement the bill of lading on the blockchain, three points should be considered in summary:
1- There must be a completely independent system operator and the system must be trusted,
2- Participants of the platform should know how to solve the problems we have mentioned.
3- To be legally recognized, a legal change is required, as Commercial Law does. It is necessary to specify the rules to be followed. If a system error occurs, the operator must have stated that he will cover it and compensate.
The system should also have liability insurance against technical problems. That will give assurance to the users that all will be ok if something goes wrong!
Technical Review – Idan Zuckermann / Sales Executive at Wave & Lior Koskas / Project Lead
at WAVE BL
M.H.: Could you introduce us Wave BL and the technology that you have used?
By applying a tokenization process, we found a new way to track any type of original document for other different use cases of eBL. WAVE BL is also utilized to send and manage possession of other documents such as original invoice, certificate of origin, etc. But our main focus is eBL, because it is such a unique and mandatory document in global trade. There have been some attempts in the past to digitize the original BL. But they were all based on centralized solutions.
WAVE BL is a decentralized network and therefore provides users of the platform with the opportunity to have complete and controlled access to their data.
Our solution is based on a private blockchain. When the carrier issues and sends the eBL to the shipper, the blockchain tracks possession over the eBL, it can take no more than a few minutes for possession to transfer from a sender to a recipient. In comparison to the sending of an original paper printed BL to the shipper which may take weeks. In the near future, we will complete implementation of further enhancements which will cut down the average blockchain confirmation time even shorter than it takes now.
M.H.: What makes Wave different from the other solutions?
WAVE BL is the only purely decentralized solution in the market offering both a SaaS and on-premises solution which could be integrated to the customer’s CRM. The solution is validated by several carriers which have commenced their global rollout – offering the solution to clients worldwide. WAVE BL’s legal framework, as it is based in a decentralized network architecture, provides the exact same flow of rights and liabilities that a shipper or a consignee has with a paper bill and all that with out the need of the network’s administrator becoming an escrow party as with other centralized solutions offered in the market.
Data on WAVE BL is exchanged within a full peer to peer architecture with no central data repository while utilization of our blockchain is made through our Privacy Layer which eliminates the ability of data mining the addresses of the users that exchanged the data between themselves and their historical audit log of activities.
M.H.: What was the challenge during the project and how do you support your customers when there is a technical problem?
Building a network which offers digitization of a heavily regulated paper document without a central repository or central ledger on a fully synchronized basis was our main challenge.
WAVE BL has a very strong onboarding and support teams and well established workflows and the customers are accompanied from the moment they indicate they would like to see a demo up to the moment there account is activated and the first electronic Bill of Lading arrives at their inbox.
I sincerely thank Mr Simha, Mr. Soyer, Mr. Zuckermann and Mr. Koskas for their time, information flow and kindness.
Penned by Menekse Huryasar