Blockchain – the real deal, or a whole lot of hype?

The general press, along with the marine and marine insurance press, are awash in stories about blockchain technology: proclaiming how the technology will revolutionize both shipping and insurance, while also distinguishing the blockchain technology from cryptocurrencies such as Bitcoin.

Recently, the marine press was reporting about Insurwave, a new venture involving, among others, Ernst & Young, Maersk and Microsoft for the placement of marine insurance on the blockchain “to alleviate a range of inefficiencies and frictional costs” with respect to buying and selling marine insurance[*]. Clearly change is afoot.

But for every article proclaiming another roll-out of blockchain technology(1) in shipping, there are well-crafted counteressays highlighting the significant systemic hurdles to a blockchain-and-shipping e-revolution. For example, the banks will resist adopting technology that could result in them losing fees earned by financing international trade. Governments are steps behind in regulating a cutting-edge technology and its applications, and thus will resort to obstructionism. The idea of multiple sovereign states collaborating to promulgate and adopt international rules for blockchain’s application to shipping and trade seems especially farfetched in today’s political climate, say the naysayers.   

This is the public framework in which the technology exists and is evolving, and these are the debates currently underway between those who sing blockchain’s praises and those who remain sceptical of its grandiose claims. Meanwhile, the rest of us are still trying to learn the answers to a few simple, basic questions: what is blockchain, how does it work, why is it potentially such a big deal, and how will it save shipping “billions” as is widely promised.

For laypersons (including the author), a good place to start is with a working definition. Blockchain is a “decentralized peer-to-peer network that maintains a public, or private, ledger of transaction”[**]. It is a single platform on which a transaction, or series of transactions, can be viewed, validated, and authenticated. It is often referred to as a “distributed ledger technology”. I.e., it is a simple database or spreadsheet capable of storing information but decentralized in that it is stored on multiple computers connected to a common network (as opposed to a single server). Each computer in the blockchain is called a node, and each node operates under the same set of rules embedded in the blockchain computer code. 

As for how this works within the context of a real-life trade deal, blockchain provides the architecture for the structuring of the transaction, establishes ownership of same, broadcasts the transaction to its stakeholders, and establishes the parties’ agreement to the transaction via consensus. The computers connected in the network running the software must all agree whether the transaction should be consummated and thus added to the blockchain, i.e., the open, decentralized ledger. As diagrammed in the presentation referenced below, the “magic” of the transaction is consensus amongst the parties without the need for a centralized system. The technology works to fill the gaps ordinarily established by trust between the parties when no such trust is feasible and/or pragmatic and/or exists. Further, the immutability of each block of transactions (and the reference number or “hash” associated with same) makes alteration of the ledger entries infinitely more difficult, while offering a new level of transparency for each transaction.

The transport of goods aboard vessels and between jurisdictions involves multiple stakeholders engaged in concentric spheres of commerce. There is

• the shipper/seller who wants to get paid for their commodity,
• the bank who finances the transaction for a fee,
• the vessel tasked with transporting the goods for hire or freight,
• the buyer who wants to ensure the goods arrive in sound condition and that payment has been effectively executed,
• the trader looking to make a profit on the transaction,
• insurers collecting premium for insuring risks in the chain,
• the governments who will collect taxes and duties on the imported goods, along with
• multiple brokers whose job is to establish trust between insurers and insured, charterers and owners, customs houses and buyers, sellers and traders.

In theory, the entire trade could be placed on the blockchain, with each stakeholder’s computer programmed to follow a specific protocol that enables each stakeholder to monitor the trade with some confidence that there is only one established truth and the counterparties to the trade are who they say they are and do what they are supposed to do at the requisite time.   

Blockchain technology will probably underperform expectations for the next couple of years, but ten years from now will be a gamechanger, automating yet more administrative tasks that previously required human-to-human interaction and verification. If that is the case, blockchain’s impact could be revolutionary. Or, like so many self-styled technological revolutions that predated this one, it could be nothing at all.

Blockchain technology enables stakeholders, including Skuld, to have access to one established set of facts. Access to relevant data in the blockchain – i.e. for example bills of lading, charterparties, survey reports, legal advices, but also insurance documents, information about the vessel’s location etc. may reduce administrative work. From a claims handling point of view, this can potentially reduce the time spent on each claim, and avoid possible misunderstandings and mistakes related to claims documentation.

From an underwriting point of view, the technology may enable Skuld to streamline existing processes by linking the Club, brokers, members, clients and third parties. The data collected from the stakeholders and placed on the blockchain may potentially reduce costs and time by lessening the administrative burden through simplifying existing processes. 

Skuld will follow the development closely to, when the time is right, achieve a successful integration of the blockchain technology into our insurance solutions. Apart from questions related to the technology itself, for the time being questions related to the legal framework will have to be answered.  Due to the anonymous and non-specific location nature of the blockchain technology, governing law and jurisdiction to any transaction in the chain is difficult to ascertain, which poses an additional challenge to the parties involved.

Should you have any comments or questions, then please do not hesitate to contact us at any time. 

On behalf of your Skuld team of underwriters and claims handlers who serve our charterers and traders 24/7/365.

[*] https://insurancemarinenews.com/insurance-marine-news/blockchain-system-now-marine-insurance-use/

[**] For a concise and informative overview, see “Blockchain: Potential Impact on Shipping and Logistics,” a presentation delivered by Holland & Knight Senior Counsel K. Blythe Daly to New York’s Society of Maritime Arbitrators on 11 April, 2018, available here:
https://www.hklaw.com/events/Blockchain-Potential-Impact-on-Shipping-and-Logistics-04-11-2018/.