Paper 3: Digital Infrastructure Development and Governance in Maritime Trade: The Role of Blockchain
4.1. Technology architecture
The first aggregate dimension, technology architecture, reflects how key technical characteristics of blockchain technology enable the development of the architectural component of the digital infrastructure to support eBLs.
As an electronic record, an eBL essentially represents a piece of data that has legal rights and obligations attached to it. That being the case, for an eBL to be legally and commercially effective, it must be unique and secure. Additionally, there must be only one holder at any moment, and that holder must be able to transmit the eBL in a manner that can be independently verified. In other words, a robust audit trail has to be established. Despite all the downsides associated with paper BLs, one crucial characteristic that affects their universally harmonized treatment in maritime trade that was repeatedly emphasized by informants, as well as relevant literature (e.g., Pagnoni and Visconti, 2010), is the inherent decentralization that paper enables due to its innate tangibility. An electronic alternative including a blockchain-based solution needs to be at least as good as the solution it is replacing for it to be widely accepted, making decentralization a key issue to be addressed.
Finally, there must be only one version of the eBL in circulation where a notion of exclusive control73 is maintained. This means that, upon transfer of an eBL, the transferring party relinquishes its status as a holder and the receiving party unequivocally gains that status. Put differently; an eBL solution has to be able to prevent the double-spend problem often associated with digital assets.
One complication in developing a technical infrastructure to support eBLs was that initial technological solutions relied on proprietary systems requiring costly and time-consuming user onboarding. The first system of such kind that gained prominence, called the Bill of Lading Electronic Registry System Organisation (BOLERO), was introduced in 1998 by SWIFT and the Through Transport Club. In this setup, eBLs were issued on the Bolero system, and the issuer would be
73 The notion of exclusive control of an electronic transferable record is used as an equivalent to the notion of possession of an original paper document, see article 11 of the UNCITRAL Model Law on Electronic Transferable Records: https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mletr_ebook_e.pdf
provided with a set of private keys that enabled access to the document. The Bolero system enabled secure transfers of electronic messages that registered the rights and obligations of trading parties. It further centrally maintained a primitive audit trail of transactions through checks and logs of each such message for historical reference and to enable conflict resolution.
The Bolero system crucially relied on the membership status of prospective trading parties, both from the legal and the security points of view (Goldby, 2008). However, several severe drawbacks to this model were recognized. Trading parties needed to make (1) significant relationship-specific investments related to integrating the Bolero system into their operations; while at the same time (2) relinquishing the opportunity to leverage the efficiencies of eBL use with non-member trading parties.
These drawbacks illustrated the inadequacy of the central registry model for eBLs. An expert in international maritime law and a consultant to UNCITRAL and the Law Commission of England and Wales explained the sentiment in the industry and legal implications of central registry systems:
“Having to sign up to a system that was under central control held back systems such as Bolero.
Basically, there was a lot of nervousness about having a central counterparty for everything, absolutely everything. You had a central point of control, you had a central point of failure.”
By demonstrating that it was possible to transfer eBLs successfully, Bolero and other early central registry-based platforms such as essDOCS (founded in 2005) raised expectations about BLs becoming digital on a wide scale. Prominent container shipping actors began testing these solutions and running proofs of concept in real trade scenarios involving shippers, consignees, and banks, in addition to ocean carriers and eBL solution providers. However, a key complication for further developments towards adopting these eBL solutions was the centralized model using proprietary software that was expensive to use and not conducive to integrating a large number of trade partners.
The Chief Digital and Information Officer (CDIO) of the Mediterranean Shipping Company (MSC) explained:
“We as MSC, we saw the value of the eBL for many years, but there wasn’t a solution out there which was easy to implement. […] we had tested of course with Bolero and essDOCS, and other
solutions, but they basically require you to install software. We don’t want 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 putting everything on the [central] database. We want everyone to maintain control over their data.”
Because dozens of organizations might be involved in handling a single eBL transfer (e.g., ocean carrier, solution provider, buyer and seller’s banks, importer, customs authorities), the industry actors were eager to adopt eBL solutions that were easy to use and which did not suffer from scalability issues associated with earlier central registry eBL platforms. Since 2018, blockchain has been a prominent topic in the container shipping industry, with major information sharing industry platforms such as TradeLens (Jensen et al., 2019; Sedej, 2021) seeing wide adoption74. Although major container shipping industry actors initially expressed skepticism about the usefulness of blockchain technology for eBLs, successful trials of blockchain-based eBL solutions during 2020 and early 2021 initiated by major ocean carriers such as MSC demonstrated blockchain’s potential beyond that of earlier central registry solutions and led to production-level implementation. The Head of Contracts and Clauses at the Baltic and International Maritime Council (BIMCO) described these developments:
“The industry wanted to digitize [bills of lading] in some way, but they didn’t necessarily know the way forward. Initially, blockchain was thrown out there as being the solution to all problems, and people were thinking: “Ok, but how exactly? How do we apply this technology to our business?”
[…] And I think in the background, some smart people working on blockchain have come up with platforms and solutions that are very, very easy to use as their offering to the industry. Because they’ve appreciated that the older platforms [i.e., Bolero and essDOCS] haven’t been as successful
as they should have been.”
Because blockchains are tamper-evident, they enable firms on a blockchain network to identify potential opportunistic behavior. Put differently, blockchain-based eBL platforms deploy modular architectures that can transfer digital documents of title while maintaining data security. Namely, the title to the eBL is transferred on-chain, and the content that can include commercially sensitive data can remain “on-premise” in the trading party’s local IT system or hosted on a cloud, depending on the preferred configuration by the users. The benefits of being able to transfer a document of title in a decentralized ecosystem while preserving the security of proprietary information were highlighted by several respondents. An expert in international maritime law and a consultant to UNCITRAL and the Law Commission of England and Wales, for instance, noted:
74 On March 24th 2021 TradeLens became the seventh eBL solution provider to receive approval from the International Group of P&I Clubs. Additionally, the TradeLens platform processes more than 700 million shipping events and 6 million documents per year as of January 2022. Source: https://www.tradelens.com/ecosystem
“Blockchain has got everybody very excited because a blockchain service provider can provide you with a service you need without having access to your documents at all. Basically, they just have the hash value. They can confirm the validity of the transaction without having access to any data at all
about the transaction itself.”
4.1.2. Preventing the double-spend problem
Blockchains were originally designed to prevent the double-spend problem for digital currency. In other words, blockchains are intended to provide a reliable record to ensure that a digital asset sent from one party to another: (1) is unique in the sense that it has not already been spent elsewhere, (2) is subject to reliable electronic delivery where a change of possession occurs (i.e., if A transfers a digital asset to B, A can no longer claim possession over the asset), and (3) leaves an audit trail of previous transactions.
In contrast to the paper BL where the content (e.g., information about the type, quantity, and quality of the cargo), the title to the document, and the endorsement chain75 itself are embodied in its tangible paper instantiation, blockchain-based eBL solutions essentially separate these core elements that are in turn handled in different ways. The trading parties retain control over the content that may contain sensitive commercial information, while the title of the document and the endorsement chain are tracked on the blockchain. Several respondents have emphasized the importance of the audit trail that enables parties to keep track of the transfers of title to an eBL in trading scenarios.
Communication on a blockchain network occurs directly between participants. Users generate transactions by placing raw data into a standardized format, including a cryptographic signature for authentication, and broadcast it to other nodes in the blockchain network. The signature, created by a private key, serves as the users’ authorization for the system to request an entry for the corresponding transaction. A valid signature presents the cryptographic guarantee that the initiator of the transaction is authorized to execute a given ledger entry (Rauchs et al., 2018). At the same time, this technical architecture places control over an electronic document such as an eBL exclusively in the hands of the entity with the knowledge of a relevant private key. Combined with the previously
75 In scenarios when goods are sold during transit, transfers of BLs must also occur. Namely, the shipper can “endorse”
the BL to a subsequent titleholder by putting the titleholder’s name on it. With paper BLs this involves writing the name of a subsequent titleholder and the signature on the back of the document. As this process is repeated, a chain of signatures, known as the endorsement chain, is created (DCSA, 2022).
described functionalities of decentralized consensus and tamper-resistance of the records, blockchain enables reliable transfers of possession of electronic documents. This crucial functionality was described by the co-founder and CEO of WAVE BL:
“All the communication mechanisms, protocols, technologies are all built on the same concept. I’m not sending it [digital information] to you. I’m replicating the information from my computer to your computer. And this goes for SWIFT, email, and any other protocol. Blockchain, when used in
the right way [being fully decentralized], allows you for the first time to deliver something.
Blockchain allowed us, for the first time to have an electronic delivery. So when it [an eBL] is sent from me to you, I can’t take it. It’s not in my hands anymore. This is what the blockchain brought to
you; it first brought it in Bitcoin.”