The possibilities opened up by technologies such as blockchain could revolutionise international trade; but there are legal challenges that remain to be confronted.
The promises of the so called “blockchain revolution” are almost boundless. Claims that it will change how economic rights are licensed, empower inanimate objects to communicate and interact with each, or even change the way government is carried out, could just be the tip of the iceberg. In the same way that in the early days of the internet no-one predicted the rise of the tech giants of today, it is quite possible that its second or third order effects cannot yet be comprehended. Conversely, it is just as possible that it will fall short of its more evangelical proponents' predictions.
But whatever your views on its likely consequences, what is interesting from an international trade practitioners’ perspective is how many technical experts from outside the traditional trade community have concluded that, of all industries, the way in which goods are bought, sold and transported around the world is the area that is ripest for disruption.
Blockchain, or more accurately, “distributed ledger technology” (DLT) is famously the technology that underpins, and to many is synonymous with, Bitcoin. It is based on a relatively simple proposition: distributing amongst participants of a network the role traditionally played by a central administrative authority in recording transactions on a ledger. The cryptographic technology underpinning the technology means that the record of the distributed ledger is secure, immutable and – to the extent necessary – public.
But it has applications well beyond just cryptocurrencies. The ledger in question could be – as in the Bitcoin blockchain – a record of the ownership of a digital asset. But in principle a record of the economic rights relating to any asset or even just information, can be stored on a distributed ledger in a secure and immutable manner and made available to appropriate persons as required.
Which is why it could change the international sale of goods.
A 21st Century industry built on 19th Century fundamentals
The 20th Century saw many technological advances in how goods are bought and sold; from navigational and safety improvements at sea that reduced the risk of loss of life and property, through the containerisation revolution, to increasingly sophisticated means of trading and financing commodities.
But in some crucial respects the industry is still stuck in the 19th Century. In particular, the industry is still heavily reliant on paper documentation, with the attendant costs and inefficiencies that this brings. Whilst that documentation is often “digitised” in the limited sense that paper documents are turned into PDFs, many of the underlying documents are inefficient duplications of existing data: think of the proliferation of paper documents required to record the weight, origin, and specification of goods for customs purposes as they are moved from jurisdiction to jurisdiction. There is no great efficiency realised in this "digitisation" of information. But even more fundamentally, the industry requires certain crucial documentation, such as documents of title, to be produced in original paper form. The transactional inefficiencies associated with that are significant.
Take the venerable bill of lading as an example: a shipowner has an obligation to deliver a cargo to the lawful holder of the original paper bill of lading representing that cargo. If the original bill of lading (which is often being physically passed through a chain of financing banks as it is endorsed from one to another) is not present at the discharge port, the shipowner takes a risk in delivering the cargo to the charterer’s order, potentially exposing itself to a significant misdelivery claim. This requires a letter of indemnity from the charterer – and often back to back LOIs from other parties in the chain of sale contracts. This paper edifice collapses if a party in the chain of contracts defaults on payment obligations, often causing an unpaid holder of the bill of lading to arrest the vessel and bring a misdelivery claim against the shipowner, potentially causing multi-party litigation in a number of jurisdictions as demands are made for security and indemnities under the cascade of LOIs.
DLT’s promise that it can operate as an immutable digital record of economic rights, enabling their transfer in a cryptographically secure manner, is an obvious potential solution to the difficulties associated with the continued reliance on original paper documentation.
Indeed, it opens up the prospect of truly digitising all manner of data associated with the international sale of goods, storing that data securely and making it available as and when required to (and only to) the necessary persons.
The industry has already responded to the opportunity, with traditional shipping and trading companies developing their own tech driven solutions. Maersk has teamed up with IBM to create TradeLens, a DLT based platform that records and shares information and tracks physical assets and documents. A consortium including APL, Keuhne + Nagel and Accenture have cooperated to develop a DLT solution that, in trials, removed the need for up to 20 different printed shipping documents which contained data that was replicated in each of them.
In the commodity trading and financing sphere, two consortia of financial institutions, oil majors, traders and survey companies have developed two related DLT start ups aiming to revolutionise oil trading: Vakt, a platform that digitises the paper backed processing of physical commodity deals; and komgo, an open financing platform where traders – including the Vakt participants - can elicit finance for the oil trades in question from financial institutions with letters of credit issued over the platform in a cryptographically secure environment.
What the various proof of concept trials and early commercial ventures show, by and large, is that innovation is being driven by individual DLT solutions rather than one global all-encompassing distributed ledger. If that is understandable in context of early commercial trials of new technology, it brings with it some commercial limitations too: for example, IBM admitted last year that it is struggling to add competing carriers to the TradeLens platform given IBM and Maersk’s ownership of the IP involved. To a certain extent the long term viability of the technology is dependent upon its "network effects" and ability to reach the maximum of participants. In that regard, the Vakt and komgo platforms are particularly interesting because of the number and variety of stakeholders involved and the fact that two DLT based platforms were designed at the outset to interoperate.
But if there are commercial challenges to reap the true network effects DLT in the international trade sphere, the legal challenges are at least as significant. In particular, replicating the legal effect of paper documents presents a challenge. As a recent report by Clyde & Co on Electronic Bills of Lading for the ICC Banking Commission shows, whilst data contained in documents such as bills of lading can be securely transferred and shared on DLT based systems, replicating in electronic form the transferable nature of a negotiable instrument such as paper bill of lading is technically and legally much more complex.
Few jurisdictions legislate to provide for the effective transfer of the rights enjoyed by a lawful holder of a bill of lading when an electronic bill of lading (e-bill) is transferred. There have historically been attempted work arounds. Organisations such as essDOCS and Bolero have, for many years now, attempted to replicate the functional equivalence of a paper bill of lading with e-bills, but this requires agreement by pre-determined participants to a single set of contractual rules within what is sometimes referred to as a “club system”. When a party who is not a part of the club is involved in a transaction, it requires the conversion of the e-bill bill into a paper document. The development of DLT solutions has not changed the fundamental difficulty that very few jurisdictions place e-bills on the same legislative footing with regard to the transfer of right as original paper bills of lading.
One potential solution is the Uncitral Model Law on Electronic Transferable Records (MLETR), which is a specimen text that can be adopted by states wishing to legislate to recognise the transfer of rights in electronic documents that are functionally equivalent to transferable documents of title such as bills of lading.
It provides for the recognition of electronic records where the record contains all the information required of, say, a bill of lading and where a reliable method is used to maintain the integrity of the record and subject it to control from its creation until it ceases to have effect. "Control" is crucial in this context because it represents the functional equivalent of the possession of a physical transferable document. The MLETR is neutral as to the technology concerned, meaning that it can accommodate a variety of different technologies, including distributed ledgers, and it supports the principle of non-discrimination against the foreign origin of an electronic transferable record, to foster the cross border use of electronic records.
The MLETR has no effect until it is adopted into national legislation. It is, for the time being, an aspiration for many jurisdictions. If adopted, however, it has the potential to fulfil some of the more exciting predictions about the direction of international trade.
That is because, once DLT based platforms can transfer economic rights to negotiable documents in a legally enforceable manner, it opens up possibilities brought by other technologies. For example, data recorded by the "Internet of Things" - interconnected inanimate objects - can be stored on distributed ledgers and used as a data oracle to verify anything from the time of the arrival of a container to the specification of a cargo. So called "smart contracts" – computer codes that execute instructions upon pre-defined events – could then execute payment instructions upon the verification of the necessary facts; and title to assets or other economic rights can then be transferred automatically and with full legal recognition, on a distributed ledger.
Many of the frictional disputes and costs involved in international trade could be removed entirely by the application of such technologies. That is, for the moment, still an aspiration and there are commercial and legal challenges to be surmounted. But it is a tantalising vision of the future.