A recent news article about an oil commodities transaction sparked considerable interest in the maritime transportation sector when worldwide commodities trader Mercuria announced it would employ ‘blockchain’ technology to carry it out*
Previously, blockchain technology served as the basis for securing bitcoin transactions. Now, this technology promises to supersede hundreds of years of maritime commercial practice by replacing bills of lading and attendant transactional documents with a secure online mechanism to buy and sell goods.
Currently, and depending on their complexity, maritime transactions involve a litany of paper documents, including multiple bills of lading, letters of credit, contracts of sale and/or charter agreements, and the transmission of those documents and payment proceeds by various means among myriad parties. Whether documents are received or presented in a timely fashion may implicate indemnity obligations set forth in the underlying sales contract or charter. Until now, good reasons existed for these multiple transactions and the obligations they imposed. Each party in the transaction chain wanted assurance of payment for its performance, and protection against the unauthorised delivery of the goods being transported. No fool proof mechanism existed to ensure that the carrier could deliver the goods to the authorised recipient without error.
Blockchain technology, also known as distributed-ledger technology, may sweep these documents into history’s dustbin. The implications are profound, given that the World Economic Forum estimates that trade finance is a US$10 trillion annual market. The technology’s cryptographic protections make it virtually tamper proof. Each transaction must be signed using a private key, and requires several independent conformations during the process. Blockchain technology logs every participant in the process, which supporters hope will preclude money-laundering activities and create greater transparency. The technology provides for a revision-proof, public timestamp for each transaction.
Blockchain technology provides a secure mechanism to pay for the goods and transfer title, but absent incorporating contract clauses into its architecture, it cannot address the vagaries of what happens during the actual physical transportation. Addressing potential eventualities is the fundamental purpose of the charter and contract of sale terms and conditions. Engaging blockchain technology to buy and sell goods without including clauses addressing force majeure, lien rights, demurrage and its exclusions, notice of arrival, speed and consumption, and dispute resolution provisions, among many others, would leave the contracting parties exposed to a wide variety of potential liabilities. Moreover, each seller and buyer, and each charterer and owner, typically has its own terms and conditions that apply to each peculiar type of transaction. How do these parties preserve their terms and conditions in the new area created by blockchain technology? The technology employed must somehow be configured to include the parties’ terms and conditions at inception, failing which liability exposure will be wide open.
The maritime industry has not yet embraced blockchain technology, and whether entrenched and time-honoured commercial practices will willingly give way to it is uncertain. The technology is not yet widely available or commonly leveraged into usable applications beyond bitcoin, and whether and how quickly regulatory authorities will approve blockchain technology and its security protections remains to be seen. Some believe that blockchain technology advocates are a long way from proving its viability in commercial scenarios that involve identity authentication, or the protection of financial or privacy data.
But there is no denying the potential. Couple blockchain technology with artificial intelligence and quantum computing as the years go on, and online contractual transactions may become completely self-executing and enforcing.
Blockchain technology could reduce the need for middlemen. Commodity brokers and traders will find it harder and harder to create value in the marketplace when online access is readily available to create direct links between buyer and seller.
*This is an edited version of a longer article by Keith B Letourneau, a partner with law firm Blank Rome. The original version appeared in the March 2017 issue of Mainbrace