Blockchain may feel like an alien concept, but it’s already walking shipping’s streets providing real-world solutions to real-world problems, explain Deanna MacDonald and Karim Jabbar.
Blockchain is currently being hyped as the solution to all kinds of problems within virtually any industry, ranging from energy production to finance and, as of recently, maritime. Judging by the number of large industry players engaging in the space, and the amount of money being poured into various blockchain projects, there is definitely a momentum building up.
In this summary we sieve through the high-level noise, and identify specific, real-world cases in the maritime industry where blockchain could provide tangible solutions—Smart Emissions Reporting and Single Window Systems for customs clearance and beyond. Before expanding on the specific use cases, let’s recap the basics of blockchain technology, its underlying principles and types of implementations.
If you think about the Internet as the first layer, blockchain is poised to become the next layer of the Internet. Together with the applications that run on top of both of them, we are beginning to create the future of digital infrastructure.
Blockchain, first and foremost, represents a global movement of open source technology that is made by the people, for the people and is accessible to anyone with an Internet connection. It is also an umbrella term for the many technologies, protocols and principles that have been combined together to create shared distributed databases that can store any asset we can digitally represent, which is almost everything.
These digital peer-to-peer databases where any transaction involving value is validated by a ‘validator’ or ‘miner’ using cryptography, is then secured and timestamped to a chain of other entries and stored in a digital ledger. A copy of each transaction in the ledger is maintained by a global network of computers, or nodes, which prevents any party from altering or changing the legitimacy of the information being exchanged. This digital asset ledger is then cryptographically secured, copied and stored in thousands of network nodes all over the world that collectively maintain this database. They are updated in real time, providing the highest level of security on the market and a global source of truth. It also creates a decentralised storage solution for Big Data as well as the sharing of resources to host it.
At their core, blockchains are distributed databases of immutable transactions creating a global, decentralised source of trust and removing the need for third party intermediaries. Blockchain is not a monolithic technology: it is multifaceted and is manifested in numerous implementations that draw on the overarching principles highlighted above in different ways. More specifically, blockchains are shared distributed databases of digital assets that are accessible by both human and non-human entities, in accordance with the protocols (or sets of rules) on which they are founded. This means that so-called “public blockchains” are owned by everyone and controlled by no one (e.g. Bitcoin, Ethereum), whereas “private blockchains” are only available to duly vetted participants that have been granted access to the system (e.g. Hyperledger, Corda).
A useful analogy is the open Internet versus the restricted nature of an intranet. These shared databases—public or private—represent the infrastructure layer in which information can be securely stored, monitored and tracked, thereby creating transparency and accountability. On top of this infrastructure layer is an application layer. Each digital asset is linked to a digital token which can then be programmed. That makes the token ‘smart’, enabling it to be digitally tracked or transacted automatically according to the pre-programmed terms.
Public and private keys as well as pseudo-anonymity can be built into the applications in order to secure any private transactions and business processes from the public at large, whilst providing credibility and legitimacy to those engaging in them. Empowered by a smartphone or an Internet connection, users can securely trade and transact with and between each other, according to their priorities, monetising system and social values. This digital infrastructure will enable new ecosystems of value to emerge, decentralising the global marketplace to make it accessible to all, regardless of scale.
So, in the context of the shipping and maritime industry, how might that play out?
Case Study 1 – Smart Emissions Reporting
The maritime shipping industry is responsible for almost 1000 tonnes of CO2 emissions and 1000 tonnes of greenhouse gases (GHGs) annually and this is expected to increase by 50 per cent to 250,000 by 2050. Fuel and efficiency costs are rapidly escalating at a rate much higher than the revenue of most industrial fuel users; exposure to toxic emissions from shipping has been reported to cause as many as 60,000 cardiopulmonary and lung cancer related deaths annually; and, as fuel costs tighten, the profit margins of shippers are causing a high level of fraudulent collusion throughout the supply chain in order to recover these costs. All in all, fuel consumption and shipping emissions contribute to systemic challenges impacting economic, social, environmental and political stability worldwide.
At the heart of this problem lies operational inefficiencies. It is estimated that CO2 emissions and energy consumption could be reduced by up to 75 per cent by applying new operational measures and leveraging existing technological solutions. In addition, global coordination in the form of data collection and reporting and regulations in the maritime industry are virtually non-existent.
Although there are currently no global regulations in place, the maritime industry has been facing strong pressure from policy makers and the public to reduce emissions. European benchmarks are being set in light of the recent EU-MRV Regulation, which comes into effect January 1, 2018. Ship owners and operators will be required to annually monitor and report their emissions data including port of departure and arrival, amount and emissions factors for fuel consumed, CO2 emitted, distance travelled, time spent at sea, cargo carried and transport work. This data will be the basis of CO2 emissions calculations and requires external verifiers and accreditation schemes. The need to monitor and report on emissions data (in Europe to begin with) will soon be legally binding. However, an outstanding issue with the EU-MRV regulation remains that the approach and process, templates and technology required to implement and comply with this regulation has not yet been developed.
The Blockchain Value Proposition
Given the opportunity with respect to the EU-MRV regulations, the application of blockchain technology represents the chance to revolutionise CO2 emissions and the fuel MRV ecosystem in many important ways. Below is a preliminary outline of what becomes possible when blockchain technology is applied to enable a Smart Emissions Reporting scenario. (See also our ‘Smoke and Mirrors’ article this issue from Allan Skouboe of Danfoss for more on technologies enabling smart regulation)
Case Study 2 – Single Window Systems
Although global trade represents billions of dollars in revenue, an estimated 1 trillion USD could be gained from process improvement. Such processes contribute to the losses and inefficiencies resulting from risk, fraud, corruption and anachronistic manual paperwork delays. Furthermore, high costs in logistics and uncertainties in delivery time constrains the country from fully participating in the global production network. In order to simplify border formalities, address inefficiencies and reduce corruption, customs offices worldwide have endeavoured to establish a single electronic submission system, or the Single Window Systems (SWS). However, the SWS are not yet an optimal or well functioning system for customs clearance as they currently rely on multiple IT systems and a non-integrated process for documentation for the various different processes globally.
There is an opportunity for multiple stakeholders and customs offices to improve the SWS by leveraging blockchain as a technology platform. This would enable the introduction of one-stop services and simplify operations. The implementation of a blockchain single window system (BSWS) could drive simplicity and efficiency as well as being a critical enabler to broaden customs applications to new verticals.
This might include real-time financial services, reduction in fraud and deepened trust, collaboration and transparency between stakeholders throughout the entire T&L value chain. Those taking this step would become pioneers driving the digital supply chain whilst creating a robust solution to both physical and financial supply chain issues.
The Blockchain Value Proposition
There are several drivers for implementation within this space including:
•Multiple writers/agencies that require a single point of entry and a shared database
•Absence of trust exists between parties. Where this is the case blockchain becomes the trusted intermediary
•Interactions between, and dependencies of transactions call for a single database that can be integrated in the form of smart contracts
Current digital solutions can only address two of these use cases—a single entry window for electronic documents and global payments. However, there is no standardised technical solution and little opportunity for harmonization of single window systems with other T&L stakeholders’ IT. Furthermore, although global payments can be made, they are still based on international wire transfers which must go through two or more correspondent banks and can take up to six days to settle. Implementing a BSWS would capture an opportunity far wider than improvements in customs activity. A shared database means that value grows exponentially with each new participant in the global T&L chain.
The following table shows the requirements, value drivers and blockchain impact in this scenario.
In addition to the challenges associated with implementing a relatively immature technology, there are three high priority industry challenges and barriers that must be addressed before any type of technological solution can be adopted.
The rules and terms of transactions must be agreed upon and clearly expressed in the smart contracts. In a maritime industry that is characterised by a lack of unified formal standards and regulations, identifying, rewriting and coding regulatory guidance and legal frameworks represent a challenge.
(Regs) Will the EU regulations expand to account for the approach, process, templates and technology required to uphold this regulation?
(Customs) Can customs administrations harmonise single window data/rules with internationally recognised standards?
The type of blockchain configuration—public or private—must be carefully considered. It is imperative that the public or private configuration is established carefully. Each configuration has a unique value and risk proposition and these must be aligned with the security governance and data interoperability of the stakeholders.
(Regs) The data policies for the collection of emissions reporting are designed for closed, private and centralised storage. How will the EU (partially available data) and the IMO (confidential data) grow to accommodate the need for accessible and transparent data for emissions reporting and carbon markets?
(Customs) What is the capacity and motivation of the customs office to source and share data? What are the characteristics of the relationship between the sending and receiving entities?
If blockchain is to be used as an asset ledger for trade, these assets must be backed in order to ensure the conversion of blockchain assets to physical assets. As a technology, blockchain databases can be applied for asset tracking and for the actual movement and exchange of assets.
(Regs) How can we bridge the gap between the digital and the physical in the maritime industry? What types of IoT sensors and communication technologies will also be needed to monitor and track emissions and fuel?
(Customs) What is the nature of the assets being moved around? Who stands behind these assets being represented on the blockchain?
Stakeholders in the shipping value chain, namely ports, charterers and ship owners and financial institutions, will be incentivised to implement blockchain as an industry-wide, low-cost, easily-adopted technical tool for meeting the new challenges posed by the changing landscape of global trade. Yet, although technologies such as blockchain might appear as though they provide many solutions to the problems we are facing in the maritime industry, successful development and implementation ultimately rests upon the knowledge, creativity and willingness of the industry to break free from the constraints that currently bind it.
For example, the lack of integration between hardware (IoT, sensors etc.) and software (blockchain protocols, applications etc.) the lack of transparency and accessibility currently embedded within our legacy systems, the lack of interoperability between these legacy systems, and the switching costs associated with moving from independent systems to one cohesive system all represent major limiting factors to future technological upgrading.
This technological upgrading will not be spurred solely by one technology or player. Plagued by a lack of data and transparency, and struggling with inaccurate data and inconsistent and non-binding regulations where they exist, addressing the systemic root causes of the problems facing the maritime industry today will require a globally co-ordinated approach from all stakeholders.
Images courtesy © Getty Images/Sony Pictures/Colombia Pictures
This article appeared in the Q3 2017 issue of Futurenautics.