Ships Don’t Lie: Blockchain and a Secure Future for Global Shipping

In an era of internet jokes morphing into cryptocurrencies with multibillion-dollar market cap values and non-fungible tokens offering the next evolution in art collecting, the now omnipresent blockchain technology has been met with both confusion and creativity. Across the business world, it has been revolutionary as a trustworthy solution for digitization, but some sectors have been quicker to adopt it than others. For shipping, an industry considered “behind the curve” when it comes to technological advancements and environmental sustainability, blockchain implementation offers it the opportunity to be towed into a new, more resilient era.

Q1: What is blockchain?

A1: Blockchain is a public, digital ledger that tracks all transactions and movements of assets in real time. Each transaction, or “block,” is permanently recorded on a “chain” that is accessible to all authorized users, which confirms the timeline and order of actions. Sometimes referred to as distributed ledger technology (DLT), blockchain has three essential components: decentralization, immutability, and transparency. Blockchain data is not housed in a central location, allowing it to operate in real time. As every new block is added, the network is immediately updated, and the recent movement is made visible to all users. Transactions on the blockchain are also immutable, meaning they cannot be altered or reversed. New blocks verify and secure the previous block, strengthening the chain with each new transaction and supporting the reliable transparency of the data stored.

Though blockchain is widely known for underpinning cryptocurrencies, it has become a central component for the efficient dissemination of information and data across the business world. Blockchain gives authorized users access to data tracking orders, accounts, production, schedules, and shipping in real time. Eliminating the administrative holdups caused by the duplication of effort on matters like data entry and other administrative actions, blockchain cuts through delays that have traditionally slowed business efficiency. In 2018, the Scholl Chair published a paper examining this topic in the U.S. context by exploring how blockchain could enhance domestic business and prosperity.

Q2: How can blockchain be used to better manage shipments?

A2: Blockchain can mitigate some of the issues the shipping industry has long faced. Shipping delays, often caused by slow manual administrative processes, have sometimes bungled cargo companies’ logistics and preparedness. These delays often come at high costs. Hundreds of billions of disputed dollars sit stagnant each day as payments average 42 days to reach the invoicing company. Processing and administration costs can comprise nearly a fifth of total transportation price tags because of the labor-intensive (and error-prone) nature of manual document handling on which the industry still relies. Blockchain provides companies with the framework to eliminate these burdens and speed up business operations, especially in the maritime sector.

A U.S. Department of Transportation Maritime Administration report identifies three key areas in which blockchain can increase shipping efficiency: shipment tracking, smart bills of lading (B/Ls), and smart contracts.

High volumes of canceled orders, unpredicted cargo movements, and cargo loss during the pandemic are costly problems made worse by the lack of real-time information available to companies. The ability to track and correct an issue in a timely manner depends on reliable access to data, something traditional business practices prevent when shipments can be tracked in the margins of hardcopy paperwork. Blockchain enables this access immediately, allowing companies to course correct in a timely manner when issues arise.

The shipping industry also faces delays and fraud related to B/Ls. A B/L is a form that details the amounts, types, and destination of goods carried in a shipment. The B/L provides all the information to process a shipment for the carrier and shipper, while serving as a receipt, contract, and document of ownership of the goods. As most are physical documents and require mailing, a B/L can take days to arrive from stakeholders and is often needed physically with a shipment to be processed and claimed. Cargo often arrives ahead of the physical B/L to the relevant port. Fraud is also a concern with physical B/L as they can easily be modified with inaccurate cargo descriptions, forged signatures, and false corporate logos. Blockchain enables the digitization of these documents into secure, smart B/L, which speeds up the shipping approval processes, while reducing fraud risks. Administrative holdups at ports and customs can be reduced with the use of smart B/L technology, creating a more efficient global shipping system.

Smart contracts are another area of interest for shippers. In their current form, transactions in the shipping sector are inefficient and expensive. Figures from 2017 estimate digitizing paperwork could save the sector a total of $38 million per year. Most shipping payments currently lack automation, requiring all transactions to be invoiced and bank transfers awaited to complete transactions. This delay leads to risks of loss due to non-payment or exchange rate fluctuations but can be mitigated by smart contract technology automatically approving payments upon the completion of the job.

About half of shipments currently on the seas have already implemented blockchain technology in some form, with the first uses occurring in 2018. Joint ventures, like Maersk and IBM’s TradeLens, are paving the way toward a more resilient shipping industry with over 230 marine gateways signing on. However, there is still a pressing need for standardization across the entire supply chain to prevent pandemic-exposed weaknesses. Nine leading maritime cargo companies have formed the Global Shipping Business Network to collaborate on a platform based on digital ledger access for companies. Ports like Rotterdam and Antwerp are a few of the many to have begun integrating blockchain-based technologies in their operations. However, challenges persist for the technology to be implemented across the entire industry. In particular, scalability issues and limited technical training continue to challenge the adoption of blockchain across the maritime sector.

Q3: How can blockchain move the shipping industry toward sustainability?

A3: The conversation around the shipping industry’s resiliency is incomplete without considering its environmental impact. Shipping is responsible for about 3 percent of global carbon dioxide emissions, making it one of the most polluting industries in the world. Yet, blockchain has the capacity to make it more sustainable through tracking fuels, space maximization, and digitizing paperwork.

Shipping’s high pollution levels are primarily due to the low-quality, sulfur-laden “bunker” fuel used for cargo ships. Tracking and tracing these fuel sources is notoriously challenging because of the paper-based note systems used in its acquisition. The limited information on the industry’s fuels can be leveraged to mislead shippers on the origins or quality of the fuels. Blockchain projects like BunkerTrace are working to mitigate these issues by offering secure information about fuel characteristics and journeys. By adding a detectable DNA tag to the fuel, anyone can confirm fuel data quality, minimize risk for users, and ensure compliance with International Maritime Organization (IMO) regulations and other standards. Traditional fuel replacements are also being studied as options to limit shipping emissions. Biofuels and hydrogen, for example, have become leading alternatives to oil and gas.

Over $25 billion in revenue is lost each year from the annual 100 million shipping containers that cross the ocean nearly empty. Blockchain is in the early stages of being harnessed to reduce this inefficiency by securely tracking and selling unused space to exporters moving smaller loads. The Omani startup Cubex Global is leading the way in maximizing each available cubic meter of cargo space to reduce the over 280 million tons of carbon emissions the practice emits.

Digitizing paperwork is also key to reducing the shipping industry’s environmental footprint. The annual printing of B/Ls alone is estimated to be the equivalent of 400,000 trees per year. While critics may be quick to point out that blockchain and most cryptocurrencies are extremely energy-intensive, there have been recent advancements in blockchain that make it far more sustainable. For example, switching from proof-of-work mining like Bitcoin to proof-of-stake mining like Ethereum’s approach uses 99.95 percent less energy. Furthermore, even blockchains that rely on proof-of-work mining can source 100 percent of power from renewable energy.

Q4: How can the European Union’s Emissions Trading System (EU ETS) be used as a precedent for shipping sustainability?

A4: While the IMO is setting fuel and other sustainability standards, the EU ETS has proposed language regulating shipping emissions. This means shipping companies are subject to emissions restrictions and cap-and-trade mechanisms, similar to other EU-based industries. Shipping companies would have to monitor and report emissions, something that can be done effectively and reliably using blockchain. This technology enables a single, trustworthy platform for carbon measurement, ensuring companies are all using the same standardized measurements. After reporting, companies will have to surrender allowances or carbon credits relative to their emission levels. Allowances will have to be purchased to cover 100 percent of emissions for intra-EU voyages and 50 percent of emissions from voyages embarking from or arriving to EU ports.

Companies in this scheme will have to purchase carbon credit, incentivizing a transition toward high-quality fuel to limit emissions. Companies will be forced to confront the uncertainties in fuel origins and content that blockchain developers are working to make more transparent. Compliance with the EU ETS requirements for shipping can be streamlined through blockchain and could set a precedent for the industry’s transition to new technologies as shipping companies navigate the unknowns of future environmental efforts.

To boost efficiency—both environmental and business—the shipping industry should invest in standardized blockchain technology. The world has watched this year as key ports struggled with unprecedented levels of bottlenecking, effectively shredding the effectiveness of the paper-based system on which global shipping still relies. With these weaknesses exposed, and increased shipping threatening climate goals, it is time to implement blockchain throughout the industry.

Emily Benson is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Lexie Judd was an intern with the CSIS Scholl Chair.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2021 by the Center for Strategic and International Studies. All rights reserved.

Emily Benson
Director, Project on Trade and Technology and Senior Fellow, Scholl Chair in International Business

Lexie Judd

Intern, Scholl Chair in International Business