Blockchain reaction: will hard cash remain dominant in shipping?

Will blockchain technology and Bitcoin transform international payments for shipping, or will it prove another false turn in the long-running attempts to streamline global trade? Julian Bray examines the evidence so far

Bitcoin, blockchain and cryptocurrencies may still sound to some in shipping like something from the outer limits of science fiction, the creations of smart people with too much time on their hands and their heads in the clouds.

They would be wrong. Distributed ledger technology, as the logic behind blockchain is known, has already arrived and is being used by one of the biggest players in shipping.

In January this year, trading house Mercuria revealed it was shipping a cargo of African crude to China and selling it using blockchain.

“The energy industry will have to digitalise more and more in oil production, refining and shipping,” says Marco Dunand, Mercuria’s chief executive and co-founder. “So traders will also have to participate.”

Dunand’s enthusiasm to embrace blockchain to speed secure payments comes as momentum grows among global banks and financial services firms to understand the technology and put it to use. At its best, it is seen as having the potential to be fast, secure and cheaper than current money-clearing processes. An estimated 400 business start-ups are already using the concept.

Yet despite increasing interest in its potential, blockchain — along with the cryptocurrency Bitcoin and similar initiatives — remains weighed down by a miasma of technological jargon and marketing hyperbole that makes it difficult for outsiders to gauge its credibility.

twplus Craig Steven Wright: ‘I know that the world will never believe me now’ (Photograph: Mark Harrison)

In essence, blockchain works by creating permanent, secure public “ledgers” of accounts and transactions that could potentially replace today’s complicated, expensive clearing and settlement systems.

Bitcoin, the controversy-prone virtual currency created in 2009 and now valued at around $14bn, is based on blockchain technology but for many in mainstream business is yet to overcome its chequered record.

In 2014 the world’s biggest Bitcoin exchange, Mt Gox, declared bankruptcy, leaving 24,000 claimants battling to recover at least some of the lost Bitcoins they held in their accounts.

Mt Gox founder Mark Karpeles faces a criminal case brought by the Japanese authorities after nearly 850,000 Bitcoins disappeared from the exchange’s virtual vaults. He denies any wrongdoing.

Although 202,000 Bitcoins were later recovered, it may take years for claims to be settled, and perhaps even longer for the reputation of the currency to recover fully.

But what many — including Dunand and others in trading and shipping — are focused on are the potential practical uses of blockchain with existing currencies.

About 70 of the world’s biggest financial institutions are co-operating in the R3 blockchain platform run by a New York firm that is working on the creation of an industry standard for the nascent technology. Banks believe blockchain could save money by making operations faster, more efficient and more transparent.

In January this year, DTCC, the world’s biggest repository of post-trade credit derivatives data, which processes $1,500 trn of securities a year, announced its intention to move its database onto a blockchain ledger, in what is seen as a first big test for the technology. Citigroup, JP Morgan and UBS have all contributed to the project.

twplus The Bitcoin Foundation’s Gavin Andresen

Meanwhile, Walmart is using blockchain to ensure the provenance and quality of pork in China, and Wells Fargo and Commonwealth Bank of Australia have used it to track a shipment of cotton from Texas to Qingdao.

Oliver Wyman, the US consultancy, said in its authoritative annual commodity report last October that blockchain was likely to force rapid change in the oil & gas sector, which has been largely immune from recent internet technology leaps.

“The first ones to adopt the new technology, like blockchain, will have a significant competitive advantage,” says Roland Rechtsteiner, a partner and energy specialist at Oliver Wyman.

Mercuria’s use of blockchain for a physical oil cargo brings the technological upheaval directly to shipping, a business that remains anchored in a world where many basic processes, such as the paperwork for an oil tanker shipment, remain archaic.

“I don’t know if it is 17th- or 18th-century, but it’s not that sophisticated and ... with today’s technology it seems to be easy to improve the efficiency of the system,” Dunand told the Reuters Commodities Summit last autumn.

“I’ve seen sufficient bank presentations to believe the [blockchain] technology is there and it’s solid. And I believe we’re going to see a digital transformation of the oil & gas industry.”

Mercuria’s concept is to use a blockchain ledger to pass title from the seller to the shipper and on to the buyer, instead of a physical bill of lading. Since blockchain data is unique and non-replaceable, it would avoid the traditional concerns about security and fraud.

Further, blockchain’s evangelists believe it could open the way for smart bills of lading in which internet-connected cargo- monitoring devices could directly check that the terms of shipment are correct and the cargo is in good condition.

Such ideas remain concepts for now, with a range of challenges from the technological to the legal. Blockchain technology is still not recognised by many governments, so there is the risk of clashes over jurisdiction.

Inertia will inevitably also be a drag. Wyman estimates it will take at least a decade for blockchain to overhaul core parts of the financial industry.

Dunand admits parts of the physical energy markets could remain stuck in their ways for years. “We could adapt it fast,” he says, but “for blockchain to work, you need sufficient amount of participants to go for it. That is the only element that is slowing the development of blockchain.”

Blockchain could indeed be the next internet revolution. And it could be making an impact in shipping sooner than you think.


Keeper of the keys:  The Nakamoto enigma

History has Charles Babbage as the father of computing. For the world wide web it is Tim Berners-Lee. And for Bitcoin: Satoshi Nakamoto.

But while there is a documentary record of Babbage’s engineering work, and Berners-Lee is still around to talk about his breakthrough, Nakamoto’s identity remains a mystery that grows as time passes since the first Bitcoin transaction in January 2009.

Like Keyser Soze in the 1995 film The Usual Suspects, Nakamoto has proved a compelling enigma, adding to the mystique that surrounds the world’s first virtual currency.

Last year saw a flurry of excitement when a man called Craig Steven Wright went public with a claim that he was Nakamoto, and he could prove it with documents that could be independently verified.

tw Roland Rechtsteiner predicts that blockchain first-movers ‘will have a significant competitive advantage’ (Photograph: Oliver Wyman)

Claims that the Australian computer scientist was the now-fabled Nakamoto won support from prominent backers.

Jon Matonis and Gavin Andresen, influential names in the Bitcoin Foundation, backed Wright, until cracks appeared. Wright backtracked on his promises, saying he lacked the “courage” to face the publicity and scrutiny it would cause.

“I believed that I could do this,” he said in a blog post last May. “I believed that I could put the years of anonymity and hiding behind me. But as the events of this week unfolded and I prepared to publish the proof of access to the earliest keys, I broke. I do not have the courage. I cannot.

“They were not deceived but I know that the world will never believe me now.”

The saga only added to the enigma, since there were arguments over who was the “real” Wright. Was it Steven or Stephen? Was he from Sydney or Brisbane?

So if Wright isn’t Nakamoto, who is? Others named amid the flood of speculation are US computer scientist Hal Finney, who died in 2014; a Japanese man named Dorian Nakamoto living in California; and another American, Nick Szabo.

Such speculation would be amusing yet untroubling if the stakes were not so high. In this increasingly risk-averse age, the long shadow of the mystery threatens to undermine Bitcoin’s credibility, not least because Nakamoto’s Bitcoin hoard is worth an estimated $1bn.

While Nakamoto may indeed be someone who has chosen to preserve his privacy behind anonymity, he might just as easily be someone hiding in plain sight, like Kevin Spacey’s character Roger “Verbal” Kint and his alter ego, Keyser Soze.

As Verbal says in the film: “A man can convince anyone he’s somebody else, but never himself.”

To coin a phrase…

Blockchain A type of distributed ledger, comprising unchangeable, digitally recorded data in packages called blocks, rather like collating them on a single sheet of paper. Each block is then “chained” to the next block, using a cryptographic signature. This allows blockchains to be used like a ledger, which can be shared and accessed by anyone with the appropriate permissions.

Cryptocurrency (such as Bitcoin) A digital currency based on mathematics, in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Cryptocurrencies operate independently of a central bank.

Distributed ledger A type of database that is spread across multiple sites, countries or institutions. Records are stored one after the other in a continuous ledger. Distributed ledger data can be either “permissioned” or “unpermissioned” to control who can view it.

Mining The process by which transactions are verified and added to a blockchain. This process of solving cryptographic problems using computing hardware also triggers the release of cryptocurrencies.