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From Ince & Co

Blockchain Technology – Changing the way we do business

17.08.2018

In this update, we explore through a series of FAQs, the draw behind blockchain technology and smart contracting, which is slowly changing the way we do business.

1. What is block chain and what are its advantages?

Blockchain is a ledger of transactions and data that is stored on multiple machines. While most databases are housed on one centralized server, which is prone / vulnerable to hacking, the storage of data on multiple machines / computers (‘nodes’) removes any single point of failure and control (disintermediation), and makes records almost incorruptible, while entries and changes are 

2. How can someone be sure that the participants in the block chain are not providing false data?

As all data on the blockchain are stored on nodes, this data is validated and confirmed in multiple ‘nodes’ and each computer that stores the data runs an algorithm to confirm that a transaction is either valid or invalid before appending it onto the previous chain of data. 

3. What are the potential areas of use in supply chain management? How can blockchain reduce your supply chain costs, and add value to your operations?

As one of its use cases, blockchain forms a platform that “smart contracts” can operate on. Various parties to the supply chain (shipper, buyer, supplier) may choose to contract using these “smart contracts”, which is a self-executing computer code that automatically performs functions based on the information supplied to it. 

(a) Accountability and transparency throughout the supply chain process 

For products that need to be shipped within a certain range of temperatures –  for example, poultry – physical devices and other items can be embedded within the supply chain line (such as within a shipping container containing these products) to provide real-time updates and data to the blockchain for all parties’ review.
This adds value to your operations as any anomalies can be rectified swiftly and in real time, so as to ensure that damage to the cargo is minimised. Using the example given above, once the temperature of the shipping container rises above the optimum range, the shipper can quickly take steps to reduce the temperature and salvage the products, as opposed to the scenario where parties realise at the discharge port itself that the products have gone bad.  In the worst case scenario, the bulk of raw data also makes it easier to pinpoint liability to the exact moment where things go awry. 

(b) Reduces risk of unwanted alterations to data (i.e. by fraud, human error) 

Participants on the blockchain are constantly asked to “verify” proposed alterations / additions of data, before the same can be appended to the previous chain of data. This greatly minimises any risk of fraud occurring – in order to mislead the network into uploading false information, the fraudster would have to get each and every participant on the blockchain on board (an unlikely event as there are so many different nodes on the blockchain). 

At the same time, this system of “verifying” alterations multiple times before a change is accepted also lowers the risk of human errors. By minimising avoidable mistakes, this in turn helps to improve the accuracy and efficiency of your operations. 

(c) Streamline operations 

Blockchain has the potential to reduce the costs of supply chain management by simplifying transactions and minimising the administrative burdens in contracting. For example, if all parties to the smart contract have access to the “most updated versions” of the relevant shipping documentation (e.g., bills of lading, charter parties, surveyor reports, etc) at all times, this reduces the precious time spent / wasted on updating and liaising between the parties. 

4. How is the technology already being applied across the supply chain industry?

(a) Pacific Tuna blockchain project: This project uses blockchain to track tuna supplies from a vessel on to the market, the main purpose of which is to eliminate illegal fishing and to enhance transparency in the food supplies market (i.e. prevent mislabelling of food products). This initiative was launched in December 2017 by the WWF in partnership with Viant (blockchain company). 

(b) IBM and Maersk: In January 2018, Maersk and IBM announced their intention to enter into a joint venture in order to provide more efficient and secure methods for conducting global trade using blockchain technology. The platform is currently being tested by a few selected partners, and not yet open to public. 

5. What are the main limitations / potential legal issues that arise with the use of blockchain?

Notwithstanding the advantages and improvements that blockchain technology promises, it also brings with it much uncertainty and novel legal issues.

First and foremost, as with all technology, storing information on a blockchain puts your business up to some degree of cybersecurity risks (even if this is a minimal risk). 

Secondly, as the growth in blockchain technology has been extremely quick, there may not be an adequate legal framework in place to deal with legal issues that may arise in the event that something goes wrong. For example, anti-money laundering requirements and anti-corruption laws will have to be updated to accommodate anonymity in blockchain transactions.

Thirdly, as blockchain ledgers have no specific physical location, transactions could therefore be subject to the jurisdiction of any given node in the network.  It will thus be difficult to pinpoint which country has legal jurisdiction in the event of a dispute, which may result in complex jurisdictional issues due to the involvement of multiple contractual relationships.

6. Do you need a block chain?

It is a balance to strike between embracing new technology to innovate your business, and trying to reduce the potential risks of venturing into unchartered territory. 

The fact of the matter is – whilst we can try to anticipate new legal issues that blockchain might bring, there will likely be issues that we can see only after this technology becomes widely adopted and used. In the meantime, legal practitioners will have to work hand in hand with the various industry players who venture into the use of blockchain to ensure that as many legal issues are identified and addressed so as to fully maximize the benefits of the same when eventually adopted.

Moses Lin – Director, Incisive Law LLC 
Moses.lin@incisivelaw.com

Samantha Kong – Associate, Incisive Law LLC 
Samantha.kong@incisivelaw.com