Japanese insurance company Tokio Marine Nichido Fire Insurance and system integration specialist NTT Data Corporation announced that they had completed a proof of concept for blockchain-based cargo insurance certificates for the international trade finance market.
The test involved creating a data bill of lading, letter of credit, and a commercial invoice on a distributed ledger and was then tested from the perspective of the shipper who needs an insurance certificate to satisfy the insurance requirement on the letter of credit needed for a trade finance transaction.
A bill of lading is a legally binding document between the shipper of goods and the carrier in an international trade transaction that details all specifications such as type, quantity, and destination of the goods being shipped. The bill of lading also functions as a receipt of shipment once the goods arrive at the predetermined destination. A letter of credit is issued by a bank to act as a guarantee of payment to a specific entity under predetermined conditions, and a commercial invoice is a customs document that provides a customs declaration by the exporting party when crossing international borders. The new blockchain-based system can take the required data from the bill of lading, the letter of credit and the commercial invoice to create the required digital certificate of insurance.
According to Tokio Marine, the new system can substantially reduce the time it takes shippers to input data compared to the current online insurance certificate issuing service being used. “It was actually proven that the blockchain-based system will cut 85 percent of the shipper’s time of data inputting work in order to receive an insurance certificate. It was also tested in terms of accessibility from the parties concerned, such as consignee and banks,” Tokio Marine said in their statement.
The proof of concept also included testing “a malicious revision to the blockchain data” to see how the new blockchain-based system would react to malicious attacks. The new system performed successfully. “When one block was attacked and rewritten, the tampered block was not distributed to other nodes, and it became obvious that there was inconsistency compared to the other nodes. It also showed that the whole blockchain system still worked with the legitimate data even though one node was attacked,” the statement said.
Marine cargo insurance is an important aspect of international trade as it insures property while in transit against damage or loss arising from risks associated with the navigation of the sea, air, and land. In other words, it is used to insure goods being shipped against any potential risks that can occur in an international trade transaction.
The testing of the new blockchain solution for the marine cargo insurance component for the international trade supply chain began in December last year when Tokio Marine and NTT Data joined forces with to apply blockchain technology to cargo insurance policies. Before the collaboration, Tokio Marine has already been looking into how the distributed ledger technology can be applied to improve insurance policies while NTT Data has been researching how the blockchain can be implemented to improve the entire international trade finance process.
The Blockchain and International Trade
Currently, in international trade, insurance policies are exchanged between importers and exporters and are processed internationally through different involved parties such as banks. However, the documents involved are primarily paper-based, which creates time-loss due to the paper transfer, risk for misplacement of documents and opens up the potential of falsification of documents. By implementing blockchain technology into the supply chain management process, all documents involved in a trade finance transaction can be digitized and made impossible to tamper with, while still sharing the information with all transaction stakeholders in a transparent manner.
Supply chain management is an area of commerce, where we are witnessing several blockchain proof of concepts.
As previously reported on BTCManager, IBM and Maersk are developing a new supply chain solution on the blockchain that will enable stakeholders in an international trade transaction to track and manage the paper trail of millions of shipping containers by digitizing the entire supply chain with improved transparency and security. IBM and Maersk believe that should their new solution be adopted industry-wide, it could save the shipping and logistics industry billions. The new blockchain-based system is expected to go into production towards the end of 2017.
European banks ING and Société Générale and commodity trading house Mercuria have also been developing a blockchain solution for international trade. Their new blockchain solution called Easy Trading Connect focuses on the oil trade and finance sector and aims to digitize an “old-age sector” that still involves the use of paper documents for processing transactions. The new blockchain-based Easy Trading Connect solution can drastically reduce transaction time and allows real-time access for all relevant parties in an oil trade transaction.
There is also the Australian startup Blockfreight that aims to disrupt international trade by developing a blockchain specifically for the shipping and logistics sector. Blockfreight has built a blockchain that allows for “applications to be built for the supply chain to bring innovation and efficiency to container freight, logistics, and trade.”
Given the amount of interest by industry stakeholders to implement blockchain technology to digitize the trade finance process, we can expect blockchain technology to revamp the current status quo in international supply chain management. The sooner the shipping and logistics industry adopts one or several industry-wide distributed ledger-based systems to conduct international trade transactions the more efficient the industry will come, and the more cost savings industry players can bank.
While implementation of blockchain technology in the financial services sector will still take time due to regulatory challenges and the cost of implementing new systems with legacy banking systems, the shipping and logistics sector looks much more prone to blockchain disruption. The distributed ledger technology that underlies the cryptocurrency bitcoin provides the perfect technological solution for the digitization of the documents involved in international trade transactions.
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