Bertrand Chan, CEO at Global Shipping Business Network.
The shipping industry is undergoing an accelerated path of digital transformation spurred by the pandemic, which served as a wake-up call that systemic disruption can happen at any time. This is helping to pave the way to the tokenization of the world’s trade flows—a move that could create a new asset class and boost global economic growth. There were about $25 trillion in goods traded in 2022.
Consider the move towards cashless societies. Many countries have been transitioning to cashless payments by first adopting credit cards and followed by mobile payments. China, on the other hand, leaped straight to QR Code payments. The result is that today not only does China have a far higher adoption rate of mobile payments, but a rich ecosystem has emerged around it. Small businesses and major corporations alike have built applications on platforms such as WeChat or Alipay that touch upon every aspect of daily life, creating a multibillion-dollar digital economy.
Since QR Code payments do not require much physical infrastructure such as card terminals or paper for receipts, it enabled micro-merchants in rural areas to quickly embrace digital payments and benefit from an ecosystem of services. Similarly, the shipping industry is undergoing its version of a switch toward cashless transactions, and tokenization could become its “QR Code moment.”
The Shipping Industry’s ‘QR Code Payment’ Moment
For centuries, the venerable shipping industry has relied on the bill of lading, a legally binding paper document that constitutes a contract of carriage, details a shipment and serves as the title for the cargo. Little has changed, and today 99% of bill of lading documents are still paper-based. In 2021, about 45 million bill of lading documents were couriered around the world to ensure shipments could keep moving. While slow, expensive and environmentally unfriendly, the physical attributes of paper documents remain important. Possession of the document itself for instance signifies ownership.
Yet the past year has been fundamental for the shipping industry’s adoption of the electronic bill of lading (eBL), which is being accelerated by the introduction of blockchain-enabled infrastructure. Unlike a mere PDF copy of a bill of lading, an eBL issued over a blockchain network is unique and immutable. This ensures there is always a unique holder of the document. Since the system relies on blockchain technology, the recipient of an eBL also has the guarantee that data has not been tampered with.
This is not without its challenges. Different types of cargo, such as container, bulk and liquid, have different types of bills of lading. If the pace of adoption between them differs, then stakeholders such as banks may hold off adopting, further delaying industrywide adoption. Furthermore, stakeholders generally want a single solution, therefore there must be a level of interoperability between different solutions. It remains to be seen how and when this interoperability will be realized.
For now, there appears to be a concerted effort. Several major shipping organizations, most recently the FIT Alliance, which includes standards bodies representing container and bulk shipping, have pledged to fully adopt eBLs in the coming years (Disclosure: GSBN has signed the FIT Alliance eBL declaration, but is not a part of the alliance). Laws in several key jurisdictions have also been updated to allow for such electronic trade documents, the latest being U.K. law. We can expect more countries to follow.
While a move towards eBLs is significant in itself, it begs the question of what else can this enable. Through tokenization, we can go one step further. By tokenizing the title rights to these shipments, the trade finance sector can emerge as an entirely new asset class and allow for trade to be put on chain. This creates new securitization opportunities to help bridge the world’s $2.5 trillion trade finance gap and enable the creation of novel business models. A tokenized eBL is not simply a digital document anymore, it becomes a financial instrument that can create substantial economic value.
Other Side Of The Coin
The tokenization of eBLs allows goods in transit to become real-world assets and transacted via smart contracts on blockchain-enabled systems. A new approach, the regulated liability network (RLN) promoted by major banks such as Citibank, could offer a complementary mechanism for settling such assets.
Traditionally, asset transfers are carried through messaging that takes place instantly, but settlement does not. RLN focuses on creating a system in which value is stored in a shared ledger with Central Bank Digital Currencies. This offers 24/7 instant settlement of value with multi-asset support. This innovative financial infrastructure could streamline securitized trade flow settlements, potentially enhancing returns without increased capital requirements.
While still nascent, there is evidence of positive traction, with The Federal Reserve Bank of New York’s Innovation Center recently completing a proof-of-concept in conjunction with nine financial institutions and the Swift network. In the future, such financial market infrastructure can become the pipes through which securitized trade flows are settled.
In this future, traditional trade banks will play an important role by offering services where they harness their expertise in risk management and securitization to repackage tokenized eBLs into pools of risks to match the risk appetites of different investors. Banks can significantly improve their return on equity without increasing their capital requirements.
But like any other financial innovation, a major hurdle would be financial regulation. Earlier, the Hong Kong Securities and Futures Commission (SFC) updated the guidelines on tokenized securities-related activities, widely seen as its first step in paving the way for new regulation.
Hong Kong could also become a global hub for digital trade given its natural advantage as an international finance hub and its proximity to some of the largest trading nations, all working together with its progressive policies, regulatory development and investment to grow its Web3 sector. The tokenized eBL can play an important role in the reimagined digital trade ecosystem.
Of course, there are no guarantees that tokenization will be the panacea to reimagining global trade and the financial sector. Yet, with the space already making progress, it seems the industry is sailing in the right direction.
Forbes Technology Council is an invitation-only community for world-class CIOs, CTOs and technology executives. Do I qualify?
