Tradefinex Xinfin tokenization blockchain

How Tokenization can resolve electronic Bills of Lading (eB/Ls) issues

March 13, 2020 Off By Steven Anderson

EB/Ls introduce a number of benefits — compared to paper-based bills of lading. These include: speed and ease of transfer, reduces administrative costs, simplifies dealing with errors, and reduces risks of fraud.

Today, the international shipping industry accounts for close to 90% of global trade. Fact: Shipping is the lifeblood of today’s global trade economy.

A form of Sea-Trade made famous this year by climate change activist Greta Thunberg which has been quietly revolutionizing the global shipping industry. As Seaborne trade expands, benefits for consumers around the globe continue to benefit from improved efficiency and competitive freight costs. An increase in Seaborne trade and usage of eB/Ls also benefits the world by decreasing Carbon Emission and supporting the environment for the next generation. Thanks to economic liberalization around the globe, the industry’s prospects continue to grow.

With the growth of the Seaborne trade, several challenges abide. Particularly on the Bill of Lading (BOL) front.

What’s a Bill of Lading?

Bill of Lading is a prerequisite to moving freight shipment. The BOL works as a receipt for freight services, a contract between a shipper and freight carrier, or a document of title. The legally binding document provides carriers with details required to process freight shipment.

What’s the importance of Bills of Lading in Global Trade and Finance?

A BOL is important in Cross Border Trade and Finance for a number of reasons.

These are as follows:

  • As a receipt for goods shipped: Details of a shipment are included in this document. The details may include — quantity, weight, packaging and any notable conditions of the goads in transit.
  • Confirms carriage and serves as a proof of the contract: A BOL serves as proof of a valid contract and agreement to deliver specified goods by sea. The contract exempts the carrier from any form of contract between a buyer and a seller.
  • As a document of title: A BOL is a document of title. That is it’s transferable through endorsement even when goods are in transit. A BOL allows a receiver of goods in transit to take possession of the goods as soon as a vessel dock.
  • As a binding Contract of Carriage between the Buyer and Carrier: A BOL is a binding contract between a carrier and a buyer/receiver of goods in transit. It highlights the features of goods being transferred. Terms agreed upon outside the bill of lading aren’t included in a BOL.

What is eB/Ls or Electronic bill of lading?

An electronic paperless bill of lading is a bill of lading issued electronically instead of being printed on paper and issued physically to the customer as a hard copy.

Benefits of Electronic bill of lading

EB/Ls introduce a number of benefits — compared to paper-based bills of lading. These include: speed and ease of transferreduces administrative costssimplifies dealing with errors, and reduces risks of fraud.

eB/Ls also promotes trades faster with more transparency and dependency on machines rather than humans and it also helps trade parties to not stop with current problems in the world like CoronaVirus or Covid-19.

Benefits notwithstanding, electronic systems introduce a new risk: Hacking. Citing the “ MSC Mediterranean Shipping Company v Glencore [2017] EWCA Civ 365” case, hackers gained access to the pin causing unwanted inefficiencies.

Challenges facing eB/Ls and eB/Ls-platforms currently in use

  • Uncertainty over the legality of an electronic transferable record

With legal rights associated with traditional paper B/Ls being well-established, the legal status of eB/Ls remains unclear. Only the USA has a law that outlines and supports the use of eB/Ls. That’s despite several countries trying to adopt eB/Ls.

At the same time, there’s no clear pattern on how to establish rights based on an electronic acknowledgment given by the carrier to the holder of the eB/L. At present, whether the law catches up with the technology to ensure the transferability of rights and liabilities under an eB/L without specific contractual agreement remains uncertain. This hinders widespread eB/Ls adoption.

  • Principal Issues for Banks

With the uncertain legal status of eB/Ls, banks don’t treat security over original paper B/Ls as legally equivalent to security over eB/Ls. (Source)

Notably, there are risks that a bank holding an eB/Ls may not be able to claim possession of goods in certain cases. For instance, there’s a risk that failure of a legal system to recognize eBLs, as part of its local law, may deny holding banks their claims.

While such risks may be overrated, in cases of insolvency, the rights of a bank depend on whether the property has passed from seller to buyer. Whilst such terms are dependent on particulars in a contract of sale, banks can be exposed to risks of losses in case of a buyer’s insolvency. Due to the instant nature of bills the risk is high, however, paper bills also hold some risk.

  • Lack of onboarding

Digitization platforms like TradeTrust, Bolero, and essDOCS have established surefire central electronic platforms for the transfer of eB/Ls. However, In most of the cases, they fail to onboard all parties involved in the transactions.

Without proper onboarding of all stakeholders, Electronic bills of lading aren’t receiving the full support and confidence of all participants in the international business scene. That’s predominantly because of security and authenticity in such documents.

  • Lack of clear guidelines under the law

Without clear guidelines on the cross-border transactions under law, a lot of uncertainties — regarding custody of the original documents of Bills of Lading held as eB/Ls — abide.

At the same time, legal problems arise due to the fact that laws in many jurisdictions are limited to paper-based bills of lading. And without proper guidelines in law, more stakeholders remain reluctant to accept e-bills as there’s no clear-cut approach to transfer rights normally obtained when bills of lading pass on to relevant transferees.

  • Traceability challenges with eB/Ls

Lack of traceability of external parties and non-members in eB/Ls is a stumbling block. As well, most eB/Ls Platforms require high subscription fees, which are not feasible for the SMEs that conduct one-time transactions.

To remedy the problem, there’s a need for modern registries in which security interests granted with eB/Ls — evidence of affreightment, contract of carriage, and control of title —can be recorded. At the same time, these registries should be reasonably inexpensive and secure from tampering. What’s more, such modern registries should be easily accessible to authorized users, easy to use, and globally recognized and accepted.

Regarding the banking industry and other legally-sophisticated players in the industry, eB/Ls should provide security that matches or that’s nearly comparable to UCC section 7–106(b)(1–6) as possible.

  • Lack of clear laws on dispute resolution on double financing

Without an effective dispute resolution framework, dispute resolution for double financing for eB/Ls becomes a major roadblock. Banks, which are important players in the trade, may withhold their engagement with E-bills if they increase operational risks.

So as to give the E-Bill functional equivalence, developers of eB/Ls should develop frameworks that enable the replication of laws and regulations in paper bills of lading. Particularly, there’s a need for a system that prevents double-spending/financing by providing the guarantee of uniqueness.

(Guarantee of uniqueness refers to the phenomenon where specific details of a transaction are stored in a tamperproof system allowing verifiability. In a blockchain, distributed ledgers are cryptographically secured on the Blockchain by assigning a unique id or hash and a timestamp when it is added to the network. Since blocks are cryptographically linked to adjacent blocks, anyone seeking to alter contents in eB/Ls would have to modify the content in all blocks to hide evidence. That’s impossible as new blocks are generated 24/7 as more shipping transactions are recorded.)

Can Blockchain remedy problems facing eB/Ls and eB/Ls Platforms?

Following a lengthy incubation period, electronic bills of lading (eBLs) are finally taking their first tentative steps in the shipping world. Through closed systems currently in operation, only banks, traders and carriers that are members can participate. These closed schemes cannot, therefore, be considered as true replacements of traditional paper bills of lading.

However, Blockchain technology makes it possible to offer an open system to shipping stakeholders. Transactions are recorded on a block-by-block basis and each block is added through a computationally difficult puzzle. Therefore, blockchain can remedy problems facing eB/Ls and eB/Ls Platforms.

Figure 1: (source)

With blockchain, an open and decentralized system(illustrated in figure one above) allows synchronizing of ledgers held by all the participants. This allows participants in the shipping industry to reach a consensus-based on the priority of their transactions.

At the same time, the blockchain solution offers a more secure and transparent platform. That’s because key stakeholders — throughout the process — can check the eB/Ls, and it’s not possible to edit or forge blockchain-based electronic documents.

However, the blockchain system faces some legal issues. With data sharing across jurisdictions, there’s a likelihood of cross-border data-protection issues arising. What’s more, the legal efficacies of smart contracts are yet to be fully tested under the law of contract. Particularly, with blockchain’s decentralized technology, and there being no single controlling entity, who would bear liability if the system were to fail?

These challenges, however, can be remedied through blockchain-based tokens.

Blockchain-Tokens remedying problems facing eB/Ls and eB/Ls Platforms

By stamping additional information on blockchain tokens — through blockchain’s in-built scripting capability — tokens can be assigned for different purposes.

Through blockchain technology, eB/Ls Platforms can circulate tokens that function like transferrable documents. That is documents that entitle the rightful holder to claim the performance of an obligation indicated in the document. For instance, a carrier of goods can issue an electronic bill of lading — -in the form of a blockchain-based token — — to represent a right to demand the carrier to deliver a consignment. The token can thereafter be transferred to sellers and subsequently to the buyers on the blockchain-based eB/Ls Platform.

Today, tokenization of electronic documents (especially bills of lading) and the safe and secure transfer of such documents is possible through TradeFinex Network that’s offered by TradefinexTech Ltd.

TradeFinexTech Ltd.

TradefinexTech Ltd. is an entity regulated by the Abu Dhabi Global Market Authorities (ADGM). The entity specializes in the deployment of tokenized assets on Public/Private Blockchain Networks via regulator-friendly instruments as compared to other eB/Ls.

TradeFinex — a decentralized application (dApp) — runs on the open-source XinFin Hybrid Blockchain. XinFin was developed to eliminate inefficiencies in financing and global trade and permit institutions to provide real-time solutions and enable cross border smart contracts.

TradeFinex is licensed by the ADGM to serve as a custodian, to settle, and to finance tokenized assets in Trade Finance’s secondary market. An example of a trade finance asset is a Bill of lading.

How can TradeFinex Network work with eB/Ls and eB/Ls platforms?

With TradeFinex Network, tokenized electronic records are safely and securely transferable through private keys issued by a regulated custodian. Through the open-source XinFin Blockchain Network, control of multi-party eB/Ls transactions is possible. Specifically, through MutiSig Smart Contracts in the blockchain network, stakeholders can synchronize ledgers held by all the participants.

Figure 2: Multi-party signatures to transfer Tokenized assets

As well, the partnership between eB/Ls Platforms and TradeFinex distribution networks enable liquidity by making it possible for eB/Ls Platforms to participate in secondary markets for tokenized Trade Finance assets.

ELB Tradefinex

Partnering with eB/Ls Platforms, TradeFinex works with regulators like Abu Dhabi Global Market to recognize tokenized financial assets like bills of lading. This ensures all operations are within regulatory guidelines.

TradeFinex Network creates a standard bridge from platforms like Bolero,essDOCS, and TradeTrust subsequently allowing such platforms to participate in the secondary market. This is possible since TradeFinex is fully regulated by the ADGM and licensed to take custody, settle and finance Trade Finance assets like tokenized Bill of lading in the secondary market.

To ensure traceability of eB/Ls, XinFin Blockchain, which is open source, does not limit access as compared to proprietor blockchain networks. As well,the XinFin Blockchain network avails limited transaction data on the public blockchain network for Traceability purposes.

How does TradeFinex Network Benefit eB/Ls Platforms?

The adoption of the TradeFinex network has several benefits to eB/Ls Platforms. Notably, tokens/tokenization has a more clear legal status of the resulting Electronic Document as compared to a mere electronic version.

TradeFinex creates a bridge to onboard buyers and suppliers on eB/Ls platforms via the TradeFinex website link “Bills of Lading ‘’. EB/Ls platforms, on their part, extend 25% of revenues/fees generated from buyers/suppliers in billing credits to TradeFinex.

For eB/Ls that join TradeFinex’s origination partner program, they’ll have access to the eB/Ls of interested buyers and suppliers. In return, TradeFinex will distribute 75% of the funding fees to such Platforms.

What’s more, initial members at XinFin Blockchain Network preferring products optimized for Trade and Finance earn a Governance council Membership. The position is only available for initial industry players in eB/Ls. This option also has provisions for the allocation of XDC from the ecosystem’s development pool.

Note: EB/Ls platforms can enquire on TradeFinex’s partnership proposal here

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