Tuesday, 24 November 2015

Is a blockchain-based bill of lading a "negotiable electronic transport record" under the Rotterdam Rules?

In my earlier post, I have suggested that one of the most promising use cases of the blockchain technology is electronic bill of lading: a token on a blockchain issued by the carrier of goods which represents the right to demand the delivery of the goods. As noted in another of my earlier post, I stressed the importance of the legal infrastructure supporting a blockchain-based electronic bill of lading. The Rotterdam Rules embrace electronic bill of lading, calling it a "negotiable electronic transport record" (See Articles 8, 50 and 51(4)). Though not yet in force, if the Rotterdam Rules come to form part of the legal infrastructure, the question will arise whether they are applicable to a blockchain-based electronic bill of lading as well as the existing registry-based electronic bill of lading. 
One of the underlying principles of the Rotterdam Rules is technology neutrality: the law should neither require nor assume the adoption of a particular technology. It follows that a blockchain-based electronic bill of lading is certainly not excluded a priori. But it does not mean that any technology can create a "negotiable electronic transport record" within the meaning of the Rotterdam Rules. According to Article 9, the use of a "negotiable electronic transport record" is subject to the procedure referred to in the contract of carriage which provides for:
  • (a) the method for the issuance and the transfer of the record to an intended holder;
  • (b) an assurance that the record retains its integrity;
  • (c) the manner in which the holder is able to demonstrate that it is the holder; and
  • (d) the manner of providing confirmation that delivery to the holder has been effected or that the record has ceased to have any effect or validity.
Is the blockchain technology capable of providing for all those elements? Article 9 is the manifestation of another principle underlying the Rotterdam Rules: the principle of functional equivalence which requires an electronic medium to fulfill the essential functions of the corresponding paper-based system. In this regard, implicit in the two concepts "issuance" and "transfer" in (a) is the "exclusive control" of the record. Article 1 provides their definitions in the following terms:
For the purposes of this Convention:
...
21. The “issuance” of a negotiable electronic transport record means the issuance of the record in accordance with procedures that ensure that the record is subject to exclusive control from its creation until it ceases to have any effect or validity.
22. The “transfer” of a negotiable electronic transport record means the transfer of exclusive control over the record.

The requirement of "exclusive control" fulfills the essential function of a bill of lading as a document of title. The blockchain technology satisfies this requirement since a token on a blockchain is subject to the exclusive control of the holder of the private key corresponding to the address in which the token is kept. Furthermore, since its algorithm makes a double spending impossible, no two persons could claim to hold the same token.
The blockchain technology is also capable of providing for (b), i.e. an assurance that the record retains its integrity. There can be no tampering with records locked in a well-maintained blockchain such as the one for bitcoin. The blockchain technology indeed has an edge over registry systems since the latter rely on the trustworthiness of the entity maintaining the registry: the registry may have to be equipped with, inter alia, activity logs, an offsite backup system and an adequate oversight on its management.
With respect to (c), Sturley et al. in their book, The Rotterdam Rules (2010), observe, "[t]he token system suffers the technical disadvantage that the required security is extremely difficult to achieve. Indeed, it appears that the technology needed for a reliable token system is still not available in the market place" (para. 3.039). It would be safe to say that things have now changed with the advent of the blockchain technology (See also my earlier post). A question remains, however, whether (c) requires the holder to be identified by its name. That would not be possible on an open, permissionless blockchain since the parties are anonymous. Logistically, it seems possible to build a system whereby goods are delivered without the name of the holder of the private key being revealed to the carrier by, for example, allowing the token to activate the key to the container. Then, a blockchain-based bill of lading may be seen as functionally equivalent to a bearer bill of lading and accordingly considered to be sufficient to provide for (c).
The point (d) would be deemed to be provided for if the system is configured in a way that causes the token to be transmitted to the carrier upon the delivery of the goods.

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