"Implications of the Blockchain Technology for the UNCITRAL Works" – published.

It has come to my attention that my article “Implications of the Blockchain Technology for the UNCITRAL Works” had been published from the United Nations in November last year.
The 50th anniversary Congress was a big occasion for UNCITRAL and it was my great honour to be part of it.
Here is my article excerpted from the book.

An additional note: In my original manuscript, there were some references to specific chapter numbers. I have noticed that in the published version, they have been changed to “Ch. 0” due to the editorial work which has removed all the chapter numbers from the headings. To see where those were actually referring to, please consult my original manuscript here.

Implications of the Blockchain Technology for the UNCITRAL Works

I will be presenting my thoughts on the subject above in the upcoming Congress of the UNCITRAL for the celebration of its 50th anniversary (4-6 July 2017).

My paper currently on the Congress website is a version which I sent to the UNCITRAL Secretariat some months ago and which no longer represents my latest thinking in some significant respects. I am asking the Secretariat to replace it with the latest version, to which I make a link from here. 

The paper gives a particular emphasis on the topic of proprietary restitution of blockchain-based tokens as an area which calls for a globally unified solution.

Postscript: As from 16 June, the Congress website carries the latest version. Many thanks to the Secretariat for swiftly acting on my request. 

Blockchain Technology and Electronic Bills of Lading

My article “Blockchain Technology and Electronic Bills of Lading” has come out from the Journal of International Maritime Law ((2016) 22 JIML 202-211). The full text is here.

Blockchain Technology and Electronic Transferable Records

Here is the powerpoint file for my presentation at the seminar “Electronisation of Transferable Documents or Instruments Used in International Trade” (10-11 March 2016) in Singapore (organised by UNCITRAL, Attorney-General’s Chambers of Singapore and the Association of Banks in Singapore (ABS)).

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.

Blockchain-based bill of lading: need for support from the legal infrastructure

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.

In another of my earlier post, I have pointed out that while many of the proposed applications of the blockchain technology seem to rest on the assumption that the participants could make effective arrangements themselves, they will produce their intended effects only in the sphere of party autonomy as recognised by the applicable law.

That also holds true with a blockchain-based bill of lading. Suppose that the parties to a sale contract have agreed on the use of a blockchain-based bill of lading and the seller has concluded a carriage contract under which the carrier has agreed to issue such a bill of lading. Their arrangement will work among themselves in accordance with their agreements (If not, remedies for breach of contract will be available). But their agreements are not sufficient to defeat the claims of third parties such as a creditor of the seller seizing the goods, the trustee of the seller’s bankruptcy estate, another buyer who has bought the same goods from the seller and a person who has bought the goods in good faith from the person who had stolen them.

The applicable law might protect the (original) buyer if he holds a traditional paper bill of lading. Thus, under Japanese law, once a bill of lading has been issued, the disposal of the goods represented by it is not possible otherwise than by means of the bill of lading (Article 573 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act). Furthermore, the delivery of a bill of lading to its lawful holder has the same legal effect as the delivery of the goods represented by it (Article 575 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act), with the consequence that an erga omnes effect is bestowed on the holder’s title in the goods (Article 178 of the Civil Code).

For electronic bill of lading to flourish, it is essential for it to be given a similar support from the legal infrastructure. The lack of it has long afflicted the various projects of electronic bill of lading. Thus, the banking industry has been reluctant to accept this type of bill of lading as adequate collateral. One laudable initiative for embracing electronic bill of lading is the Rotterdam Rules (United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea) which contain provisions for “negotiable electronic transport records.” Adopted in 2008, the Convention has not entered into force yet.

For a blockchain-based bill of lading to take off, it is also important for it to be given a sufficient support from the legal infrastructure. To start the ball rolling, it may be worth asking whether a blockchain-based bill of lading constitutes a “negotiable electronic transport record” under the Rotterdam Rules, a question I intend to address in my future post.