Modernizing Ship Finance
By Dushyant Bisht
Humans have been sailing on ships since 4,000 B.C.E., but for many centuries ship ownership has been confined to closed networks and family dynasties.
Now, a digital revolution is shaping a maritime finance industry that is more transparent, efficient and accessible.
The maritime industry has historically been riddled with lack of trust and transparency. Ownership verification because of the division of global networks and diverse legal systems has been lengthy and difficult. The faking of shipping documents amounts to $1.2 billion per year.
Shipping companies were family-owned for generations, relying on regional, exclusive networks of investment funds. This resulted in an oligopoly on capital, in which a few managed the on-ramp to investment and billions worth of market cap were closed to the masses. This consolidation of power into a small number of hands resulted in market inefficiencies and inhibited the industry’s ability to innovate and grow.
The maritime industry’s reliance on paper for documents such as bills of lading or ownership certificates, which have stayed the same in form and function since the early 1600s, has been a recurring nightmare. This system is ripe for fraud, at a cost of billions every year. In addition, the current manual procedure for transferring ownership is slow, typically requiring 30 to 90 days to complete, and human error on paperwork contributes to 40 percent of all maritime lawsuits.
Ships are asset investments that pay off over decades, and liquidity is a challenge. It can take 12 to 24 months to sell a ship, plus time to transfer ownership. The lack of market transparency makes it difficult to discern accurate pricing. Illiquidity, coupled with the minimum $10 million to $50 million investment threshold, has prevented smaller investors from market entry.
The post-World War II global order gave rise to “flags of convenience,” under which shipowners would register their vessels in countries such as Liberia and Panama to lower taxes and skirt strict regulations. This practice of ownership obfuscation allowed creation of havens for tax evasion and enabled owners to take advantage of regulatory arbitrage, at the expense of safety and labor standards.
There is now a turning point, with new technologies to answer old problems.
Blockchain technology enables cryptographic security that makes forgery of documents virtually impossible. It creates an immutable record that can be verified by anyone and is entirely transparent. Transfer of ownership can now be done in minutes.
Tokenization allows for fractional ownership, allowing multiple investors to pool resources to buy ships via digital tokens. This reduces the investment threshold from millions of dollars to as low as $1,000, opening up a historically closed-off asset class to the ordinary investor anywhere in the world. The fact that these tokens can be traded on a digital platform enables a degree of liquidation previously nonexistent.
Smart contracts–the automated implementation of contracts via blockchain–are being used to secure maritime operations, enforce regulatory compliance by activating automated compliance checks per region, and automate payment for charter contracts and maintenance. This solution can reduce administrative overhead by 40 to 60 percent and can reduce legal spend by enabling programmed, rules-based dispute resolution.
The tech revolution is already happening, with maritime fintech startups paving the way for a new, sleek infrastructure for shipping. Shipfinex is one such company, providing a platform to invest in ship ownership in the form of a digital token on a blockchain. This system enables trust and efficiency. The process starts with asset vetting. An independent partner of Shipfinex will perform due diligence, legal check and professional valuation on a vessel. Next is “ring-fencing” the asset to protect investors via a special purpose vehicle to isolate financial risk. Finally, asset ownership is converted into marine asset tokens on the blockchain.
All this is made possible by distributed ledger technology, which ensures the authenticity and integrity of ownership shares and transactions. These smart contracts are integrated on Ethereum to automate functions such as the distribution of charter income directly to the token holders in a timely and fair way. It eliminates the middlemen and allows several investors to hold shares in a ship.
The marine tokenization market is growing, and Shipfinex offers investors a new way to diversify their portfolio by investing in fractional ship ownership. This is a fundamental change in ship ownership: completely digital, transparent and inclusive.