As of early November, investors have plunged more than $3.2 billion into more than 200 initial coin offerings (ICOs) globally in 2017, according Coinschedule, a database that tracks cryptocurrency activity.
The lion’s share of that money has been raised since May, as speculators, institutional investors, and businesses flock to the hottest financial trend around.
Yet this activity comes amid a tremendous amount of uncertainty around what cryptocurrencies are, their usefulness, their value, and the regulatory impacts and security implications of such digital value assets.
Even someone with a vested interest in its success has a realistic take on the current state of affairs of cryptocurrencies.
“It’s the wild west,” Johnson Leung, a longtime shipping and finance veteran and co-founder of 300cubits, a startup seeking to bring together the worlds of digital currencies and liner shipping, said in a recent interview.
Brave New World. At the heart of this technological frontier are the recent spate of ICOs, an instrument that has engendered excitement, heartache, and a healthy dose of skepticism.
Simply put, ICOs are like initial public offerings (IPO) of a company’s stock, only in place of a stake in a company, digital coins—often called tokens—are sold to a market of buyers with the idea that the coin will become an asset with its own inherent value.
The ICO could be about disseminating multi-purpose coins that might act as a direct alternative to established state-denominated currencies. Or, as in the case of Leung’s company, it could be a coin designed to be used for a specific industry or, more narrowly, a specific type of process or transaction.
Bitcoin is the most famous of the cryptocurrencies, and its value has skyrocketed in recent weeks. But there are countless other digital currencies that have emerged the past few months, and businesses, government, and investors are only beginning to come to terms with what these currencies will mean.
In a logistics and shipping context, the implications are even less well known at this point. In truth, it’s probably far too soon to even speculate what, if any, impact cryptocurrencies and any related ICOs will have on the industry.
300cubits, which in late summer introduced its currency, called the TEU, will be one litmus test. The TEU token is built on what is probably the second most famous cryptocurrency: Ethereum. Whereas Bitcoin is essentially a direct replacement for fiat currencies like the dollar, Ethereum is a more malleable digital currency platform upon which applications like the TEU can be built.
As revealed in an August white paper, 300cubits has a specific use case for the TEU. To help ameliorate systemic overbooking by container carriers and fall-downs by shippers, 300cubits proposed attaching digital tokens to the process.
The concept is relatively straightforward. The cargo owner wanting to book space on a container vessel attaches one or more TEU “coins” to the request. If the carrier agrees to the booking, it must attach a similar number of TEU coins to the confirmation. If the shipper delivers the container, its coins are returned. Likewise, if the carrier then loads the container on the designated sailing, its coins are also returned. If either party fails to live up to its end of the bargain, the other party takes all of the coins.
The theory is that the value of the coins will intrinsically grow as parties use the coins to back the booking process. That value will not only compel carriers and booking parties to hold on to their coins, it will induce the secondary market—i.e. coin buyers with no attachment to the shipping industry—to invest in the TEU coins.
Since there are a finite number of TEU coins, their value rises over time as the coins effectively become more scarce relative to the demand. This is a key facet of all cryptocurrencies, the idea that a finite number of coins will ever be put into circulation.
In one sense, ICOs can be seen as a way for a company to raise money and create liquidity in its created market at the same time. In other words, an ICO can help a startup raise the funds that otherwise would need to be provided by the founders (bootstrapped) or venture capitalists, while simultaneously using investment from the secondary market to drive the value of the coins.
Fluid Situation. 300cubits is trying to create liquidity by giving TEU coins to carriers, freight forwarders, non-vessel-operating common carriers (NVOCCs), and beneficial cargo owners (BCOs) that agree to hold on to the coins—and hopefully transact with them—for three years.
Whether this will actually work, however, is still an open question.
A host of companies that spoke with American Shipper in recent weeks about the application of cryptocurrencies in logistics and global trade are largely skeptical. There are the traditional roadblocks, like general resistance to change, and there a more specific ones, like the fact that most companies are still trying to figure out exactly what cryptocurrencies are and how they might be useful in their specific industry or vertical.
There’s also the issue of regulation. Cryptocurrencies, by definition, are not regulated, at least not in the way traditional financial vehicles like fiat currencies or stocks are. But this could change. China, for instance, has banned ICOs, while the U.S. Securities and Exchanges Commission is scrutinizing what ICOs and digital currencies mean to investors. This is, in every sense, a moving target.
There’s also still a good deal of confusion about blockchain, the backbone technology behind cryptocurrencies.
“There’s an idea-communication gap when it comes to blockchain as a whole,” Gavin Carter, former chief executive officer of the Journal of Commerce and now an investor, said in a wide-ranging interview. “[Advocates have] done a poor job of describing it outside of Bitcoin. The interesting thing when it comes to logistics is that it’s a complicated global business process, but it struggles with adopting new technologies. It hasn’t become efficient, even as new technology has emerged. It’s struggled with something like the forward contract, so I find it ironic that [people think] the industry is all of a sudden going to adopt blockchain.”
when it comes to blockchain
as a whole…Even those who
understand it haven’t
connected the dots on the
optimal uses in logistics.”
former chief executive officer,
Journal of Commerce
Given this general reluctance to new technologies, Carter said it’s that much harder to envision the use cases for cryptocurrencies in the global supply chain.
“Even those who understand it haven’t connected the dots on the optimal uses in logistics,” he said. “It would be a huge leap, as I think the early successful ICOs will be businesses where the token-based business model is understood by investors, but that business model is then largely masked to the consumer of the service. So the consumer gets a value they understand without having to think about the underlying process, the model, the technology, etc.”
A more realistic adoption curve would see the value delivered in what Carter referred to as “bite-sized chunks.”
“It’s just an enormous task to get the industry to embrace such speculative innovation,” he said.
Carter, though skeptical, said the model set forth by 300cubits fits perfectly with this kind of approach.
“You need to bring the consumer (BCOs) along with you, by gradually enlightening them to the process,” he said. “I think entering with a small use case such as a deposit is very smart, rather than trying to change the whole process at once. I would just fear a deposit which has to be understood as a cryptocurrency adds an unnecessary layer of complexity.”
He suggested that one solution would be to mask the cryptocurrency with a fiat currency while it would be treated on the back end as a cryptocurrency.
Long-term, Carter said he’s more bullish about the way blockchain applications and digital currencies could be used to drive broader use of forward contracts and derivatives.
“Carriers and BCOs couldn’t get their heads around how a derivative worked,” he cautioned. “It has to be perceived as a benefit for all, and not a threat.”
Swimming Upstream. Skepticism around the 300cubits model isn’t just coming from inside the industry.
Hacked.com, an online resource that examines financial technology, blockchain, and cryptocurrency developments, said in a breakdown of the 300cubits TEU model that it’s a positive that the solution comes from those with industry knowledge, and that the founders envision the coin eventually underlying more than just the booking process.
“An open ledger would also allow the industry to build its own applications to interface with the TEU token,” the analysis said.
But it also noted that there are significant headwinds.
“All of these opportunities mean great potential, but we don’t share the confidence of the white paper in a single release of a cryptocurrency independent of everything else,” the report said. “Use of the TEU token is going to be dependent on companies making use of it—being willing to sign immutable contracts, implementing technology to ensure them, and so forth. Problematic to say the least. From a technological standpoint, sounds like fun. From an investor’s standpoint, sounds like either unicorn or minotaur.”
In its summary, Hacked.com said it foresees “some usable products that come out of [the TEU coins’] existence.”
“But whether they are what they expect or not remains to be seen,” the analysis said. “In much the same way that numerous banks wanted ‘blockchain, but not Bitcoin,’ the industry might be very interested in the ability to accurately predict demand for containers—whether that would be worth paying into the TEU system or not remains to be seen. It should be noted that they currently intend to force all users to interact through their system, but supply and demand rule all.”
When considering the impact that the TEU or other cryptocurrencies might have on logistics, shipping, or trade, it’s instructive to think historically about currencies writ large.
“The general idea is ‘what’s money, and what’s an asset?’” said Michael Ehrlich, associate professor of finance at the New Jersey Institute of Technology’s Martin Tuchman School of Management. “An asset is a store of value. It’s generally recognized as valuable and has persistence. Gold is a classic asset. It’s rare, it doesn’t degrade over time. More modernly, you can create an electronic stock.
“Money has been much more of an exclusive franchise,” he said. “Money is issued by a bank, and it’s issued based on the assets owned by a bank.”
Ehrlich gave an example from the early days of banking in the United States. “There was a problem if you took your New York bank note and used it in California,” he said. “They didn’t know that bank and would take it, but only at a discount.” The implication for cryptocurrencies is that each one is somewhat of an unknown quantity and is therefore less valuable to those who don’t see it as a known, trusted commodity.
“Cryptocurrencies are small and rather fringe,” he said. “In general, the response of government has been, ‘you can call it an asset, but we’re not calling it money.’ I’m not so positive on crypto. Where a government has a franchise on money, they don’t approve of anonymous money. It can be used it to do things that are illegal or embarrassing, or to evade taxes.”
Stranger Things. Ehrlich noted that Bitcoin was essentially a political response to the global financial meltdown of 2009.
“We’re going to create this electronic artifact as an alternative to money,” he said. “They called it ‘money,’ and it was structured as a challenge to the government.”
The initial demand for Bitcoin came from entities needing to either stash assets away from the gaze of regulating governments, or to conduct transactions away from that same gaze. Not coincidentally, it quickly became known as a financial vehicle underpinning illicit activities.
Only in the third wave of demand, Ehrlich said, did honest speculators start to enter the fray.
“I’m not sure why it’s valuable. But the more speculators that come in, it becomes a self-fulfilling prophecy,” he said.
“There’s a standard pattern to bubbles. There’s a new idea to create value in an unexpected place, followed by less informed people, not because they recognize the value, but because it’s ‘going up.’ That creates ‘momentum.’ There’s a following cycle where the smart people who got in early cash out. It may continue to rise, but at some point—due to sentiment, media coverage, animal spirit—people look around and realize the emperor has no clothes. At that point, things go down really fast.”
Ehrlich said he believes governments will soon begin gearing up to resist cryptocurrencies, at least insofar as they enable tax evasion.
He called the Ethereum model “clever,” but noted what he referred to as “a chicken-egg problem” with it.
“You need to have a thing of value, but you need to have a currency,” Ehrlich said. “Ethereum is somewhat analogous to a farmer’s market that creates farmer’s bucks. Those using bucks get discounts on products, and farmers use the money to improve the market.”
More broadly, he said the problems with cryptocurrency are that “someone has to start the thing and someone has some control over the currency.” That control means that an entity (or entities) other than a trusted government has command over a currency’s value, something that may keep potential investors away.
“There are plenty of people good at thinking of nefarious things to do,” he said. “Cryptography (the science of encrypting things, including blockchains and cryptocurrencies) has been rock solid, but that doesn’t mean it will be in the years ahead. Governments have really long lives, and they are self-sustaining. When there was inflation in the ‘70s, the government stepped in to protect its currency. Who’s going to protect your Bitcoin in 40 years?”
Specific to cryptocurrencies in ocean shipping, Ehrlich said he foresees lots of hurdles.
“Ocean shipping is not a place where people have been doing secret transactions,” he said. “There’s a real reason for governments to hate anonymous shippers and freight and associated transactions. Governments have a huge interest in knowing who’s attached to what freight.”
Ehrlich also cited the “small number of carriers, who are super-duper conservative, with little interest in trying out this crazy marginal stuff. I think it will be hard to penetrate the market.”
Or, as one shipping industry veteran put it, “I really would love to know which liner will accept what amounts to cryptocurrency deposits.”
There’s also the issue of separating the merits of blockchain in general from those of a specific currency issued by one party.
One technology provider told American Shipper, “I’m generally annoyed with anyone who wants to centralize blockchain, thus destroying what I believe to be its inherent value.”
The industry-specific issue 300ctubits is initially trying to solve—namely the cycle of overbooking and fall-downs among container shippers—is also being addressed by another platform, the New York Shipping Exchange (NYSHEX), and its forward contract model.
But Leung said the two aren’t mutually exclusive. For instance, a forward contract consummated by a BCO and carrier on the NYSHEX could still also include the TEU token.
The broader question then is whether shippers, carriers, and forwarders—both international and domestic—see value in investing in cryptocurrencies. And according to Carter, it’s “unlikely to be meaningful to logistics in the next five to 10 years.”
Leung, on the other hand, is clearly hoping to accelerate that adoption.
“The idea is to channel that liquidity to real value,” he told American Shipper in August. “We said, ‘Let’s issue a token, a crypto coin, because the most successful use of blockchain, the only one that people understand, is Bitcoin.’”
It’s not clear when, or if, cryptocurrencies and ICOs will ever truly impact liner shipping, logistics, or global trade. There are so many technologies attempting to revamp the way traditional processes have been structured, including blockchain itself, that it is difficult to imagine digital tokens grabbing the same level of attention.
But stranger things have happened. After all, cryptocurrencies emerged in the aftermath of an historic economic event, one that has also reshaped international freight movement. Who’s to say another as-yet-unforeseen event won’t similarly compel to the industry to look for new financial mechanisms?
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