June 11, 2018

How can blockchain open up new opportunities for rail freight?

Written by  Nick Newman
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Blockchain technology promises to cut out the middle man in financial transactions, improving efficiency for businesses around the world. But how can railways benefit and what challenges does universal acceptance of the digital ledger technology face? Nick Newman investigates.

DESPITE the many recent advances in tracking the movement of goods, railways and their customers still have a hard time following specific freight consignments, leading many to question the reliability of rail freight services.

But this could be about to change.

BNSF BlockchainTrials of blockchain technology are underway around the world which could help to improve the level of service provided to customers and cut costs. For example, over a nine-month period Russian Railways (RZD) successfully carried more than 5000 freight consignments ordered via Freight Transport, an electronic trading platform underpinned by Emercoin, a blockchain technology launched jointly by RZD and Intellex in April 2017. Likewise, State Railway of Thailand (SRT) is investing in blockchain with Internet of Things (IoT) technology to manage signalling, passenger information systems, ticketing and goods delivery.

At its simplest, blockchain is an online ledger, which allows parties to conduct secure (encrypted) transactions without a middleman or a centralised authority. Each transaction is cryptographically recorded and stored, enabling secure exchanges of value with pre-existing trust.

“Blockchain is not so much a concept, but a technical application,” says Dutch logistics expert, Ms Klara Paardenkooper, a lecturer and researcher at Rotterdam Business School. “It logs data in a way that it cannot be changed or erased de-centrally. Blockchain should bring massive improvements in quality of service, efficiency and organisation for transport companies for current and future operations.”

Indeed, blockchain has the potential to transform and reduce the costs of business processes such as documentation and identification management, infrastructure billing and supply chain management across multiple intermediaries.

For example, the movement of freight containers from a factory in Shanghai to a warehouse in London can be co-ordinated by matching shippers with multiple carriers. Similarly, in logistics, blockchain can provide a single environment to exchange and check documents, improving efficiency and effectiveness while strengthening supply chains. IoT sensors fitted to freight wagons or containers could also monitor real-time use of capacity, with this data sent to a blockchain-based system, enabling accurate billing for the actual space occupied by a freight consignment.

By making business processes less error-prone, faster, more effective and more traceable, blockchain can help to reduce costs significantly and reduce the risk of fraud. It could also strengthen relationships with customers and partners.

However, for the rail and logistics world to successfully realise the prospective benefits on offer, three pre-conditions must be met: building trust, gaining the full participation of all stakeholders, and data standardisation.

Blockchain works on the basis of trust between its participants. It is a digital ledger recording blocks of transactions, linked and secured by cryptography. To use a rail analogy, blockchain is a train of information with each coach holding blocks of transactions. However, unlike a train which can be divided or even exchanged, the data cannot be modified or corrupted. What’s more, because the ledger is distributed, there is no single central authority in charge of certifying the information. That’s the attractiveness of the system.

In addition, all parties must have confidence in the accuracy and security of the data. For example, a customer could demand that the rail operator has at least $US 250,000 of freight insurance before committing his goods. When the rail freight operator enters “yes, we have the insurance” in the blockchain, the prospective customer must trust that this is the case. Likewise, carriers must trust that the customer hiring them through the blockchain will pay for their services.

Moreover, since commercial confidentiality is important, all participants need to be vetted. This might be achieved by automatically processing the blockchain using a smart contract connected to a reputable insurance company. Alternatively, the members could be vetted by an industry group setup for the purpose.

To secure customer acceptance and adoption requires everyone - infrastructure managers, carriers and shippers - to have access to the correct software, hardware and knowledge. This is a really big ask because of thepotentially large number of participants in a chain.

In Europe alone, there are hundreds of rail operating companies providing freight, passenger, infrastructure services for all aspects of the logistics chain. In the United States, the figure is even larger. And if the experience with the national adoption of Positive Train Control (PTC), which has seen numerous delays and deadline extensions, is anything to go by, adoption of a similar industry-wide technology application could prove just as problematic.

Defining and adopting international standards of terminology, development, deployment and security is therefore crucial to gain widespread acceptance of blockchain by the logistics industry and its customers. Indeed, successful deployment of blockchain in the rail sector is dependent on standardisation of inputs such as customer purchase orders and invoices. There is some encouragement in the work of the Blockchain in Transport Alliance (Bita), which has brought together some of the United States’ leading logistics firms, with the goal of leading, developing and embracing a common framework and standards from which the industry participants can build revolutionary applications.

Speaking when US Class 1 BNSF joined Bita in February 2018, the railway’s vice president of technology services and chief information officer, Mr Muru Murugappan, said that it is important for the industry to come together to define a set of standards for blockchain, and that BNSF is “excited to drive those standards forward as a member of Bita.”

Yet current experience shows that data standardisation is neither easy nor fast.

For example, despite globalisation, there is still no single electronic data interchange (EDI) standard for the logistics sector: ANSI ASC X12 is used in the US, while Europe’s car industry uses the Odette standard with Edigas the standard dealing with commerce and transport. Communications standards also vary between continents and industries.

To sum up, blockchain technology is at the trial and error stage. The opportunities are exciting, but companies will need time to familiarise themselves with the technology and to identify the best prospective application areas which are supported by a universally-accepted set of standards. Only then can blockchain truly transform the rail and logistics world.

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