Initial coin offerings are all the rage in technology markets, and veteran analyst Johnson Leung says his new company 300cubits is intent on bringing blockchain-backed crypto coins to the liner shipping world.
A combination of a mid-life crisis, jet lag, and mounting frustration with ocean liner shipping are all part of what’s spurring a new effort to introduce a blockchain-enabled cryptocurrency into the container carrier industry.
Johnson Leung, one of the founders of 300cubits, a Hong Kong-based startup behind the cryptocurrency, has spent 20 years in liner shipping, first with Maersk Line, then with Hutchison Ports, and the last 10 as an analyst with JP Morgan, Tufton Oceanic, and Jefferies.
“I love shipping and I hate it,” he said in an exclusive interview with American Shipper Wednesday. “It’s so miserable. The industry is chronically struggling, and that impacts your career and your mentality. You feel the good times will not last long.”
Leung said his frustration reached a boiling point last fall, joking that he left his position at Jefferies to figure out his next step as part of a mid-life crisis.
“The industry landscape for analysts has never been better,” he said. “We’ve had the best corporate analysts in last the 10 years. But the intelligence doesn’t add value. That was my frustration. We’ve done so much better than previous generation of analysts. But it’s not about what the industry understands.”
In other words, Leung became frustrated that while analysts had gotten better at understanding why the shipping industry struggled, the industry still wasn’t taking their advice. Instead, it has careened from one bad cycle to the next.
While Leung was going through his existential crisis, a long-time friend in the banking industry, Jonathan Lee, was going through a similar malaise.
“We both felt like we were milking our careers,” he said.
Both were also noticing digital startups were snagging huge valuations, especially those related to blockchain and cryptocurrencies.
A severe bout of jet lag after a flight back from Europe led to Leung talking with Lee, who coincidentally was also up that night. Over a six-hour coffee session, the two mapped out a plan to provide value to the shipping industry through a cryptocurrency.
Leung leveraged his two decades of experience in shipping, and Lee tapped into his years as a treasurer, along with his programming skills. The two became self-taught in the ways of blockchain technology and so-called “smart contracts,” a tool that binds two parties through a blockchain platform.
“The idea is to channel that liquidity to real value,” Leung said. “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.”
At its heart, 300cubits’ solution is to create an alternative currency that underlies liner shipping transactions. While many blockchain applications in logistics are aiming to provide an immutable electronic platform and audit trail for document sharing or to replace letters of credit, a more straightforward use is giving users financial motivation to participate through the issue of crypto coins.
The company’s plan, in a nutshell, is to generate a certain quantity of crypto coins (Leung suggested 100 million) using the Ethereum platform, an alternative to the more well known Bitcoin. It will then release a certain percentage (probably 20 percent) of those to the general public in an event called an initial coin offering (ICO).
The founders will keep a certain percentage and then disseminate the remaining coins to vetted industry members. In a newsletter 300cubits sent Tuesday, the company said it has been in discussions with seven large beneficial cargo owners (BCO), four top non-vessel-operating common carriers (NVO), two of the top 10 container liners and a couple booking portals.
“We also have had preliminary meetings with a couple of potentially large token buyers from Asia,” the newsletter said.
The key to the success of that plan is inducing the companies who are given the token to transact with them. Initially, 300cubits is trying to using the crypto coin to solve the pesky carrier overbooking/shipper no-show problem that’s long plagued the industry.
The idea is that both a carrier and a shipper – whether BCO or NVO – would each submit a token to neutral party, in this case, the Ethereum network. If a carrier does not load a container with the token as a booking deposit, then the carrier’s token goes to the shipper. If a shipper – say an FOB shipper out of Asia, for example – no-shows, then its token goes to the carrier.
Leung said this approach, using a financial incentive which both sides are equally motivated to use and which neither side can ignore due to blockchain’s immutability, is a better than the traditional dollar-value penalties assessed for no-shows or rolled cargo.
Theoretically, this should motivate both parties because the total number and value of the coins doesn’t come close to corresponding with the number of bookings that occur each week globally. In other words, once both parties see the value in using the coins as booking deposits, the value of the coins rises. That means the crypto currency not only incentivizes behavioral change, it becomes a valuable asset for parties in the shipping industry in and of itself.
Some remain skeptical that carriers and their customers would be willing to use an untested currency. The industry is notoriously slow to adopt cutting edge technologies, but there has been a broader appetite in the last year, especially among liner carriers, to examine what technologies like blockchain can mean for liner shipping.
300cubits is calling the currency “TEU,” but don’t be confused. Each coin does not correspond to a booking for a single TEU. As just described, the value and number of coins in circulation are, by design, far less numerous than the number of transactions in the market.
This scarcity is designed to attract buyers outside of the industry, but also to induce users inside the industry to properly value the currency themselves. For instance, Leung said that carriers that receive the coins should hold on to them because they will have value in the market if the industry stakeholders use it as intended. In fact, the value of the coins would theoretically rise over time as industry adoption increases because of the discrepancy in the volume of coins and volume of transactions.
“The key thing is shared ownership, and the value in a secondary market,” Leung said.
Along with the booking module, 300cubits envisions a marketplace emerging if either party knows ahead of time it won’t be able to fulfill its smart contract obligations.
“If a shipper knows the factory will miss the booked sailing, the shipper may risk losing its TEU tokens in deposit to the liner,” the company wrote in a white paper describing its roadmap. “The shipper could sell this booking in the Market Place Module for TEU tokens in order to cover the token loss.”
Leung and Lee say they have “grander ideas” for the TEU token, ideas that involve more programming and a trickier adoption curve. Leung, for example, floated the idea of tying the tokens to carrier capital expenditure.
In that scenario, a carrier might ask for its largest shippers to commit to a certain volume over the course of the life cycle of a ship it plans to order. That would create more rational capacity-building behavior, helping carriers keep supply in line with demand, theoretically lowering rate volatility.
“The carrier industry is weird,” Leung said. “There are very few industries forced to make such huge capex expenditures without having any idea of what guaranteed volume will be.”
For context, he said energy companies don’t build power plants without government assurance of future usage, and even bulk carriers are able to lock in long-term contracts with specific customers before commissioning or chartering vessels to handle that business.
“Half of carriers’ revenue per TEU is sunk costs,” he said. “It’s hard to recover from that.”
Much of the success of 300cubits’ success depends on the initial rollout. That includes creating buzz in the cryptocurrency market, getting buyers to pay for the 20 percent of tokens put up for sale in the ICO, and ensuring the giveaway tokens are actually used and not immediately sold to secondary market buyers instead.
ICOs are all the rage in technology these days, as numerous other cryptocurrency founders, buoyed by the success of Bitcoin and Ethereum, sell tokens tethered to their individual market. These markets purport to cover transactions in everything from healthcare to video games.
Some of these ICOs have raised tens of millions of dollars, but there is a big question about who regulates the market, especially since most cryptocurrency purchases and transactions cut across international borders.
Cryptocurrencies, by their nature, are designed to be unregulated by entities like governments or banks. They are, in a sense, governed by the totality of their users, since they rely on public blockchain technology that records every transaction in an un-editable format.
The U.S. Securities and Exchange Commission (SEC) said in late July that ICOs, also known as “digital currency financing events,” will be regulated as securities.
According to a report in Techcrunch, which follows the ICO market closely, that means unregistered offerings could be subject to criminal punishment.
“This is a blow to many startups that had been using ICOs as an alternative way to raise capital,” the report said. “There have been a wave of these offerings in recent months, where people have been investing in business ideas via Bitcoin, Ethereum or other cryptocurrencies.”
Regulation notwithstanding, Leung said 300cubits is not rigidly requiring the companies to whom it will give away coins use the coins for their intended purpose. The founders believe those parties will use them for booking deposits because it makes sense for them to do so.
“Once the market uses it, the value will shoot up,” he said. “It’s a blockchain initiative, but at its base, it’s a change of currency. If the ICO isn’t successful, the token won’t work.”
Tech startup 300cubits bringing ICO market to liner shipping
