Blockchain in the Commodity Industry
Physical trading in the Energy & Commodity Industry has traditionally been organised around vast paper trails, however new technology like blockchain is starting to transform the long-established system. Blockchain is creating exciting opportunities for industry players to upgrade the outdated workflows and realise the many benefits of moving to a digital ecosystem.
The industry is still largely paper-based, and this has resulted in many operational inefficiencies and challenges. Some of the major challenges include:
- Lack of industry standardisation
- Lack of market transparency
- Inefficient logistics
- Error-prone processes
- High costs
- Lack of regulatory oversight
- High enter barriers to trade financing
- System complexity
- Reliance on intermediaries
How can Blockchain help?
Blockchain has the capability of bringing much needed change and improvement to the global trade of commodities in many different areas. It can bring many benefits to the industry participants and stakeholders, some of which are listed here:
- Enhanced Security:
The public, immutable nature of the distributed ledger technology on the blockchain network makes the system tamper-proof, reducing the risk of fraud and contaminated or counterfeit products from entering the supply chain.
- Cost Savings:
Lower financing costs as well as lower operational costs due to efficiency gains, lowering of barriers to finance, eliminating the middlemen, more transparency and generally improved management capabilities.
- Operational Efficiency:
Workflows are standardised and streamlined and many of the manual, time-consuming tasks can be automated and digitised. There is no longer the need for intermediaries and lengthy verification and confirmation procedures which cause delays.
- Regulatory Oversight:
Harmonised digital documentation and immutable, transparent data storage enables full audit trails and improved compliance management.
What are the Key Industry Initiatives?
Blockchain can provide solutions to many of these challenges and industry players are starting to recognise this. Companies are working towards unlocking the potential of the technology across the following major areas:
- Trade Finance
- Trade Transactions
- Document Management
There have been many projects and pilots carried out in this space, but here is a review of two that are gathering momentum and becoming widely adopted within the industry. They both have blockchain-based platforms focused specifically on the energy commodity trading space, Komgo on the trade financing aspect of the market, and Vakt which provides digital solutions for the post-trade lifecycle.
Komgo SA was founded as an independent venture in August 2018 by a group of banking and commodity industry leaders. They partnered up because they held a shared vision of bringing the energy industry and its outdated systems into the digital world. They were commitment to finding innovative digital solutions to some of the industry’s biggest challenges. The 15 shareholders are: ABN-Amro, BNP Paribas, Citi, Credit Agricole, Gunvor, ING, Koch Supply & Trading, Macquarie, Mercuria, MUFG Bank, Natixis, Rabobank, Shell, SGS and Société Générale.
The solution they built is a blockchain-based platform specifically tailored for the financing of commodity trades. They issued the world’s first blockchain digitized letter of credit through the platform, which also provides secure ways of sharing and storing data. Through the introduction of features like Receivable Discount and Standby Letters of Credit, the company is helping to bring the industry out of its paper-based system and into the digital world. It is also facilitating the standardisation of the commodity trade finance industry.
The first area of focus was the oil industry, but the community of authorised network users has since expanded to well over 1000 which includes banks, commodity traders, energy corporates and regulators. Komgo has now supported approximately USD 1billion of financing through the platform.
Komgo provides the following tools for different areas of the trade finance workflow:
Through the simple and well-structured workflow, this tool provides commodity buyers with efficient means to access and manage trade financing.
Standardized and transparent financing and transaction data stored in a single place gives the customers the ability to better manage risk and liquidity needs.
- Know Your Customer (KYC):
Simplified and harmonized KYC processes and workflows.
The traditional paper-based procedures are much improved through the digital document management system which enables customers to easily access and manage their records while also securely storing them for audit trail and regulatory needs.
- Komgo developed the platform in partnership with ConsenSys and Kaleido.
- The Komgo platform is built on JP Morgan’s Quorum network.
- It is connected with the blockchain-based post-trade platform, Vakt.
- It allows private transactions between authorised network peers.
The company was formed in November 2017 when a group of some of the biggest players in the energy market as well as some banks came together with the aim of modernizing and digitising the global commodities trading industry. This goal was reached with the release of their blockchain-based platform in December 2018 which it claimed was the world’s first enterprise blockchain solution for the energy industry.
Initially the platform was only authorised to be used by a select number of participants who were active within the North Sea oil market. This included energy companies British Petroleum (BP), Shell and Statoil as well as trading houses such as Koch Supply & Trading, Gunvor and Mercuria. The company ultimately aims to build digital solutions for the whole ecosystem of the physical energy trading industry. Therefore, all of the stakeholders including third parties like traders, brokers, shippers, banks, surveyors and terminals, are being brought onboard.
The Vakt platform has been built to focus on transforming the post-trade lifecycle for physically delivered commodities. It is not a platform designed for commodity trade execution but rather for all of the complex procedures that take place post-trade. Therefore, the capabilities of the platform, as outlined on the website, are focused on four main areas:
- Deal Recap and Confirmation:
The platform enables the recording and verification of physical energy deals which are stored in the immutable distributed ledger. This prevents the need for a lengthy reconciliation process and any errors or inconsistencies between parties.
- Trade Finance:
Through the platform buyers will be able to more easily and efficiently access funds to finance the deals. Vakt has partnered with some banks to build integrated tools for all of the involved stakeholders.
Data from third parties including terminals, surveyors and shippers like nominations, actual deliveries, timely physical location updates etc. will help to create a more transparent system and enable companies to more efficiently manage their logistics.
All of the data necessary for invoicing will be available and automatically verified within the platform without the need for intermediaries and implemented automatically with the use of smart contracts. In addition, all of the paper-based documentation for this and all of the other processes can be stored in digital form on the distributed ledger.
- The Vakt platform is built on the Quorum private enterprise blockchain which was developed by JP Morgan.
- Security and privacy are strengthened through permissioning which allows only relevant parties to access the data.
- It is integrated with the trade finance blockchain platform Komgo.
AI Link Group Limited, through its operating affiliates, AI Link Finance Limited (collectively “ALG” or “AI Link”) provides TradeFi, an integrated platform which allows holders of Ethereum-based stablecoins to earn interest income generated from trade finance assets.
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