As with most new and inherently disruptive technologies, it is far too early to appreciate the full potential of blockchain in the commodities space right now, because it is human creativity and innovation that will drive successful applications.
Anchored on a distributed ledger algorithm that enables peer-to-peer transactions without a third party being involved, such as a bank, blockchain is probably one of the most impactful breakthrough disruptions of recent years. Briefly, blockchain is a series of connected “blocks” of data containing records of transactions – the most common type in use at present being bitcoin. These interconnected blocks form a “chain” of data which is effectively a database that is decentralised, fully distributed, and publicly visible, making it open for scrutiny and acting like a ledger.
The financial services industry is already well underway with piloting applications for the new technology, but its potential to transform the commodities markets is only just starting to be explored. Some of the early objectives that are generating interest, and attracting funding to develop solutions, include areas such as trade reconciliation and confirmation. Here, transaction costs could be significantly reduced by keeping the ledger distributed between counterparties and trade settlements, where the operational risk of cash misallocation and the potential to optimise working capital is attractive.
Other possible applications include price reporting, where blockchain permits improved data verification while preserving the anonymity of counterparties and physical commodity tracing. The reason behind this is because it becomes possible to locate both physical commodity and its owner at any point in time.
We are also starting to hear about the concepts of Smart Commodity Trading, whereby blockchain allows traders to set up platforms to develop liquidity, arrange funding, execute trades and hedges, and handle logistics in an automated, tamper-proof way. Blockchain could also soon facilitate peer-to-peer energy trading, by enabling owners of solar panels to sell off excess generated power to neighbourhood peers without any requirement for third-party verification.
And then there is the potential for smart tendering: pallets equipped with RFID tags can publish their need to move from point A to point B on a blockchain ledger. Carriers use blockchain mining applications to place bids to win the job. The blockchain will award the job to the bidder that best fits their requirements and the transaction is recorded on it. The shipment is then tracked on the blockchain as it moves through the supply chain. With blockchains, all of these steps can be done automatically, cutting out cumbersome negotiations and inter-party information exchanges, and significantly improving efficiency.
Warehouse receipt financing can also be dramatically overhauled and de-risked by digitally tracking an underlying physical asset by features such as origination, current location, beneficial owner, certain attributes of its quality or grading, and its provenance. Tracking is enabled by capturing data held by a unique identifier for each consignment, and a digital smart contract embedded within the platform captures and enforces the stored data.
For every part of the commodities deal life cycle that blockchain might disrupt and reconfigure, there are enormous human capital implications, as the need for manpower with current skillsets is replaced with entirely different demands. Intermediaries such as brokers, exchanges, price reporting agencies and clearing houses could see their entire business models disrupted by the widespread adoption of blockchain-based applications, and many more back- and middle-office functions could find themselves redundant.
Considering the impact from trade execution through to payment, it is apparent that few – if any – commodities businesses are likely to emerge from this revolution unscathed. The first movers will be the ones best placed to adapt and capitalise on a new era of commodities management.
by Stuart MacSweenview my profile