Making blockchain a reality in commodities

Before we can expect to see the use of blockchain technology taking off in commodities, and starting to transform the way that business takes place, we must undergo the pilot phase. Financial institutions have been piloting blockchain applications for around two years now, and the exciting news is that a number of pilots are underway in commodities over the last six to eight months. That means it is likely that we will see things being put into practice within the next year, as the pilots move to the phase of onboarding regulators with a product that works, and moving in to a real-world environment.

There are two exciting pilots going on that show the potential, the first involving two European oil majors and Canadian start-up BTL. The aim of the pilot is to achieve trade-matching software that can pair up the buyer and seller algorithms, and it has already proven successful in the pilot phase. The challenge now is to address security implications in the blockchain; how relevant data will be shared between parties; and at what stage of the deal life cycle they will release the information.

A second pilot is being run by Talistix, with the aim of building a complete backend blockchain portal, such that customers can register their details on the portal and it can then be used to access the ledger for oil majors, for example. Ideally, they hope to create a ledger with all the oil majors on their portal – to give you an idea of the ‘value add’, BP has over 14,000 trade-recognised partners. That list is security checked and changed weekly. Blockchain can create a more secure environment for BP and its partners, requiring less surveillance and protecting BP against fraudulent activity.

The exciting thing is that these pilots are being driven by the business rather than the technology, with major corporates appreciating the applications and prepared to invest in how the theory is applied. At the same time, 10 energy companies have set up a not-for-profit foundation, Energy Web, to focus on extending the use of blockchain technologies in the energy sector as well.

But there is still much work to be done. The role of regulators and the ability for market participants to meet compliance obligations will need to be examined in careful detail, and in some cases regulation may need to evolve in alignment with new ways of working.

The issue of anonymity and payments will also need to be addressed, as will the ultimate link between the digital conveyance of value over the blockchain and the actual conveyance of value through an acceptable means of payment (i.e. currency).

There are also obvious cybersecurity concerns that need to be tackled, and more specific challenges around what the operations model will look like for start-ups in this space – will they look to sell licence fees, for example? If the technology takes off, how long will it be before firms like ICE buy the software and incorporate it into their own offerings as they have in the past. And with blockchain offering greater price transparency, how will benchmarking firms like Argus Media and Platts respond?

There may well still be a long way to go to take blockchain from theory to reality, and certainly regulators and cybersecurity challenges have the potential to derail many of the potential breakthroughs. But if this does take off, we could witness a complete redesign of trading processes across all commodity trading firms in the not-too-distant future, and that will have massive implications for the staffing requirements of all concerned.