You are a part of the digital revolution that is reshaping society if you are reading this on a phone, tablet, or laptop rather than on paper.One of this century’s most significant economic changes has been the transition from paper records to electronic ones in many facets of life.
This change has brought new efficiencies, cost reductions, and opportunities deemed impossible with paper records.
Commodity trading, which has historically relied on extensive paper trails to undertake, authenticate, execute, and process each transaction, is now experiencing that change.
Read on to learn more about the implementation of blockchain in global commodity trading.
An Overview of Blockchain And Commodity Trading
Blockchain, a distributed ledger system best known for its connection to the digital currency Bitcoin, is one example of how digital technologies are opening up new possibilities. It helps in streamlining and simplification of paper operations as well as for reshaping long-standing business models.
Some movers and shakers in commodity trading, including Gunvor and Mercuria, oil and gas giants like BP and Shell, and significant banks like Societe Generale and ING, have expressed considerable interest in blockchain.
However, blockchain can also benefit smaller companies by lowering the cost of trading, making it more affordable to enter a market.
Regulators are also curious about how blockchain technology might assist them in increasing market efficiency and transparency.
How Blockchain Works
The distributed, decentralized digital ledger known as the blockchain, which powers the immutable transaction record of the cryptocurrency Bitcoin, officially emerged in 2009.
This is how it works: either a person or a machine registers to become a member of a blockchain, which can be either public—like Bitcoin—or private—like a neighbourhood of residents or a network of traders.
The person or machine can then conduct business with other blockchain members.
Using the same consensus algorithm, nodes on the blockchain’s peer-to-peer network verify each transaction to determine whether it is accurate and valid.
Then, verified transactions are combined with unverified transactions to add a new data block to the preceding chain of blocks. The digital ledger then receives a permanent data entry.
Benefits Of Blockchain In Commodities Trading
Within the context of commodities trading, blockchain has the potential to transform this massive market by making many of its native processes affordable, transparent and more efficient. In this regard, some of the key benefits of using blockchain concerning commodities include:
Overhead cost reduction
The mitigation of post-trade processing charges is by far the most essential advantage here, with conservative estimates suggesting that blockchain technology can help reduce costs related to daily operations, accounting, settlements and IT.
Seamless peer-to-peer (P2P) trading
Another underrated application is facilitating large-scale commodity exchanges that allow massive wholesale markets to gain seamless access to smaller regional ones.
Elimination of fraud
The technology can help eliminate issues related to financial irregularities since it utilizes a decentralized ledger that makes it extremely easy to detect and identify invoice irregularities, carousel transactions, etc.
Easier stock maintenance
Using blockchain, it can become easier to keep track of critical supply-and-demand data, making the global commodities ecosystem more efficient while allowing for an extremely high level of commercial confidentiality, if required.
Improved privacy and safety
Commodities-related trade data stored on a blockchain platform is safe from any third-party interference since a copy of the info is available with each node operating within the network. Therefore, relevant actions can be taken immediately if any transactional irregularities are identified.
Cutting Trade Costs With Blockchain
According to blockchain developers, digitizing post-trade procedures for commodities could save expenses across operations, accounting, settlements, and IT.
To process individual trades through settlement and delivery, modern commodity trading still heavily relies on manual, cross-checked, paper-based administrative tasks.
But this is expected to change with the introduction of new IT options, including blockchain and other distributed ledger technologies.
Present Frictions With Commodity Trading
With the wide variety of commodities globally, marketplace friction can depend on the asset in question. Physical assets are typically encumbered by outdated trading technologies, logistical challenges for investors to access these markets, and performance and credit risks.
Consumers are now pickier about where and how a commodity is produced, which adds to the complication.
Blockchain improves the efficiency of tracing the digital ownership of tangible goods, which could be done via a digital certificate—a digital title associated with a particular inventory item.
Additionally, this digital “twin” records data about the commodities’ production and delivery allows producers to distinguish their goods through, for example, Renewable Energy Certificates (RECs). As one panellist put it, RECs enable the creation of “uncommoditized commodities.”
How Blockchain Makes Commodity Trading Easier
Blockchain-enabled traceability brings much-needed transparency to commodities transactions, reducing fraud that has previously led banks to leave the sector.
Blockchain systems act as a central asset registry, linking the inventory to the invoice throughout the entire payment lifetime and enabling funders to examine modifications, observe disputes, and other pertinent information about the transaction.
Blockchain has the potential to drive value across industries. As one panellist remarked, distributed data doesn’t just go into a single database; it can provide transparency through the life of a commodity, from a mine to the manufactured product.
As corporations are increasingly pressed to hit ESG (environmental, social, and governance) targets, there is “little verification today if something is green,” according to one expert. By tracking inputs and activities in real-time, ESG factors become more auditable, delivering valuable information to investors.
Growing consumer demand for sustainable products could also boost the adoption of blockchain due to its authentication capabilities.
A recent McKinsey banking industry report stated that the pandemic had increased focus on sustainability, estimating that producers could expect a 15–30% price premium for sustainably produced products and services.
Another benefit is broader participation in commodities trading. Historically, commodity markets were only open to those who could manage substantial credit lines.
Blockchain has the potential to democratize the market, allowing new participants through more transparent pricing, lower transaction processing costs, and increased demand for “better sourced” products.
Path To Adoption of Blockchain in Commodity Trading
Current commodities traders and funders are looking for ways to reduce high back-office costs. Experts expect this group to lead the charge until more considerable penetration can be made into smaller supply chains.
Smaller traders could benefit from blockchain’s ability to connect all counterparties, such as funders and suppliers, without interoperability issues.
In addition, larger companies that need to meet ESG reporting targets will demand better reporting from their smaller suppliers, which could further expand blockchain as the big firms chip away at the less accurate parts of their operations.
Could tokenization of the underlying assets in a commodities trade be retrofitted to existing assets such as gold bars, or is it necessary to start with entirely new assets?
The question remains open. However, there is an agreement that data quality is crucial, and self-reported data is not feasible because of validation issues. All parties must ensure that data is monitored, verified, and auditable.
The growing consumer preference to demand transparency and evolving tech capabilities available to all participants will drive accessibility and visibility in commodities markets.
Commodity Trading With SpellSystems
Blockchain solutions work as a central asset registry, linking all data throughout the transaction enabling funders to examine modifications, observe disputes, and other pertinent information.
Quality data is essential and all stakeholders must feel certain that data is being watched over, double-checked, and auditable.
SpellSystems can do all of the above for your company. And much more!
Our deep expertise in custom blockchain technology can certainly give organizations and individuals an advantage.