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Blockchain Technology Represents a New Frontier of Innovation in the Commodity Trading Industry
By Arnaud Stevens, MD & Head of Global Energy and Commodities-Trade & Structured Finance, Americas, Natixis
Blockchain can support a wide range of applications, and it’s already being used for peer to peer payment services, supply chain tracking and more. We want to use blockchain to optimize the antiquated arena of commodity trade finance. The current process is based on the exchange of paper documents and is labor intensive; we have multiple friction points with high processing costs and limited automation. Distributed ledger technology brings some much-needed innovation into our industry.
Blockchain Solution for the US Crude Oil Market
Natixis, IBM and Trafigura (one of the world’s leading independent commodity trading and logistics houses) have pioneered the first blockchain solution for commodity trade finance for crude oil transactions in the U.S.
The permissioned distributed ledger platform, built on the Linux Foundation open source Hyperledger Fabric, allows major steps in a crude oil transaction to be digitized on the blockchain, ensuring improved transparency, enhanced security, and optimized efficiency.
Processes in the energy and commodity trade business are ripe for improvement: yet the basic mechanics of how commodity trade finance players execute transactions with one another are centuries old process. The industry hasn’t seen much improvement during the last 50 years. Blockchain allows the contract for asset transfer to be embedded in the transaction database. Once a contract is validated and deployed, its execution is guaranteed.
Data privacy is the key for a permissioned distributed ledger network. We have designed the prototype to ensure appropriate visibility. The blockchain platform allows various participants in the network to execute transactions, while only allowing rest of the participants to see activity on a need-to-know basis.
Detailed Workflow Analysis of Crude Oil Transactions
During intense design thinking sessions, Natixis, Trafigura, and IBM have analyzed the workflow of crude oil transactions in the US, detailing the different steps of a transaction, the interactions with the financial institutions and the documents exchanged among the various parties.
Blockchain is a disruptive data solution and this technology will challenge commodity trading industry players to fundamentally re-imagine their data sharing processes
We have run blockchain simulations using Trafigura’s existing crude oil deals in the US.
By having the buyer, seller and their respective banks all on the same ledger, all parties can simultaneously view and share data on the status of a transaction, from the time a new trade is confirmed and validated, to when the crude oil is inspected, to its final delivery and cancellation of the letter of credit.
In the second phase, we want to expand the platform to allow all parties in the transaction to enter data directly onto the blockchain. For example, the shipping company, pipeline operator, inspector or warehouse can provide real-time status updates via the blockchain on the crude oil transaction.
Key Benefits of a Blockchain Solution
The goal is to replace paper-heavy manual processes with blockchain-based workflows to improve transparency and data sharing. Adoption of blockchain technology should enable faster, permissioned, immutable, transparent and auditable business-to-business interactions among companies and their business partners in the energy and commodity industry.
The key benefits are:
• Reduced cash cycle times, transaction time from days to near instantaneous;
• Improved efficiency via lower overhead costs and fewer cost intermediaries;
• Real time access to trade documents on the blockchain;
• Increased transaction visibility to help reduce the threat of tampering, fraud and cyber-crime.
• Creation of transparent transactions by using shared processes and recordkeeping.
With the distributed ledger technology, all transaction participants in the network are updated simultaneously with a record that cannot be altered or tampered with. Each change or new transaction immediately creates a new record in the shared ledger. Blockchain is designed to store information in a way that makes it virtually impossible to add, remove or change data without being detected and authorized by other users.
The new platform allows trade documents, shipment updates, delivery and payment status to be shared across a single shared ledger, assisting to reduce transaction time, duplication of documents and authentication processes among all trading partners.
Blockchain is a Team Sport
Blockchain is a team sport, it’s about operating a business network, and the goal is to extend this initiative to the key players in the commodity trading space and our banking partners to create an industry specific platform and to get to production as soon as possible.
Key obstacles to broad implementation include performance, scalability, and absence of regulatory and legal frameworks. But the competitive nature of commodity trade finance (margins have declined because of more transparency and price arbitrage has disappeared) should push the market participants to adopt the technology.
Distributed ledger technology drives substantial efficiency in the commodity trading landscape. It can aid fraud prevention and costs take out. Furthermore, this is a good opportunity to redraw middle and back office operations. The C-suite executives of the banks and commodity trading companies have already started to take notice.