The benefits of blockchain remain unclear for most commodity exchanges

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LONDON (Reuters) – Commodities companies and banks have embarked on blockchain pilot programs in the past two years, but the application of the new technology to most exchanges has likely been overestimated, report says of the Boston Consulting Group (BCG).

Blockchain, originally the platform behind the Bitcoin cryptocurrency, is seen by some as a solution to inefficiencies, improving transparency and reducing the risk of fraud. But BCG believes its potential has been overstated.

A high-tech ledger, the blockchain uses a shared database that updates in real time and can process and settle transactions in minutes without the need for third-party verification.

The volume of transactions through various programs has been negligible so far and it is too early to say how soon it could reach critical mass.

“There are so many pilot projects out there, but none have yet become true production systems. One of the problems is that it is not designed for physical trades. The fundamental question: how to follow a physical entity in a virtual world? It’s two worlds colliding, ”said Antti Belt, co-author of the BCG report.

Some of the obstacles to scaling the technology include reconciling terminologies and whether the move to a blockchain platform is even financially justifiable.

“The industry is very old and everyone uses a different language. How do you define quality, shipping schedules … a lot of reconciliations are needed on both sides right now, ”Belt said.

“People have spent millions, sometimes over $ 100 million, on computer systems, do they want to start over? “

Additionally, it is unclear to what extent traders will want to adopt technology that will erode already very slim profit margins.

BCG said that as the platforms take shape, this will be “bad news” for traders, as pricing inefficiencies and the uneven dissemination of the information they rely on for profit will disappear.

“The use of blockchain solutions would dramatically improve transparency … It would also create a more efficient and liquid market, moving commodity trading away from bilateral agreements made directly between two parties to transactions based on electronic platforms to make match buyers and sellers, ”he added. report said.

Co-author Steven Kok said interest in wider adoption of blockchain technology will start where the main driver is to certify the source of the asset, such as with diamonds, rather than efficiency.

De Beers of Anglo American said in May that he had tracked 100 high-value diamonds from miner to retailer using blockchain, in the first such effort to rid the supply chain of impostors and exploitation.

Nonetheless, large corporations and banks have tested the blockchain on commodities such as electricity, diamonds, food, and oil. Last year, a consortium comprising major banks, trading companies and producers BP, Equinor and Royal Dutch Shell announced that they would develop a blockchain-based platform ready to go by the end of 2018. .

Separately, commodities trader Trafigura set up another platform with IBM and Natixis last year for the US crude oil market. Large agricultural traders have also tried blockchain like Louis Dreyfus Co with a shipment of soybeans.

“Put simply, blockchain may not be the right answer for all gamers,” the report concludes.

Reporting by Julia Payne; Editing by Mark Potter


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