Blockchain for commodity and energy trading

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Blockchain for commodities trading & electricity trading

Blockchain technology can and is being tried, tested, and used in the commodities and energy trading world as well. This could be a $6 trillion market collectively, if not more.

The benefits are many as it can add an additional layer of trust and authenticity to the underlying commodities traded. In this way it could offer a secure means of exchange for documents and raw materials. Commodity trading in itself can be varied and there are several aspects to it even in terms of the settlement and actual delivery of the underlying if at all.

Trade finance

The first thing that potentially comes to mind when trading is discussed is the financing aspect and the related documents – letters of credit and bank guarantees. Many trading parties also require the appropriate insurance documentation in place to do business.  Dating back to the very inception of trade finance there have been cases of fraudulent documents or transactions. The most prominent, referenced, and recent one was the Qingdao $3 billion scam in 2014 which also impacted a few international banks – Citi, Standard Chartered. There have been a couple more, ironically also within China at a much smaller scale, but still to the tune of a few hundred million. With smart contracts on the blockchain, documentation is hard to replicate without related parties knowing and at the same time it forms a legitimate audit trail.

Physical Commodity Tracking 

Coming back to the raw definition of commodities trading and keeping it to the physical commodity product in itself. The raw materials are typically stored in warehouses and not necessarily documented in very authentic and secure ways. There could be some tags that suggest what grade/class a product is, but mistakes can be made sometimes erroneously and sometimes maliciously. So once the inventory is logged in a more trusted way, the goods when they are to be moved are also tracked more effectively. So instead of having paper records, they are on the blockchain embedded with smart contracts.

The beauty in all of this would be an integrated blockchain which has not only the trade finance documents, but also the physical commodity tracking and authenticity working in tandem which makes it ever so transparent and at the the same time secure when goods move not just internationally but also domestically.

Examples (via Reuters):

  • Mercuria completed a pilot oil trade with ING and Societe Generale where a letter of credit was set up on the blockchain using smart contracts while paper documents also ran parallely.
  • Trafigura partnered with IBM and Natixis to create a platform using IBM’s Hyperledger Fabric for U.S. crude oil deals
  • Members of a blockchain consortium are working on a supply chain trading system on Hyperledger Fabric for the cotton industry.
  • HSBC, Bank of America Merrill Lynch and the Infocomm Department Authority (IDA) of Singapore worked on a PoC replicating letters of credit on a distributed ledger.
  • Standard Chartered, DBS and IDA completed a PoC on trade finance invoicing on the blockchain.
Energy Trading

Traditionally people utilise electricity from the main public and private sector provided sources, and this continues to be the case for the most part of it. However, there is also an increasing use of solar power (the most common) created and utilised by people at their own homes, and some might even be distributing it to others (regulation aside). Although the uses could be beneficial in microgrids, even in the traditional way that electricity is consumed, traded and utilised, it would be better to gauge and track on the blockchain to be able to ensure that payments and usage are not just accurate, but also transparent. There are also views that since it is tracked, it would be easier to provide those who conserve energy with rewards and benefits accordingly. Similar to the financial services industry, the energy and utility industry also has its set of regulations that would have to be addressed, which again are specific to the markets.

Examples (via Reuters):

  • Power Ledger, an Australian blockchain startup has teamed up with:
    • BCPG Public Company, a subsidiary of Bangchak Corpporation (Thailand) to create the first peer-to-peer energy trading platform in Thailand.
    • Tech Mahindra at test sites in India.
    • Origin Energy in Australia started a three month test in October 2017.

There are also applications within the Over-the-Counter (OTC) commodity trading markets.

As seen, the use of blockchain technology, can be used in areas well outside the financial services industry. It’s not necessarily about the speed but more about the traceability, the effectiveness and efficiency that it brings. In addition, there are studies by EY which indicate that there are significant cost savings as well. Clearly companies that have entered proof-of concept (PoCs) have seen the value in it, which is why they have gone ahead justify the business case to expand it beyond the PoC stage.

 

Example Sources: