Blockchain

There are new blockchain initiatives announced almost daily, yet it doesn’t appear that many commercial applications that rely wholly on blockchain are yet in widespread use in the commodities industries. Further, and particularly over the last year, there have also been a growing number of more critical commentaries noting an apparently growing belief in the industry that blockchain has been over-hyped. In all, the jury is still well and truly out as to if and when blockchain will find its potential in energy and commodities.

Despite this ongoing negativity toward additional investment in Blockchain, there has been no lack of initiatives, consortia and POCs announced many of which come to nothing. There are so many blockchain initiatives targeting energy and commodities that it is impossible to cover them all and so the narrative below uses examples and is not a definitive list. There are some notable blockchain efforts in the market like Vakt and Komgo that have resulted in at least some adoption in specific parts of the industry. However, when you press Vakt about blockchain, its role in their solution is suddenly diminished and is described as a just a small aspect of the entire solution. In fact, Blockchain appears to be less than 20% of the Vakt solution.

As previously noted, Blockchain requires standardization and consortia (market agreement) to work and to be attractive to new players - two things that have historically not worked well in the commodities markets: 1. There have been many standardization attempts in the industry and none have really ever produced what was intended, but rather ended up as a compromise between a standard and extensions or customizations. While there have been numerous calls for greater standardization in the industry, and with increased frequency, the fact remains that standardization often gets in the way of differentiation and the potential for competitive advantage in the industry. As a result, it is often given lip service and does not, in the end, result in little more than some type of standard reporting.

However, as the industry seeks greater efficiencies and reduced costs via digitalization and automation, standards will need to emerge even if it means that the competitive and innovative side of the business, commodity trading (often where the true complexity is) remains non-standard. 2. While there are many industry bodies and affiliations, this has also been an industry in which working as consortia has not proven to be particularly successful either. This failure to reach agreement is primarily because the establishment of a blockchain platform really requires that each participant gives up some control to a ‘central authority.’ This is why most blockchain initiatives have depended on a consortia structure in which the overall solution is owned by an entity that is subsequently co-owned by the participants. Again, whether this model can really work in an industry that has mostly been cutthroat, highly secretive and competitive remains to be seen as the results of such efforts to date have fallen well short of their founding goals.

For blockchain initiatives to take off commercially, they not only have to offer the promised business efficiencies and benefits, but they also require new ways of thinking and doing. It may be this that is impeding real progress as much as anything now. Another issue with blockchain is simply the hype. The simple mention of blockchain has, in the past, created sufficient market hype to inflate a public company’s stock price. Unfortunately, knowing this, some companies have very publicly announced their intentions to make significant investments in the space, only to provide little or no follow-up on the results of those efforts. This means that parsing the various initiatives and announcements needs to be done carefully with half an eye of the hype involved. Unfortunately, it is still somewhat true that any application that involves a hint of blockchain will likely be marketed as a ‘blockchain’ application, leading, even today, to out-sized press coverage and hype… even if the blockchain aspect of it is nothing more than window dressing. As such, in this market, it continues to be buyer-beware!

All that said, Blockchain is still being proposed and pursued for many use cases in the industry. Below we mention a few of the use cases we are aware of. Trying to categorize them is often an issue because the blockchain initiatives also tend to claim they will extend into a myriad of areas that often overlap with each other.

Inventory

Using blockchain to securely record ownership of commodities is certainly an area where many initiatives have already been announced. For example, the Dubai Multi Commodities Centre (DMCC) announced plans recently to create the first precious metals refinery and storage facility in the Gulf region enabled by blockchain technology. The facility will refine and store precious metals including gold, silver, platinum, palladium and rhodium, which will be optimized on goldexchange.com, a secured trading platform. The refinery and storage facility will create an optimized record of transactions, making it possible to track all precious metals that are refined and eventually sold internationally to more than 150 countries.

Trading, Trade Back Office and supply chain support

In commodities, one of the most visible initiatives is the Vakt consortium. Using blockchain technology, Vakt helps to manage physical oil transactions, eliminating reconciliation and paper-based processes. It’s a consortium of oil companies and banks (BP, Gunvor, ABN-AMRO, Equinor, Koch, ING, Shell, Mercuria, Chevron, Total, Reliance and Societe Generale) focused on developing and deploying solutions for post-trade processing. It has been designed to help ‘eliminate reconciliation and paper-based processes,

enhance efficiency and create new trade finance opportunities.’ Recently, the platform went live for the physically traded BFOET crude oil business and is arguably the world’s first fully operational, enterprisegrade blockchain platform to enter the market. Vakt can also offer blockchain-based financing solutions to its users via its alliance with komgo.

BHP Group has completed a first blockchain trade in iron ore with China Baoshan Iron & Steel Co Ltd, in a transaction worth around $14 million. BHP said that the trial transaction using the MineHub platform was worth about $14 million and was delivered in June. The platform processed contract terms, exchanged digital documents and provided real-time cargo visibility, it added. The Minehub platform is designed to improve efficiency in trading operations and environmental and social governance (ESG) compliance in mining and metals supply chains.

Another area where blockchain is being proposed is in support of supply chain. For example, Trames, a Singapore-based supply chain orchestration platform, recently launched a software-as-a-service (SaaS) solution that it claims will help small and medium enterprises optimize supply chain operations and improve overall profitability. Running on R3’s Corda, the blockchain-based platform enables collaborative drafting and confirmation of shipping documentation and advanced analytics to help optimize decisionmaking as well as speed up shipping processes by reducing physical paperwork.

Another recent initiative in this use case area is the Covantis blockchain platform. It caters for post-trade processes and has moved into full production two years after being created by a group of major agribusinesses to digitalize agricultural shipping transactions. The platform recently went live with more than 30 entities, including – Archer Daniels Midland (ADM), Bunge, Cargill, Cofco, Louis Dreyfus Company and Viterra. It will initially cover bulk shipments of commodities such as corn and soybeans from Brazil to destinations globally, and will seek to connect shippers, traders and charterers involved in these trade flows and is aimed at eliminating post-trade paper-based processes. After this initial use, Covantis intends to bring in additional post-trade processes, including trade confirmation, contract management, as well as laytime calculation. The firm also has stated their intention to explore other markets and commodities, including the remaining grains and oilseeds, beyond the existing offering of corn and soybeans.

TradeTrip, is another blockchain initiative that involves digitalization of documents including Bills of Lading, Certificates of Origin, Warehouse receipts and Letters of Credit. TradeTrip markets the solution as being designed to work via API’s with a client’s existing ecosystem of commodity-focused applications to provide greater transparency, trust and fewer transactions around documentation through the supply chain – particularly those documents around custody transfer. The solution uses blockchain as well as 2D QR codes to identify scanned documents and deep learning-based text recognition to aid in transfer of document data to systems.

GrainChain, is marketed as a blockchain-based supply chain management firm seeking to enhance visibility for producers and consumers in the commodity supply chain in Latin America and North America. The partnership is aimed at empowering suppliers and farmers to protect their brand reputation through adherence to supply chain standards in a bid to create trust with the final consumers. The supply chain management will be provided by the Mastercard Provenance Solution, and together with GrainChain, trusted end-to-end visibility will be given to products, ranging from coffee to sorghum, from the farmers or producers to the final consumers. This visibility will afford everyone in the supply chain to track each product and authenticate its origin, thus providing room for trust in the industry.

Cargill, Agrocorp, Rabobank and other logistics partners used a blockchain platform provided by Singapore-based dltledgers to settle a $12 million shipment agreement on April 1. The dltledgers blockchain solution is built on the open-source Hyperledger Fabric platform. The blockchain platform provides a repeatable framework for end-to-end digital trade executions, digitalizing the document and trade execution process. The trade took a total of just five days to settle, whereas traditional trading processes can take up to a month. The platform created a shared, unchangeable record of the transaction.

According to dltledgers, cross-border commodity trading is one of the most promising sectors for blockchain, which allows for real time monitoring by multiple parties, dispenses with concerns about data ownership, and simplifies the exchange of documents in a digital, secure and decentralized manner. The solution is a way to continue operations within the global constraints of the pandemic.

Dutch bank Rabobank, commodities trader Concord Resources, software developer Gen10, insurer AON and warehousing firm PGS formed a blockchain consortium and in November 2019 the group executed a physical sale and repurchase (repo) trade using blockchain. Repos are a type of financing, in which the lender temporarily owns the goods instead of getting a lien or charge over the assets. The original asset owner repurchases the commodity at an agreed time and slightly higher price. The consortium aims to drive efficiency, traceability and transparency in metals trading and repo financing using the blockchain platform. It tracked the metal from the point of trade to delivery and provided real-time confirmation of completion without manual intervention. The trade took less than five minutes to complete using a mobile phone.

Perlin, large companies in Singapore, and the government have teamed up to develop an opensourced blockchain trade platform (ICC TradeFlow platform). DBS Bank and Trafigura, in collaboration with Infocomm Media Development Authority (IMDA), the International Chamber of Commerce (ICC), Enterprise Singapore, and Tradetech Perlin aim to connect trade partners across borders and streamline manual paper-based trade processes to improve trade flows. Built on IMDA’s TradeTrust network infrastructure and powered by Perlin’s

blockchain technology, the platform is designed to be interoperable with existing and future digital trade platforms.

The Ricex platform is a blockchain-based rice trading exchange developed by Fujitsu. The platform is designed to specifically address the problem of managing trading across a wide variety of strains, each with differing quality, taste and fragrance, all of which determines the price of rice. The Ricex digitalizes rice trade using blockchain and provides a transparent ecosystem of importers, exporters, wholesalers, producers, regulators and other stakeholders. The platform claims to streamline the trading process by providing insurance, shipping information, inspections, and automated settlement to participants. With the blockchain platform, traceability is also enabled, allowing buyers to identify rice certified as sustainably grown.

Even traditional CTRM is seen as a candidate for blockchain and EnHelix®, an oil and gas commodity trading and logistics management software marketed as having embedded artificial intelligence and blockchain capabilities, recently announced its Marketplace Blockchain software for commodity trading companies. The company claims its software is an advanced blockchain solution for trading companies which helps to standardize and automate its system of physical trades. They note they believe their solutions reduces fraud and operational risks and expedites payment and provides other benefits like automated trade execution via a distributed blockchain enabled application to reduce trade discrepancies and can integrate with existing ETRM systems.

Another trading area that has been touted as ideal for blockchain is at the retail end of power and gas trading. Distributed power generation and small local grids which can function independently have been identified as an area for blockchain to provide peer-to-peer online platforms to trade energy. Various initiatives exist in this space including one by Transactive Grid in April launched a peer-to-peer (P2P) transaction platform that enables Brooklyn Microgrid members to buy and sell electricity produced from residential PV solar installations. Other examples include Germany’s GridX and Australia’s Decentralized Energy Exchange (deX) and numerous other examples exist and this area does seem ideal for blockchain.

Finally, TradeCloud is an initiative started by several ex-commodity traders in Switzerland. Its initial focus was on a communications platform for metals commercial users and, based on the success of developing that, a similar platform for energies like coal, oil, refined products, and so on. It has also released a post-trade component that utilizes the blockchain and intends to connect to a wide range of third-party services and develop an API to connect to commercial CTRMs prior to the end of the year.

In trade negotiation, the solution uses several setup configurations like a workflow application to allow appropriate communications, and a number of other setup and configuration items to define various contract terms and conditions. Users can set up sales and purchase proposals and share them as broadly or as

narrowly as they wish while others can explore the sort of deal, they may be interested in. Once both sides of a deal are moving forward, each step is recorded and captured whether it be a contract or deal changes via conversation or edits and it is all done in a way to highlight what has changed and what needs to get done next. Once accepted, a legally binding contract is created. The solution also covers the KYC process in a similar way such that parties can exchange documents and go through an organized process securely and have a complete audit trail at the end of that process. The post-trade aspect also has a bit of permissioning and set up to configure of course though nothing so very complex. It seems straightforward to achieve this. The trade is then imported, and the system shows the work that each person and organization need to do following it through to completion. Amendments can be made to the contract, parties notified of events like insurers, warehouses, logistics firms, banks, and so on and everything is auto filed as the processes are worked through. All are written to the blockchain for security, trust, and confidence. The highly complex and often manual steps are digitalized as a result.

Sourcing

The Responsible Sourcing Blockchain Network (RSBN) is a network aimed at supporting responsible sourcing and production practices from mine to market. Several mining and metals producers have joined the platform to participate in a circular value chain, tracing commodity flows in near real time as well as replacing cumbersome paperwork. Built on IBM Blockchain technology and powered by the Linux Foundation’s Hyperledger Fabric, the RSBN platform aims to improve transparency in the mineral supply chain by providing a highly secure and immutable record that can be shared with specified members of the network.

RSBN is designed to be adopted across industries by original equipment manufacturers (OEMs) in automotive, electronics, aerospace and defense, as well as their supply chain partners such as mining companies and battery manufacturers.

Atomyze LLC is the US branch of a global fintech platform that claims to digitalize and modernize the trading experience for products, assets and commodities by enabling investors to invest in the actual underlying commodity directly and safely. Using technology powered by blockchain, Atomyze provides a marketplace for investors to buy digitized assets of any kind, including commodities, for issuers to trade their assets on blockchain, and for the management of supply chain contracts between issuers and commercial users.

Trade Finance

Komgo is a blockchain trade finance platform specifically targeting commodities in which Rabobank is a member alongside other prominent Dutch banks ING and ABN Amro and several other international financial institutions. To date, the focus of the initiative has been on oil and gas. The platform is said to provide a wide range of solutions that facilitate trade finance between participants and increase the speed of transactions. According to the company, the blockchain technology allows stakeholders to control a deal in real time and offers improved transactional transparency. Currently the company offer two products: 1) a digital letter of credit (LC), which allows commodity players to submit digital trade data and documents to their banks, and 2) a know-your-customer (KYC) solution to standardize and facilitate the KYC process enabling exchange of documents on a “need to know basis” without a central database.

dltledgers has also launched a platform called SmartFin for small and medium enterprises (SMEs) to access trade financing from alternative financiers. SmartFin is a blockchain-based system that matches SMEs that are seeking finance to funders who can provide it. According to dltledgers, over 400 companies have already signed up, and can currently access financing from a handful of non-bank financiers, including TradeFlow, Drip Capital, Funding Societies, Crowd-Genie, Stenn International and Capital Match.

Document Management

TradeTrip is a blockchain initiative that involves digitalization of documents. Currently those documents include Bills of Lading, Certificates of Origin, Warehouse receipts and Letters of Credit. More document types will be added. The TradeTrip solution is designed to work via API’s with a clients existing ecosystem of commodity-focused applications to provide greater transparency, trust and fewer transactions around documentation through the supply chain – particularly those documents around custody transfer. The solution uses blockchain as well as 2D QR codes to identify scanned documents and deep learning-based text recognition to aid in transfer of document data to systems. Currently the solution is being piloted by a company in Singapore and is part of a couple of accelerators in Singapore as well. The company sees the solution growing not just in terms of documents but also in terms of tracking cargoes and via the use of smart contracts, which could facilitate event-based activities like automating a payment on receipt of cargo.