Blockchain benefits remain murky for most commodities trading

18 September 2018

While blockchain technology continues to be viewed as a key piece of future infrastructure across many industries, a new report has cautioned against it being viewed by traders as a silver bullet. According to the study, the volume of trade via blockchain has often been negligible to date, while a critical mass of use may be some way off.

Having come to prominence as the technology underpinning Bitcoin, blockchain initially made its presence felt in the financial sector. It has since made waves in the freight and logistics industry, while clients in every sector from insurance to retail are pressing their consultants for advice on how to exploit, or defend themselves, from its disruptive impact.

The technology has long been discussed as a potential ‘game-changer’, which could not only save companies large sums of money in efficiencies, but improve security and productivity in the process. As a result, commodity firms and banks have been diving into blockchain pilot schemes over the last two years. However, a new study from The Boston Consulting Group has warned that the new technology’s application for most trading has likely been over-hyped.

A high-tech ledger system, 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. While it has seen a great deal of excited uptake, though, BCG contend that the volume of trades through various schemes has been so negligible at time of writing that it is too early to tell how soon blockchain might reach a critical mass, if at all.

Hyperliquid Markets Are at the Vanguard in Using Blockchain

According to Antti Belt, co-author of the BCG report, despite a number of pilot schemes having been executed by companies, few have become real production scale systems yet thanks to a range of obstacles. Chiefly, blockchain was not designed for physical trades, presenting a fundamental issue of how to track a physical entity in a virtual world. Among other obstacles to scaling up the technology, Belt noted the trouble of reconciling terminologies and whether the switch to a blockchain platform is even financially justifiable.

He expanded, “The industry is very old and everyone uses a different language. How do you define quality, shipment schedules... a lot of reconciliation is currently needed for both sides. People have spent millions, sometimes over $100 million, on IT systems, do they want to do it again?”

In terms of trying to pin-point where a wider adoption of blockchain technology might start, the report suggested that interest in the wider adoption of blockchain technology would start where the primary driver for its use is certifying the source of the asset, rather than efficiency. One illustration of this is the case of the diamond industry, where ensuring the commodity’s source can avoid various abuses or instances of fraud. BCG highlighted Anglo American’s De Beers Group, which noted in May that it had tracked 100 high-value diamonds from miner to retailer, leveraging blockchain technology. While this was the first effort of its kind to clear the supply chain of impostors and exploitation, it could be the start of a key trend for blockchain.

Commodity Traders' Blockhain Pilots

In accordance with this, BCG suggested that hyperliquid markets are the ‘vanguard’ of blockchain adoption. A liquid market is one where there are many bids and offers and participants can easily enter and exit it for minimal transaction cost. Over recent years, digital forces have pushed commodity markets increasingly toward ‘hyperliquidity’, the state at which a market's efficiency and transparency are at their highest possible levels, making it far removed from the traditional comfort zone of traders, who have long made their money by exploiting markets' inefficiencies. Blockchain can most tangibly assist trade in this sensitive market, by demonstrating the source of a commodity to even those briefly engaging in the market.

Traders of such commodities subsequently have developed the most advanced blockchain infrastructure, with the majority of their volume now controlled electronically. These include commodities such as CO2, government bonds, foreign exchange and financial oil.

Now, BCG suggests that this may spread to other major companies and banks trading in less liquid commodities, carrying out tests for blockchain across things such as power, and food – with fraud costing the food industry an estimated $40 billion a year. Further to this, last year, a consortium including major banks, trading firms and producers BP, Equinor and Royal Dutch Shell also announced that they would develop a blockchain-based platform ready to go by the end of 2018, while commodities trader Trafigura set up another platform with IBM and Natixis for the US crude oil market last year. Major agriculture traders have also tried blockchain such as Louis Dreyfus Co with a cargo of soybeans.

In spite of this, the report concluded that firms should still approach blockchain with a note of caution, rather than pouring money into it as a cure-all. The document warned, “Simply put, blockchain may not be the right answer for all players.”

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How blockchain can drive transportation and logistics forward

04 April 2019

The much-hyped innovation of blockchain has been said to have myriad possibilities, as companies across the industrial spectrum seek to safeguard their supply chains and increase efficiency. A new survey has found that it can drive transportation and logistics forward, bringing rise to several benefits, including addition transparency in its value chain, financial improvements, and better customer alignment.

While blockchain technology’s applications have long been speculated about thanks to the growing prevalence of cryptocurrencies, it is now a very real mechanism used by businesses worldwide to implement powerful solutions to some of commerce’s most pressing problems. Early experimentation with variations of blockchain technology proved most fruitful in the financial sphere, but it has also proven extremely useful in supply chain management and logistics.

A blockchain is a shared digital ledger which can be used to record and store transactions between multiple participants in a network. Changes made to the blockchain record must be approved by participants through an automated process. As a result of the fact information cannot be deleted, only appended, a blockchain provides an evidentiary trail of information back to the point of origin, meaning companies can locate and prevent fraudulent activity in their supply chain, should they leverage the tech adequately.

In September and October 2018, Boston Consulting Group conducted an online survey of global companies in the transport and logistics (T&L) industry in  order to assess their understanding of blockchain and their progress in adopting the technology. Despite the promises of the technology, however, BCG’s survey of executives from more than 100 T&L companies found that most industry participants have not taken a deep look at blockchain’s potential applications.

How blockchain can drive transportation and logistics forward

Commenting on why uptake may still be slow, report co-author Jacqueline Govers, a Partner at BCG in Amsterdam, said, “Many T&L executives regard blockchain technology as at best mysterious or at worst ripe for exploitation. In fact, the underlying concept is fairly straightforward. Simply put, because blockchains create data transparency, they help to establish trust among participants in complex networks... Blockchain can help the [transport and logistics] industry address these pain points by providing an immutable shared data repository, promoting trust among participants, and enabling automation of repetitive processes.”

A wide variety of pain points impede information sharing and create costly inefficiencies for modern T&L firms. In order to encourage more firms to tap into blockchain’s potential, BCG identified nine areas which can be aided by the technology.

Inefficient data and document management is possibly the most costly of these pain points. In the age of big data, leveraging blockchain to make the most of a company’s data could open up major untapped revenue opportunities. At the same time, blockchain can help with regulatory compliance efforts, helping secure supply chains at a time when laws firms can be stung by huge fines when failing to safeguard their data. It also goes without saying, then, that blockchain can help prevent the direct impacts of trade-based money laundering and fraud as well.

Efficiency savings

Further increasing efficiency in the industry, according to BCG, suboptimal equipment utilisation can also be tackled, while blockchain negates the need for a cumbersome letter-of-credit process, thanks to the digitalisation of the supply chain. Non-transparent pricing and booking can also be avoided, meaning it is easier for members of a value chain to get a fairer deal for their efforts, and avoid being exploited. 

BCG also asserted that blockchain’s rapid and efficient mechanisms mean that complex claims and changes in ownership can more rapidly be resolved, avoiding more lengthy back-and-forths between different suppliers. T&L executives can also use blockchain to reduce the cumbersome methods of traceability in their supply chains, though BCG warned that to make this happen, T&L companies must start to establish trust as the foundation of a collaborative blockchain ecosystem. Finally, T&L firms could use blockchain to improve on complex processes of reverse logistics, since a blockchain provides an evidentiary trail of information which can rapidly be used to work back to the point of origin.

Govers concluded, “With some T&L companies taking the first steps toward forming a blockchain ecosystem, other companies must decide whether to participate or adopt a wait-and-see attitude. In our view, the benefits of being among the first to join these collaborative efforts far outweigh any advantages of a cautious approach... As customers increasingly demand higher levels of trust, security, and automation, no T&L company can afford to remain on the side-lines while its competitors seek to resolve the blockchain paradox.”