(Repeats Monday item)
* Commodities trade still relies on paper mountain
* Tests underway to adopt blockchain technology
* Moving into digital age could save billions
* But business remains secretive and jobs at stake
By Eric Onstad
LONDON, May 22 Alistair Cross was flying high
after showing in a pilot project how blockchain - the technology
first developed for the crypto-currency bitcoin - could
transform the old-fashioned and secretive world of commodity
But since the pilot ran early this year, Cross and his
rivals have hit some hard realities as they try to propel their
industry into the digital age at last.
Word spread fast through the business when Mercuria, the
Swiss-based commodities house where Cross is head of operations,
successfully tested an oil trade. "The number of phone calls
I've had from people in the last month once they heard we had
done this has been incredible," he told Reuters.
Cross and many others in the sector are excited about the
possibility of saving billions of dollars a year in commodities
trading by scrapping millions of paper documents and moving to a
digital equivalent with blockchain.
FACTBOX: Who's doing what with blockchain in commodities:
But adopting some form of blockchain, which in the case of
bitcoin allows for transactions through a peer-to-peer computer
network, with no need for middlemen, wouldn't be universally
welcomed. Many in the conservative commodity business shrink
from the thought of losing discretion in their dealings, as well
as jobs and perhaps even their business if the technology
succeeds disrupting the status quo.
After a series of upbeat announcements from Mercuria and
others about successful pilots and "proofs of concept", Cross
and rivals have found that translating enthusiasm into a
broad-based roll-out of the technology is proving difficult.
Even if problems in the blockchain technology are ironed
out, the sector has to hammer out common legal standards,
ensure there are links between different dealing platforms and
persuade scattered elements of the supply chain - from commodity
producers and brokers to traders and consumers - to co-operate.
For Cross, the fear is that a profusion of systems will
emerge. "There's got to be consolidation in all this because if
everyone comes up with their own offering it will be too
burdensome, it will kill itself," he said.
VAULT FROM PAPER TO BLOCKCHAIN
Long after stock, currency and bond trading moved to
electronic systems, the business of buying and selling
commodities is largely stuck in an era of paper and fax
"When you start to think about some of the (possible)
efficiencies in that environment, it's astronomical," said Guy
Halford-Thompson, CEO of BTL Group, a technology firm that is
running a blockchain pilot with European energy companies.
Whether it is trading oil, copper or wheat, participants
currently grapple with a mountain of documents including letters
of credit, bills of lading and inventory receipts.
For instance, more than 4.5 million letters of credit were
issued in 2015, accounting for over $2 trillion of global trade,
according to HSBC. Blockchain has the potential to
eliminate all this kind of paper and much more.
Shaving only part of the costs from such a huge volume of
trade could amount to billions of dollars in gains for firms
across the supply chain.
Mercuria has estimated that costs in terms of payments could
slide by 30 percent by using the technology.
Eager to turn the concept into reality, HSBC completed a
test run last year along with Bank of America Merrill Lynch
and the Infocomm Development Authority of Singapore,
proving that a letter of credit could be replicated on a
The test, while successful, also revealed the tough road
ahead. "We learned that it could be done, but there were quite a
few restrictions with the technology itself... particularly
around the scalability and security," said Vivek Ramachandran,
global head of product for HSBC's trade finance business.
HSBC is now working with another broader group of banks and
technology firms to move the project forward.
Ramachandran believes the technology will eventually
transform the sector, but it will be tough convincing a wide
range of market participants to set aside rivalries and move
onto a blockchain platform.
Some in a fiercely competitive commodities sector are
reluctant to put their data on a common platform.
"If you're a proprietary trader with your specific
strategies that make you a lot of money, you're not in the
business of sharing that with anybody," said Talib Dhanji, EY's
Commodities Markets Leader.
Blockchain technology allows for public, private and mixed
platforms, but to reap the benefits, the whole supply chain
including producers, shippers, warehouse operators and customs
authorities must use it.
Technology giant IBM recognises the difficulty of
moving beyond a pilot of trading crude oil that it has tested
with French bank Natixis and trading house Trafigura.
"Clearly it needs a number of banks and a number of buyers and
sellers, enough to get a critical mass to make a business
network valid," said Keith Bear, IBM's vice president of
Even among commodity and technology partners working on
blockchain projects, there is reluctance to share information.
"You don't want to give away your intellectual property or
your market knowledge, access to clients, to fintech companies
for the privilege of paying for that technology for the rest of
your life," said Kris Van Broekhoven, global head of commodity
trade finance for Citibank. "So it's not an easy discussion."
In some cases, people may be wary of joining an initiative
that may render their roles redundant. Banks, brokers and energy
utilities could all face uncertain futures in a world where the
buyer and seller can do business directly in a digital system.
"Once you have the transparency, the visibility, the digital
trust...it means a challenge to the value that they add to that
process," said Richard Payne, managing director of commodities
trading and risk management at Accenture Resources.
While banks will still be needed to provide finance, their
role is likely to change, while some energy companies and
brokers may find themselves squeezed out.
In the pilot, Mercuria completed an oil trade using a
digital "smart contract" on a blockchain instead of a letter of
credit. "With paper flow, it takes 10 to 20-plus days to get the
documentation in order, and we did it in two days, so it's not a
stretch to imagine that the working capital cycle can leverage
much more effectively," said Cross.
Still, a legal basis must be created for digital contracts
and regulators have to grant their approval for a technology
that was originally created by radical libertarians who sought
to disrupt the established economic system with bitcoin.
Central bank regulators, already unable to control bitcoin
business, are cautious. "They're very, very interested...(but)
they are rightly nervous," Peter Stephens, head of blockchain at
UBS, told a conference. "They will have to take this very
In the United States the acting head of the Commodity
Futures Trading Commission said in January that distributed
ledger technology offered promising benefits as long as
regulators can ensure it will "do no harm".
Despite the obstacles, once a critical mass is hit, the pace
of transforming commodities with blockchain is likely to
quicken, Cross said.
"There's going to come a time that from the wellhead to the
gas tank, the physical production to the administrative will not
be touched by humans. It’s happening and we need to get on
(editing by David Stamp)