Energy traders and banks new blockchain platforms
Energy giant’s, energy traders and banks are uniting to revolutionise a centuries old trade-finance industry with the launch of two blockchain based trade platforms. The aim is to provide a faster, cheaper and more secure way of completing trades. This new platform will shake up the way we trade everything from oil to wheat.
Energy giants such as ABN AMRO, BNP Paribas, Citi, Crédit Agricole Group, Gunvor, ING, Koch Supply & Trading, Macquarie, Mercuria, MUFG Bank, Natixis, Rabobank, Royal Dutch Shell, SGS and Societe Generale are among the corporations backing the two new blockchain based platforms.
Conspicuous by their absence are the top three independent oil traders — Vitol Group, Glencore Plc and Trafigura Group — as well as oil majors and traders BP Plc and Total SA. It is not known if they will use the platform or will develop a competing platform.
Through the digitization of a large number of contracts, letters of credit, invoices and the other related paperwork (currently relayed around the world by email, fax and post) and placing them on a platform operating on the Ethereum blockchain network, they envision a seamless, faster, cheaper and more secure method of completing trades and settling transactions.
The platform will be run by a venture called komgo SA, based in Geneva, Switzerland, and it plans to go live later this year. The platform will be developed in partnership with blockchain technology company ConsenSys.
“Blockchain technology will answer the needs of key participants in commodity trading by improving efficiency and security,” said Souleima Baddi, chief executive of Komgo. “The launch of komgo SA highlights a shared vision for industry innovation and underlines the ongoing commitment among members to build a truly open and more efficient network within commodity trading”
Komgo will provide the financing via blockchain for all commodities and can scale itself up to new and emerging commodities. It will do this by digitising the lenders’ customer identification documents as well as electronic letters of credit.
Komgo will launch in November alongside VAKT. VAKT is the second platform designed to focus on the raw material transaction. It will assist in putting the information and paperwork together to make it possible for a deal to be processed on the platform.
The two companies “will explore synergies between both platforms,” Komgo said in the statement.
Komgo expects to launch two products before the end of the year: a “know your client” database and a digital letter of credit facility.
The platforms have seven common shareholders and will cooperate so that their users can complete a transaction on both the physical material side and manage the deals financing.
Due to the immutable nature of blockchain technology all encrypted digital information can be stored in a secure, linear, chronological order. It can be shared with permission allowing all parties involved in a trade to collaborate. Once records are created they cannot be revised as blockchain is an append only database and any attempted changes are visible to all parties involved.
Given the size of the parent organisations the new system is well placed to replace the work practices of a centuries old sector. One that has been slow to adapt to the modern digital world. Until now the entire process has been reliant on the exchange of physical documents. This is an inefficient and costly process with the inherent risk of fraud.
Banks, commodity traders and associated lenders have been trialling completing deals with blockchain for some time now. The technology has been used to digitize and process paperwork.
One such trial discovered that document processing times could be cut to 20% of the average, whilst another oil based trade trial led to cost savings of up to 30% according to the participating banks.
There has also been some progress in using blockchain to track the provenance of produce. Cargill, a commodities group is operating its pilot scheme to track the movement of turkeys. Danish shipping group AP Moller-Maersk is using blockchain to facilitate some of its marine insurance contracts. Some of Europe’s largest banks such as HSBC and Deutsche Bank are experimenting with blockchain technology in cross-border trade finance.
Komgo and VAKT have been implemented as a result of earlier successful trials. Mercuria, the Geneva-based energy trader, and banks ING and SocGen used a blockchain based platform in early 2015 for an oil cargo deal. Agricultural trader Louis Dreyfus completed a soya bean trade using blockchain, with a Chinese buyer. This was done with the assistance of banking giants ING, SocGen and ABN Amro.
VAKTs primary focus when launching later this year will be the North Sea oil market. Although both komgo and VAKT are in talks with other parties to increase the number of participants in the scheme.
From early next year, komgo will widen to agriculture and metals.
Ms Baddi, a former deputy head of commodity finance at SocGen has stated “The projects are unique in that you see both traders and lenders backing the ventures, and the solution is answering to the needs defined by the industry itself, and co-constructed together,”