Blockchain’s Role in Digitizing Commodity Trade
Singapore is Asia’s most important commodities trading hub. Recently, a panel discussion was organised in Singapore Iron Ore Week, 2018, for commodity industry leaders to evaluate how technology can play a role in digitizing trade and driving business efficiencies. Team Arkratos was invited to participate in the discussion. It gave us a chance to interact directly with the main players of the value chain and understand the major pain points of the commodity industry.
Commodity trading ecosystem faces decade old challenges of manual documentation, fake contracts, quality disputes and lack of transparency. Efforts from the industry players to digitize the trading process have yielded very limited success so far mainly because of security concerns and unaffordability of technology in emerging markets. Systematic inertia and resistance to change are still prevalent in the commodities trading industry. The main challenges of this process include risk, low speed, lack of trust and transparency.
The question here is will the new technologies such as Blockchain be successful in bringing about significant change to the current process of documentary credit?
Blockchain or the Distributed Ledger Technology (DLT) seems to address all these challenges quite efficiently. Firstly, in a DLT platform, all digital data remain immutable, which allows all parties involved in the trade to check with the origin of the commodities. This not only makes the whole process transparent but also removes the chances of systematic abuse.
Secondly, the entire process of commodities trading is built upon trust among the parties involved. However, this trust is not strong enough, resulting in the need for the letter of credit process. The bill of lading gives power and control to the party holding it. It gives certainty that the goods will be properly delivered and the payment will be rightly made. A decentralized DLT platform, by bringing the buyer and supplier on the same page, will transform this process as well as strengthen trust among the parties.
Thirdly, the LC approval process, which plays a key role in Commodity Trade Finance, takes around 14 days to complete. LC has been widely used in commodity trade as an instrument to mitigate payment risk as well as to obtain financing. However, this paper-based and highly manual process fails to cope with the increasingly fast-paced environment and demanding compliance screening requirements. Consequently, many fraud cases are seen to capitalize on the weaknesses of this process. But, the Blockchain technology, by eliminating the need for manual documentation, will make the process faster and more efficient.
However, one big issue that still remains in the commodities trading industry is the involvement of intermediaries.
According to Choo Wai Yee, Deputy Director, NTP Project Office, “Blockchain technology will not remove intermediaries, but will help the existing intermediaries evolve”.
In a nutshell, the Blockchain technology will ensure interoperability between platforms by streamlining commodity trading process with digitization. However, change does not come overnight. By educating as well as by incentivising, the authorities should encourage the companies to be more open to change. Industry leaders should also adopt new technologies to bring transformation to the entire commodities trading industry.
It was great to see that financial institutes have finally started to accept Blockchain technology as a new-age solution to digitize physical commodities trading. Arkratos Blockchain Solutions recognized the need for an integrated, transparent and secure platform for commodities trading about eight months ago and developed an in-house Blockchain powered decentralized commodities trading platform KRATOS to address the above mentioned challenges of commodity trade. It’s surprising that banks took quite a while to finally start talking about it.
The functional MVP of product is already available and being tested for end-to-end trade by over 15 early adopters. For more enquiries on our product, visit our website www.triterras.com/kratos
