Physical commodity trading on blockchain

Banking & Finance
| The European | 2nd October 2018
Save

Blockchain is now a household name. The mention of Blockchain rivets the mind towards Bitcoin and Cryptocurrencies. However, Blockchain is not restricted to Bitcoin and Cryptocurrencies. It is the underlying technology on top of which different software solutions are designed and executed. The promise of Blockchain technology in making global businesses efficient is huge. One of the Blockchain types is Ethereum. The software solutions designed on top of it are known as “Decentralised Applications” or “dApps”. Enterprise software solutions designed on Ethereum Blockchain are not visible to Ethereum “public” Blockchain users. Rather, these software solutions operate in a “private ecosystem”. The technical term for this private ecosystem is “permissioned” network. An alliance of companies, Enterprise Ethereum Alliance (EEA) was formed in early 2017 to support the development of commercial and industrial software solutions on Ethereum Blockchain. Many software solutions have been developed on “permissioned” Ethereum Blockchain. The core encryption and distributed ledger technology (DLT) makes it virtually impossible to penetrate a “permissioned” network. Physical commodity trading is one of the oldest businesses on Earth. Evolution of modern economics ushered a new era for physical commodity and trading on blockchain solutions.

The business started taking place through banks which act as intermediaries. Not only do they serve as a bridge for trust between counterparties, but they also finance cross-border trades of commodities. In this digital age where emails and messages are exchanged in a blink of an eye, too much time is consumed in completing paperwork for executing physical commodity trades. It takes anywhere between two to seven days to execute commodity trade deals between companies that are located in “banked” countries and regions. Intercontinental transactions involving “lesser banked” countries are extremely inefficient. Blockchain promises to eliminate inefficiencies in physical commodity trade by offering trading on blockchain. A press release (dated 19 September 2018) issued jointly by ABN AMRO, ING and SOCIETE GENERALE announced:

“Fifteen of the world’s largest institutions (including banks, trading companies, an inspection company and an energy major) have formed a new venture known as Komgo SA, that will seek to digitalise the trade and commodities finance sector through a Blockchain based open platform. The founders of this new company, managed and operated as an independent entity, include ABN AMRO, BNP Paribas, Citi, Crédit Agricole Group, Gunvor, ING, Koch Supply & Trading, Macquarie, Mercuria, MUFG Bank, Natixis, Rabobank, Shell, SGS and Societe Generale.”

Commenting on this initiative, Souleima Baddi, Chief Executive Officer of Komgo SA said:

 

“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.”

 

While explaining the technical efforts made for this project to allow trading on blockchain, Toon Leijtens, Chief Technology Officer of Komgo SA said:

 

“The potential that distributed ledger technologies (DLT) have in transforming the commodities sector is clear, as evidenced by the success of the Easy Trading Connect (a successful Proof of Concept – POC – done earlier) experiments”.

 

“We can now achieve a long-term ambition to improve security and operational efficiency in the commodity trade finance sector.”

 

Proof of Concept (result disclosed by the consortium)

 

In January 2018, in collaboration with Louis Dreyfus Company, ING, Societe Generale and ABN AMRO used Komgo SA’s platform to execute a soybean shipment transaction from the United States to China. The transaction, which mirrored the paper-based process, demonstrated significant efficiency improvements for all participants in the chain with time spent on processing documents resulting in data being reduced fivefold.

 

Blockchain Partner

 

The Blockchain technology aspect of this project is being looked after by ConsenSys LLC, a consulting firm and a founding partner of the Enterprise Etherum Alliance (EAA). The company assists organizations across the globe to build, test and deploy public and private Blockchain solutions.

 

Joseph Lubin, Cofounder of Ethereum (Blockchain), and Founder of ConsenSys LLC said, “We are now entering a new era of simple and inclusive access to Blockchain technology to advance stronger and more collaborative business relationships that were previously out of reach. We are thrilled to see leading commodity trade finance banks and commodity houses come together to create Komgo SA, which will radically simplify and accelerate trustworthiness, auditability, and accessibility to trade financing across the industry.”

 

Blockchain Solution of Komgo SA

 

There are two products that form the Blockchain solution offered by Komgo SA.

 

The first one standardizes and facilitates the KYC process without using a central database. The exchange of documents takes place on an encrypted way over the Blockchain on a “need to know” basis.

 

The second product is “digital letters of credit”, allowing commodity houses or other platforms to submit digital trade data and documents to Komgo SA customer banks.

 

Business address of Komgo SA

 

Komgo SA is incorporated in Geneva, Switzerland, which is one of the main global commodity hubs.

 

Switzerland aims to capture a big chunk of Blockchain industry players. The Swiss town of Zug is named as “Crypto Valley” and is recognised for its (Blockchain) business friendly environment.

 

Competition

 

IBM has developed a Blockchain solution, Batavia, for global trade finance. The important thing to note is that Batavia’s platform is not “physical commodity trade specific”. It is a generalised Blockchain solution that makes global trade finance business efficient. On the other hand, Komgo SA offers a “dedicated” physical commodity trading Blockchain solution.

 

Future

 

The consortium consists of powerful players in the physical commodity trading industry. If Ethereum Blockchain scales with the global physical commodity trade operations, this alliance will be long-term and in future will bind other physical commodity market participants to use Komgo SA’s platform.

 

 

 

Sign Up

For the latest news

Read On The Go

Subscribe

Get the digital edition of the Award Winning The European

subscribe for free

Get The App

Download

Your Favourite Magazine will soon be available on the App Store

APP COMING SOON

Hard Copy

Magazine

Get your favourite magazine delivered directly to your door

£49.95 4 issues

Other Banking & Finance Articles You May Like

Website Design Canterbury

Magazine

Hard Copy

GET YOUR FAVOURITE MAGAZINE DELIVERED DIRECTLY TO YOUR DOOR



Annual Magazine Subscription (4 Issues)
Shipping Options



Subscribe

Read On The Go

GET THE DIGITAL EDITION OF THE AWARD WINNING THE EUROPEAN