Blockchain for commodities: trading opportunities in a digital age
If you’re reading this on a phone, tablet or laptop, instead of paper, you’re part of the digital revolution that is transforming society.
The shift to electronic documents and data in all areas of life is one of the key economic developments of this century, bringing new efficiencies, cost savings and opportunities far beyond anything that could be achieved with paper records.
That shift is about to hit commodity trading, which has traditionally relied on vast paper trails to execute, authenticate, and process each transaction.
Digital technologies like blockchain, the distributed ledger technology best known for its association with cryptocurrency Bitcoin, are creating new options for streamlining and simplifying paper processes, and for disrupting long-established business models.
Blockchain has attracted serious interest from some of the biggest names in commodity trading, like Gunvor and Mercuria, as well as oil-and-gas majors like BP and Shell, and big banks like Societe Generale and ING.
But blockchain also creates opportunities for smaller players by potentially reducing the cost of trading, making it cheaper to enter a market.
Regulators are also interested in how blockchain can help them make markets more transparent and so more efficient. This again helps new entrants.
In Fujairah, for example, S&P Global Platts uses a blockchain platform to collect and publish weekly aggregated oil terminal stock levels on behalf of the Fujairah Oil Industry Zone authority and data committee FedCom.
This is one of the first commercial live applications of blockchain in the energy sector. Trade finance, which underpins all global commodities trading, is another sector that blockchain could transform.
Increased transparency in trade workflows could make fraud much easier to detect, but a secure blockchain system with trusted counterparties also threatens the role of banks as trusted intermediaries.
In electricity, the role of utilities and grid operators is threatened by the shift to decentralization, as more and more distributed energy sources, such as rooftop photovoltaics and battery storage in electric vehicles, come into play.
Blockchain can support this decentralization by enabling peer-to-peer trading in microgrid communities between prosumers – retail consumers who also produce small quantities of power. It is blockchain’s ability to process frequent micro-transactions that helps to make such trading technically possible.
But physical and regulatory constraints mean that utilities and grid operators will still have major roles in delivering power for many years to come.
Virtual peer-to-peer power trading, however, which sits on top of existing structures, is possible and potentially viable now. One of the challenges for both virtual and physical peer-to-peer trading is pricing this power.
S&P Global Platts is bringing its years of experience as a trusted price reporting agency to bear in solving this problem. It is working with the Port of Rotterdam on a project to offer transactive pricing for peer-to-peer power trading in a microgrid community of port-side businesses.
Blockchain faces many other challenges to becoming a big part of commodity trading, including cost, privacy, liability, and achieving mass participation. It is also just one part of a new digital trading infrastructure, with artificial intelligence, machine learning, and robotic process automation all set to play a role.
It goes beyond the scope of this report, but S&P Global is active in all these areas, including through Kensho Technologies, which it bought in 2018.
I’m excited by the opportunities blockchain creates for commodities trading, and this report is an excellent introduction into what they are.