The size of global trade of goods and services is estimated to be $19 trillion. Commodities account for approximately $4.4 trillion of this trade comprising of 40% energy (oil, gas), 30% base and industrial metals (gold, silver, steel) and 30% agricultural and soft commodities (i.e. items that are grown - coffee, corn, livestock). The size and complex nature of global trade means there are many challenges and inefficiencies that occur when moving commodities around the world. A lack of transparency and the reliance often on paper based, analogue procedures that were developed years ago are increasingly being challenged as the world economy digitises.
A combination of technology is enabling new data to be created and shared in a way that, only a few years ago, was almost confined to science fiction. For example, Internet of Things (IoT), AI, Cloud computing and Blockchain technology are now facilitating the tracking of ships, planes, trucks (and the commodities they carry) in real-time. This greater transparency and the capacity to be able to offer provenance for the end user subsequentially can lead to more ESG-compliant business practices. For instance, cobalt is a key commodity needed to make electric car batteries, with Ford and IBM now using a Blockchain-powered platform to ensure that child labour is not being used in the production of cobalt. Another example of how Blockchain technology is being used in the commodity sector exists in Africa where the Nigerian commodities exchange AFEX has created an app, Warehouse Receipt Checks. AFEX is looking to reduce fraudulent receipts being created in warehouses by encrypting the data and storing it on a Blockchain-powered platform, enabling banks and other lenders to verify if a warehouse receipt has been previously financed. This process ought to mean it will be easier, especially for smaller farmers to be granted loans and access credit since there is greater transparency (and thus more trust) as to what commodity is where, at any one time.
However, AFEX is no stranger to engaging with Blockchain technology as, in 2018, Sterling Bank and a company called Binkabi, an Africa-focused blockchain start-up, also launched a Blockchain-powered commodity finance service. Furthermore, in the Caribbean, Blockchain technology has been harnessed by Agriledger to increase by 750% the amount of money farmers in Haiti receives for their mangos. To further and guarantee the market viability and access of the Fresh Fruit Value Chain in Haiti, the government has opened a tender for Mobile Units that can be used for all the processing. The units will be owned by the farmers and create greater opportunities for commerce.
Likewise, producers of other soft commodities such as sugar, coffee and wheat, to name just a few, are also using Blockchain technology to weed out inefficient practices. Without doubt this news is encouraging since, according to the publication, Packaging News, “food waste is evident across the entire supply chain with 1.6 billion tonnes of food being lost or wasted worth a staggering $1.2 trillion”. Therefore, with the use of Blockchain technology, once produce can be tracked along its supply chains inefficiencies can be more easily identified and action taken to cut waste..
However, Blockchain technology is not only being adopted for soft commodities. Vakt is an organisation which has investors such as ARAMCO, BP, Chevron, Shell and Total and Vakt and has been used successfully in the North Sea to improve the logistics, financing and trading of oil. The creation of one data base with the ability to be shared by those parties using the Vakt platform (whilst maintaining privacy of each transaction) has allowed the removal of a central data base, whereby reducing the risk of cyber security attacks, offering greater transparency therefore creating greater trust among these petrochemical firms who are usually fierce competitors.
Ways in which Vakt uses Blockchain technology
Vakt uses JP Morgan’s Quorum Blockchain platform, aiming to digitise the way commodities are traded globally. However, it is not only Vakt that shares this vision. Another firm in the commodity sector is Norlisk (the massive Russian producer of palladium, nickel, platinum and copper) who announced in January 2021 that it had joined the Responsible Sourcing Blockchain Network. An organisation that use Blockchain technology to be able to verify responsible practices and sourcing. Also Norlisk has been given Russian central bank approval to digitise commodities on Norlisk’s tokenisation platform, thus enabling commodities to be traded 24/7. Potentially leading to an increase the liquidity of the commodities that Norlisk turn in to Digital Assets. Thus enabling investors to access the Norlisk platform and allow traditional commodity users to buy more or offload their excess exposure to the commodities that have been tokenised rather than taking physical delivery.
Whether the commodities be hard or soft they often rely on the need for financing and it was for this reason that the digital network, Komgo, was established. Komgo now has 20 banks, 140 firms and 1,000 users sending over 3,000 messages a month using its Blockchain platform. Komgo also utilises JP Morgan’s Quorum Blockchain technology to help make trade financing more efficient by reducing many of the existing paper-based manual processes. But why is this so relevant? According to ConsensYs (which acquired the Quorum blockchain from JP Morgan), “Komgo offers a 30-40% increase in cash-flow gains ..and is expected to facilitate a 20-50% reduction in operational cost.” Unsurprisingly, with savings like these in the huge commodity sector it is easy to see why more and more those organisations involved in the mining, transporting, financing and consumption of commodities are engaging with Blockchain technology.