Can blockchain fight trade finance commodities fraud?

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By:
Dominic O’Neill
Published on:

Banks and traders tout efficiency and the trust benefits of a new fintech platform, but key absentees mitigate the hoped-for 'network effect'.

Commodities traders and banks on a new blockchain platform launched this autumn hold strong views on how the technology could soon transform their business. But the scheme is not without its challenges.

Based in Geneva, komgo stands out for its focus on commodity trade finance; a niche sector dominated by an increasingly tight group of traders and banks, many of which are also in the Swiss city.

komgo has brought in a relatively large number of the industry’s biggest players.

The co-founders are the top five commodity trade finance banks by market share according to FImetrix: ABN Amro, BNP Paribas and Rabobank, as well as ING and SocGen.

Other investors include large energy traders Gunvor and Mercuria, Shell, Koch Supply & Trading, and inspection and verification company SGS.

Tawfik Sadfi, Gunvor’s head of structured trade finance, hopes komgo will therefore enjoy “a network effect” in transforming the sector.

“I believe blockchain will be the future,” he says. “It can work for our industry. It’s just a matter of time.”

Cost savings

Others agree that blockchain could be a game changer for commodity trading, which is still almost entirely done by paper. The technology could therefore have a greater impact than in other areas of finance. The commodities banks, after all, are really financing the documentation (in other words, the legal title on the cargo).

Anthony van Vliet, ING’s global head of commodity and trade finance, thinks blockchain will bring cost savings to a low-margin business that has become even more labour-intensive because of greater compliance requirements.

SouleimaBaddi_160x186
Souleima Baddi,
komgo

Souleima Baddi, komgo’s chief executive, says: “Blockchain is a large step forward for an industry that hasn’t changed in hundreds of years.”

Most market participants agree that blockchain will take off most rapidly in commodity trading in Europe and the US because of better legal enablers to electronic documentation.

One banker involved in the scheme similarly sees particular high demand for greater efficiency by blockchain in documentation of North Sea crude oil trade, for example: a fast, transparent market, where one cargo might be sold multiple times before consignment.

Yet Baddi, who hails from Société Générale’s commodity trade finance team, says the technology can help reduce other important “pain points” in commodity trade finance, particularly in riskier jurisdictions.

The industry, after all, is built on the need to mitigate the risks of large shipments between far-flung trading partners. These are risks that, especially since the post-1970s emergence of national oil companies, are naturally most important outside Europe and the US.

Large oil firms, for example, tend not to need letters of credit for trade between themselves, as like international trade in manufactured goods, this will usually be done an open-account basis (essentially credit from the supplier, and with a bank only servicing the payment).

Fight fraud

One of komgo’s sales points is its scope to fight fraud, with blockchain potentially allowing the various trade parties both greater confidentiality and the ability to keep a closer tab on the flow of the goods and documentation. It could make it harder, for example, to repeatedly mortgage the same shipment: the sort of large and costly scam that commodity trade finance banks have almost had to accept as a cost of business every year or two.

“The ideal will be when everyone works on one system, and when there’s a single version of the trades,” says ING’s van Vliet. “That’s what distributed ledger technology will do.”

Based on Ethereum, komgo follows the launch late last year of VAKT, a blockchain-based post-trade processing platform for commodities, with some similar shareholders. The two systems will work together.

komgo hopes to better standardize know-your-client processes, with an encrypted exchange of documents done on a need-to-know basis.

Another product is digital letters of credit, allowing komgo’s traders to submit digital trade data and documents to the banks on the platform.

Easy Trading Connect, in which a team from ING, Société Générale and others tested blockchain-based trades in oil and agricultural commodities, was a precursor to komgo and some of the individuals are the same.

komgo’s full launch comes as two other blockchain trade ventures – we.trade and R3 Corda – move from pilot to commercial roll-out this year.

The biggest hole in komgo, however, is the absence of the three commodities traders that account for perhaps the biggest fraction of the industry, namely Glencore, Trafigura and Vitol.

They are investing in their own in-house platforms – and “taking a wait-and-see attitude” to what others are doing and whether it works, as one banker puts it.

Though komgo will be an open platform, so these traders could join it later, Trafigura launched its own blockchain platform with IBM and Natixis last year, in the US crude oil market.