French bank Natixis, information technology firm IBM and commodities trading group Trafigura have been working together for some time on a blockchain project for commodity trade finance in crude oil transactions in the United States.
The end result is a distributed ledger platform, built on the Linux Foundation open-source Hyperledger Fabric, that is designed to modernize the largely paper-heavy global crude oil trading industry.
While currently in the pilot stage, the companies have mapped out how a centralized, distributed ledger could improve transparency, efficiency and security between the various participants in crude oil trading - all of which currently operate using individual ledgers.
Commodity trade finance is an “antiquated arena,” Natixis head of energy and commodity finance Arnaud Stevens said.
“The current process is paper and labor intensive, we have multiple friction points with high processing costs and limited automation. Distributed ledger technology brings some much-needed innovation into our industry,” he added.
Commodities trade finance refers to the funding of the trade of commodities and includes lending, the issuance of letters of credit and export credit and insurance. Traditionally these transactions require complex workflows and paper-based processes in which documentation is shared through courier, fax and email exchange.
The solution, which is hosted on IBM's cloud platform, Bluemix, was led and delivered by IBM France.
The new trading network allows trade documents, shipment updates, delivery and payment status to be shared across a single shared ledger, helping to reduce transaction time, duplication of documents and authentication processes among all trading partners.
Companies involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, logistics and warehousing companies and other service providers.
IBM had been applying blockchain to its own in-house business processes, and saw the benefits of extending its use to other market segments, such as trade finance.
It’s not just the importers and exporters: When a shipment of assets crosses borders it requires approval from multiple different entities - including customs, port authority, trucking and rail transportation companies - as goods move between exporter and importer.
Blockchain can be used to sign approvals, notify all parties that an asset has arrived and track the money transfer from the importer to the exporter’s bank. Members of a blockchain are permissioned to access it and there is encryption to ensure transactions are kept secure and confidential. Because processes are made more efficient, capital doesn’t get held up by long settlement times, errors or disputes.
Similarly, with distributed ledger technology, all transaction participants in the network are updated simultaneously with a record that cannot be altered or tampered with; and each change or new deal immediately creates a new record in the shared ledger.
By having the buyer, seller and their respective banks all on the same ledger, all parties can simultaneously view and share data on the status of a transaction, from the time a new trade is confirmed and validated to when the crude oil is inspected, and to its final delivery and cancellation of the letter of credit.
Designed to be adopted at scale across the entire industry, the network will soon be expanded to allow all parties in the transaction to enter data directly onto the blockchain.
For example, the shipping company, pipeline operator, inspector or warehouse will be able to provide real-time status updates via the blockchain on the crude oil transaction, helping lower the risk of fraudulent transactions. By creating a shared permissioned ledger for use across all trading partners, including multiple buyers, sellers, banks and trading partners, the project partners anticipate even further efficiencies.
“It is pretty key that you integrate the pipeline into the blockchain to ensure everyone is communicating through the one common marketplace network,” Trafigura’s North American business chief financial officer Rodney Malcolm said. “If you could get some level of standardization among industry participants - and there aren’t thousands of industry participants, there’s tens of industry participants - it would be big enough to make a difference and change the way commodity trade finance is managed.”