With digital revolution infiltrating in the world market, newly evolved distributed ledger technologies are transforming the commodity sector. Blockchain, in simple words, is a group of distributed digital records (blocks) of transactions that are secured chronologically by a network of computers on the internet.
Jan 22, 2018, witnesses the world’s first blockchain-based agricultural deal completed between the U.S. and China. Chinese agricultural processor Shandong Bohi Industry, Louis Dreyfus Company (LDC), along with banks ING, Societe Generale, and ABN Amro, jointly participated in this trial via Easy Trading Connect (ETC) platform.
A shipment of 60,000 tonnes of US soybeans to China became the successful pilot of commodity trade using cutting-edge blockchain technology, which introduces a new form of commodity trade transaction to the whole world. However, how could blockchain benefits commodity trade?
1.Supply Chain Management
Prevent load theft: It has been reported that the fabricated insurance documents, DOT numbers, and pick-up documentation provided by con artists have seriously affected the market trust system. The emerging fictitious pickups of logistics sector require a higher level of security where the blockchain could provide much more secure IT solutions.
Lower the Cost: The traditional transaction model between small suppliers and big buyers tightens the cash flow of both two sides. It does not only increases costs for the supplier, but also enlarge financing gap of the whole supply chain. Using blockchain mechanism, a great amount of strategic procurement cost could be saved.
Because of the transparency and accountability, blockchain begins to play important roles other than cybercurrency. According to BBC report, the Australian Securities Exchange (ASX) is going to switch their whole operation to a blockchain-enabled system for reducing transaction cost, improve process efficiency and security. In China, commodity trading platform JumoreGlobal.com is researching solutions to promote blockchain techniques application in cross-border e-commerce sector.
Smart contract maybe one of the most practical advantages that blockchain technology brings to commodity industry. In easy words, the smart contract can be defined as the form of automated contracts which apply pre-defined rules to optimize the exchange of goods and services. Smart contract weakens the role of middleman and is committed to ensuring the transparency of the transaction, as well as reducing costs and avoiding conflict over nonperformance.
Compare to traditional commodity exchange contract, in the first place, a smart contract is programmed to cope with the process from sale to delivery in supply chain activities; besides, it provides opportunities that all the data and ownership can be controlled by the participants rather than third parties; moreover, the overarching principle of smart contract makes it suits for any-sized market, many of which now operate without the transparency that theoretically one finds in a distributed ledger.
Typical commodity shipment is not as simple as from mine to smelter and ultimately to buyer. Contrarily, it involves a series of players like ships, warehouses, agents… Sometimes, it takes more than a month from shipment load to departure, the ownership can change multiple times.
When applying blockchain, all the actions throughout the trading can be easily tracked and monitored which would help timely settlement, facilitate capital allocation and provide proof of collateral.