Treasury Today Country Profiles in association with Citi

Blockchain sets sights on commodities trade

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Blockchain technology is set to deliver transparency and visibility to the movement of physical commodities in the supply chain as a new prototype application gathers momentum. Integration with the trade finance function could be the next step.

Blockchain, the technology underpinning the much discussed Bitcoin adventure, is settling into a new life as a serious commercial tool for transparency, visibility and security – and the next candidate on the radar is the commodities trade.

Following the launch of its commodities-based consensus computing prototype, GFT, a fintech specialist, claims it is now possible to individually track and manage multiple physical commodities assets through the use of its blockchain business model. With blockchain technology – sometimes referred to as a ‘distributed ledger’ – also under development for trade finance offerings by the likes of Bolero and also the DBS/Standard Chartered partnership, a new era of commodities cost efficiency, process optimisation and fraud prevention may soon be upon us.

The commodities tracker application is a creation of GFT’s ‘innovation incubator’, known as create@GFT and its ongoing ‘Project Jupiter’ development scheme which is seeking to prototype solutions around Blockchain technology. With a number of high profile cases of fraud within the commodities market – typically the result of a failure to tightly control physical inventories – Julian Eyre, Commodities Product Owner at GFT says this latest prototype is intended to showcase the distributed ledger’s ability to create a full audit trail for each and every participant in the movement of physical commodities and, says Eyre, will be of particular interest where proof of ownership and location of the physical commodity are essential for market participants.

Warehouse receipt financing, for example, where there may be a number of duplicate and therefore confusing receipts created for a bank’s financing of a commodities deal, may well be de-risked by this type of technology. This will be done by digitally tracking an underlying physical asset by features such as origination, current location, beneficial owner, certain attributes of its quality or grading, and its provenance. Tracking is enabled by capturing data held by a unique identifier for each commodity ‘parcel’ (a consignment of iron ore or wheat, for example).

Because a barcode or QR (quick response) code can be more easily separated from the asset or even replicated, Eyre explains that GFT is planning to test with an RFID (radio-frequency identification) tag. This technology has been chosen because the tags can easily be embedded into the physical asset (perhaps a sealed container or even a single package or item). The data contained in the unique identifier is written into a blockchain record to ensure a clean audit trail. GFT is using a private blockchain, on the Ethereum platform, which Eyre says was identified as the best option for this use case. A digital ‘smart contract’ model embedded within this platform captures and enforces the stored data.

To date, the commodities application has been through a theoretical modelling exercise based around internal expertise, and a design and development phase based around a series of assumptions calling upon actual industry scenarios. A third party developer – Applied Blockchain – was consulted to help steer the work. GFT is currently in the process of testing the model across a combined user group of asset class and market participants.

The prototype includes a basic permissioning model for different user-types including logistics, warehouse and end-user. “We have modelled different user characteristics, built a user interface that enables each to view and track changes in the status of the asset during its lifecycle,” he explains. The concept of this model looks to improve transparency across a very early stage component of the supply chain but this could have applications in other functions, particularly when interacting with the trade finance function. “It is quite possible that the individual asset identifiers we are able to provide to a trade finance agreement would uniquely identify those precise assets that are party to that agreement,” comments Eyre. However, the level of granularity to which the data appended to a shipment can be deconstructed is a work in progress and its resolution will depend on the use case model that attracts the most interest.

Most likely to benefit from this in the first phase of its release will be industry or asset verticals. For example, a global agri-business might seek a reduction in the paperwork required to administer but certain quality attributes (such as whether a consignment of grain is genetically modified or not, its moisture content, country of origin, or whether or not it has been sourced sustainably) must be captured and locked-down at the point of origination, then each parcel identifier can be tracked and verified at any stage in the lifecycle of that trade. “It would be possible to transfer the parcel ID through the value chain, literally to the ingredients on the packaging of the finished goods.”

The payback of this for the tracking of raw materials in terms of quality control are manifold, as indeed are they for the intervention of the finance function. For treasurers with a group risk function the increased transparency and visibility into the supply chain is clear; such a solution also has the potential to support the associated cash flow management around the status of different parcels and their asset ownership throughout their lifecycle. A commercial settlement function is not yet included in the GFT prototype but the parallel offerings from Bolero and DBS/Standard Chartered and others than follow may well solve this part of the commodities trade lifecycle.

Although this model has potential to benefit many different functions along the supply chain, the current multiple platform/multiple system technology landscape is complex, warns Eyre. Interoperability becomes the key here, he says, adding that GFT will be looking to align with any interoperability requirements that may arise and that financial participants should do likewise. A further issue might be the regulatory constraints around the cross-border movement of data. “At the moment, the consensus appears to be that blockchain may well be embraced by the regulators because of the additional transparency it allows.”