Technology giant IBM has developed a blockchain trade finance platform alongside a bank and a commodity trading house to settle deals using the blockchain solution.
Singaporean commodities trading house Trafigura and French bank Natixis join IBM in the innovative solution, one that they call as the first blockchain solution in commodity trade finance geared for the US crude oil sector.
The blockchain-based platform was build using code from the Linux Foundation-led Hyperledger Fabric, a product of the cross-industry collaborative effort, the Hyperledger Project. The solution, according to the Financial Times, has been put to the test using Trafigura’s real-world crude oil deals along Texas pipelines to run simulations over the ledger. Hosted on Bluemix, IBM’s cloud platform, the blockchain platform was managed and delivered by IBM France.
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James Wallis, vice president for blockchain markets and engagement at IBM stated:
The approach we are taking, using a permissioned blockchain network built on the Hyperledger Fabric, has the potential to transform the crude oil industry by creating consistency in trade finance and by digitizing transactions and information sharing.
Digitization Over Paper
The platform enables the immutable recording of trade documents, shipment updates, payment status and delivery to be shared on a single ledger that sees participation from all parties in the trade transaction. Essentially, the buyer, seller and their respective financiers (banks) will be able to view and share real-time data about the status of the transaction.
“The goal is to replace paper-heavy manual processes with blockchain-based workflows to improve transparency and data sharing,” stated Rodney Malcom, Trafigura’s chief financial officer in North America. “With the distributed ledger technology, all transaction participants in the network are updated simultaneously with a record that cannot be altered or tampered with. Each change or new transaction immediately creates a new record in the shared ledger.”
The oil trade industry is traditionally slow to adopt change or digitization, requiring complex workflows in a paper-intensive process vulnerable to tampering and manual error.
With a common blockchain trading platform, IBM sees a number of benefits including increase efficiency amid lower overhead costs from fewer intermediaries. Further, the increased transparency will also curb the threat of tampering of documents and fraud, while reducing transaction times.
Arnaud Stevens, the New York chief of global energy and commodities at Natixis stated:
The current process is paper and labor intensive, we have multiple friction point with high processing costs and limited automation. Distributed ledger technology brings some much-needed innovation into our industry.
While the testing processes have successfully demonstrated a common ledger shared between the buyer, seller and their banks, IBM has plans to expand participation among all parties in an oil trade transaction to enter data directly onto the blockchain.
‘For example, the shipping company, pipeline operator, inspector or warehouse can provide real-time status updates via the blockchain on the crude oil transaction, helping lower the risk of fraudulent transactions,’ IBM explained in a press release.
Transforming Trade Finance
While this particular endeavor is specific to the US crude oil trading market, a similar effort has already carried out a trade transaction involving an oil cargo shipment containing African crude, sold to ChemChina, a Chinese petrochemical giant. The blockchain test first unveiled by Swiss commodities trading giant Mercuria in January, in collaboration with Dutch bank ING and French bank Societe Generale. The transaction proved successful and the banks have since revealed talks with other global traders to conduct trade finance over a blockchain.
The trade finance industry could ostensibly become one of the early use-cases of blockchain technology in areas beyond the banking sector.
Featured image from Shutterstock.