Blockchain technology is gaining global attention. It was originally created for Bitcoin, using technology to distribute public data without the ability to copy or edit. The information is consistently updated and made available to all. Without a centralized location, data is stored in a chain of networks and cannot be controlled by any specific party, nor can it be corrupted at any point along the chain. All transactions throughout the chain are validated, recorded and can be seen by anyone. Changes are immediately available to all parties. Blockchain eliminates the majority of human or technical errors by a continuing system of self-audits. Each self-audit is considered a “block” on the chain, providing transparency and eliminating the possibility of data manipulation.
How will this innovative technology affect the commodities market?
Blockchain technology offers a transparency between buyer and seller that has not been previously available when physical assets are exchanged. Greater security is the basis for the success of blockchain technology. But it offers even more to commodity traders.
The commodities market has not been known for being cutting-edge. It functions with minimal regulatory oversight due to the different laws involving areas of production, places of storage and ultimate destinations. It’s a complex system, where shipments of commodities can change in ownership or quantity at any time. Greater transparencies in commodities transactions can avoid errors as it ensures the secure and timely allocation of funds and proof of actual ownership and quantities bought and sold.
The gold market is already using blockchain for greater transparency with remarkable success. With this precedent, other markets will follow the trend of decreasing paper trails in favor of digital records available to all. The conservative commodities market will be left behind if it doesn’t accept disruption of longstanding status quos. New standards need to be adopted between the chain of supply, and some commodity brokers may be resistant. However, new technology is quickly making business-as-usual obsolete. The paper era has ended. The sheer advantage of decreasing the mountainous reams of papers currently tracking the trading of physical commodities alone will be seen as a reason for change. As an example, in 2015, more than four million physical letters of credit were needed to process more than $2 trillion trade transactions worldwide. With blockchain, this paper tyranny can be put to an end, providing a tremendous savings in labor and cost for the companies involved. Some have estimated the savings to be up to 30 percent.
Banks are working on improving blockchain technology’s ease of use and security. It is up to rival security traders to put aside differences and make their data public. This will require a different mindset on the part of all parties. It’s understandable that the need to share intellectual and proprietary property will be seen as anathema by some in the industry. With the elimination of the middleman, some bankers may face an uncertain future. Ultimately, however, all parties will reap the benefits. Once the network is established, it will gain enough momentum to make blockchain the norm.
The fact is, the infrastructure of the commodities industry is already seeing tremendous changes. Investors own real, tangible assets, and up to now, it has benefited large companies and kept smaller investors out of the game. ChainTrade is a system that allow all interested investors to participate by decentralizing the system. Fees will decrease, benefiting small investors. In addition, digital “smart contracts” will allow anyone around the world to participate in online trading. Commodities trading will open up to many smaller investors who are now excluded from the market.
ChainTrade is preparing to shake up the $2 trillion-a-year commodities market by taking on the monopoly of trading exchanges and its exclusion of smaller investors. By taking the power out of the hands of the exchanges and decentralizing the marketplace, fees will be lowered or disappear entire and provide entry of now-excluded investors into the commodities market. This is promising a real upheaval of power in the commodities market as it operates on a safer, more efficient and less costly platform.
Institutional investors are encouraged by this modern-day “storming of the Bastille” as Blockchain is ushering in a better, less exclusive and more transparent commodity market.