BETTING ON BLOCKCHAIN: ING sees ‘immense potential’ for blockchain in commodities trading, financing
Almost two years ago, Dutch banking group ING began work on an initiative to successfully complete two proof of concepts for commodities trade finance using blockchain: the first in energy, and the second in agriculture.
The first foray into digital ledger technology for the venture, known as Easy Trading Connect (ETC) and focused on commodities, came in February 2017.
“We did a pilot financing trade on the ETC platform with Mercuria on energy, looking at how we could execute a crude oil transaction on the blockchain,” Arnoud Star Busmann, ING’s program director for trade & commodity finance, blockchain innovation, said during an interview with Fastmarkets.
The pilot saw energy trader Mercuria use the ETC platform to send African crude to a buyer in China using trade finance from ING, confirmed by Société Générale.
“We focused primarily on the letters of credit, the trade finance side,” Star Busmann said. “Aside from some obvious and well-publicized lessons, it also told us that we needed to go much more broadly into the industry and take the perspective of the physical players,” he added.
That search led ING to a collaboration with energy majors BP, Shell and Equinor - formerly Statoil; trading houses Gunvor, Koch Supply & Trading and Mercuria; and banks ABN Amro and Société Générale. The new venture was incorporated at the end of 2017 with the goal of creating a secure, real-time blockchain-based digital platform to manage physical energy transactions from trade entry to final settlement.
The experiment showed that the average time for a bank to complete its role in a transaction went from about three hours to just 25 minutes. For traders, efficiency went up by a third, with user experience evaluations far higher than expected, Star Busmann said. As the prototype uses blockchain technology and is designed for paperless trade, the risks throughout the process have also been reduced.
In 2018, ING teamed up with Louis Dreyfus to try a similar thing in agriculture.
“We built a quite advanced prototype in which we could fully digitalize a soybeans transaction, including all the data, all the documents but also the actors that are part of it, from the commercial process, the financing and through to the regulatory aspects,” Star Busmann said.
The transaction saw soybeans sold from the United States by Louis Dreyfus to Shandong Bohi Industry Co, Ltd in China, with advising banks Société Générale and ING. Inspectors Russell Marine Group, logistics firm Blue Water Shipping and the US Department of Agriculture were also involved. The transaction got as close as possible to having all the actors involved that it could.
“Louis Dreyfus compared the digital flow with the paper flow and determined there was a factor five efficiency improvement in their operations, so it was significant and very inspiring for the company. The trade demonstrated significant efficiency improvements for all participants in the chain,” Star Busmann told Fastmarkets.
“Time spent on processing documents and data has been reduced fivefold, from hours to minutes,” he said.
Other benefits include the ability to monitor the operation’s progress in real time, data verification, reduced risk of fraud and a shorter cash cycle, he noted.
“The platform’s success demonstrates the immense potential of distributed ledger technologies to advance commodity trading and financing. So I’m sure there will be a sequel to that,” he added.
The core team of ETC has since joined komgo SA, with the aim of developing a decentralized Ethereum blockchain-based platform. Banks ABN Amro, BNP Paribas, Citi, Crédit Agricole, ING, Macquarie, MUFG Bank, Natixis, Rabobank, and Société Générale; inspection firm SGS; trading houses Gunvor, Koch Supply & Trading and Mercuria; plus oil major Shell are the founding partners in the new platform.
Metals and mining is already on the radar; Star Busmann said that there were aspects that ING had been looking to explore, although it was unclear whether its work would take the form of a consortium or be similar to its soybeans partnership with Louis Dreyfus.
But he noted that the metals and minerals market has hugely concentrated segments such as iron ore and very fragmented segments such as concentrates, adding: “The question is, ‘How do you organize it and where do you start?’ That is quite difficult.”
The bank is also looking at exploring the concept of supply chain traceability - which crops up continuously in commodities and in particular across metals and softs - an area that Star Busmann said is increasingly difficult to ignore.
“The ability to prove the origin of the commodity and the responsible sourcing elements becomes very critical. Given that there’s a big pain point, you can conclude we should be looking at that as well,” he added.
Warehousing and inventory movements are part of this, although most of the work to date in physical metals has been on the seaborne cargoes and the associated trade finance.
“There’s a huge opportunity in using blockchain to bring more control over inventory movements, and I’m aware of some initiatives in that sector in the metals and broader commodities domain,” Star Busmann said.
Are you involved in a blockchain project? Get in touch with Andrea Hotter on firstname.lastname@example.org.