BETTING ON BLOCKCHAIN: Trafigura sees benefits in commodity trade finance, North America CFO says
Trafigura, Natixis and IBM are working together on a blockchain solution for commodity trade finance. Rodney Malcolm, chief financial officer of Trafigura’s North American business, explains why.
When French bank Natixis and information technology firm IBM started talking about blockchain, the topic resonated very well for Trafigura’s North American chief financial officer on the crude and gasoline side.
Rodney Malcolm, who had in a previous job worked to build a system organizing a marketplace based on more standard processes, quickly recognized how digital ledger technology could work for Trafigura. The commodities trader handles large numbers of relatively small transactions with oil producers daily, along with repetitive activities such as sending product in batches along pipelines.
“My background has more exposure to gas and power trading in the US that utilize delivery systems with more standardized processes,” Malcolm told Fastmarkets in an interview. “I’m very sensitive to process improvements on trade fulfillment and the physical fulfillment of our underlying crude and gasoline transactions.”
The companies decided to focus the pilot project on crude in North America, given the smaller pool of traders and integrated oils that move crude around the region. The proof of concept trial hasn’t involved any trades yet.
“It’s pretty much one jurisdiction, and there are only a few pipelines. If you could get some level of standardization among industry participants - and there aren’t thousands of industry participants, there’s tens of industry participants - it would be big enough to make a difference and change the way commodity trade finance is managed,” he said.
Pipeline operators are “the next critical piece,” although they haven’t yet been approached. “We wanted to figure out whether we could get enough of a common platform with enough buy-in that might make some sense,” Malcolm said. “It is pretty key that you integrate the pipeline into the blockchain to ensure everyone is communicating through the one common marketplace network.”
The end result is likely to be different regional solutions rather than one global network for multiple jurisdictions, although there is technology evolving now that enables one blockchain to talk to another, a situation that could result in critical mass eventually, Malcolm said.
“We’re looking for a common platform for communicating and fulfilling trades - not just paper trades, but also physical trades that are getting fulfilled through delivery via a physical equivalent platform to a financial paper trading platform,” he added.
The other priority is simplicity of concept.
“My view is simple sooner, complex later - get 80% of the answer going now and worry about smart contracts later. Blockchain will go through a bunch of evolutions, so we should start with something basic and then build on that as it continues to evolve,” Malcolm noted.
But central to getting blockchain working will be standardization, Malcolm said. And that is proving somewhat elusive, with various companies working to create their own solutions amid a commercial environment that is protective of its information.
“If it’s two or three standards, nobody wins. People win when it all becomes one standard. The issue is: Can you get enough people to agree on what is standardizable information, without it revealing proprietary trade-level information?” Malcolm said.
“But I think there are various ways to do that; we as a company have done that. I’m more than happy to talk to my peers about their work in this field, because if they’re getting technology to evolve to eliminate the paperwork in trade finance, we’re all winners out of that whole process. There’s no inherent loser, it’s just all winners on that front, at least as far as I can see,” he said.
In the next five years - and once the financial community gets beyond its concerns over security and trust - Malcolm expects multiple networks to emerge globally and by commodity class.
“It doesn’t take very long at all to recognize there are material economies of scale on making this happen,” Malcolm said. “After this, those networks start having the ability to either gain critical mass and gobble each other up, or talk to each other and become a little bit more connected.”
Are you involved in a blockchain project? Get in touch with Andrea Hotter at email@example.com.