Natixis, the corporate investment banking arm of France’s Groupe BPCE, has joined with IBM and commodity trading group Trafigura to pioneer the first blockchain solution in commodity trade finance for US crude oil transactions.
The distributed ledger platform, built on the Linux Foundation open source Hyperledger Fabric, allows major steps in a crude oil transaction to be digitised on the blockchain, to improve transparency, security and efficiency.
By having the buyer, seller and their respective banks all on the same ledger, all parties can simultaneously view and share data on the status of a transaction, from the time a new trade is confirmed and validated, to when the crude oil is inspected, to its final delivery and cancellation of the letter of credit.
Key benefits of the solution include reduced cash cycle times, improved efficiency via lower overhead costs and fewer cost intermediaries, increased transaction visibility to help reduce the threat of tampering, fraud and cyber-crime, and the creation of transparent transactions by using shared processes and recordkeeping.
The initiative is part of a broader effort to modernise trading in the global crude oil industry, still predominantly driven by manual, non-digital processes.
“Natixis wants to use blockchain to enhance client service by optimising the antiquated arena of commodity trade finance,” said Arnaud Stevens, Natixis’ New York head of global energy and commodities.
“The current process is paper and labour-intensive, we have multiple friction points with high processing costs and limited automation. Distributed ledger technology (DLT) brings some much-needed innovation into our industry.”
The new trading platform allows trade documents, shipment updates, delivery and payment status to be shared across a single shared ledger, helping to reduce transaction time, duplication of documents and authentication processes among all trading partners.
Traditionally these transactions require complex workflows and paper-based processes in which documentation is shared through courier, fax and email exchange. The solution, hosted on IBM’s cloud platform, Bluemix, was led and delivered by IBM France.
“Processes in the energy and commodities trade business are ripe for improvement,” said James Wallis, vice president, blockchain markets and engagements, IBM. “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 digitising transactions and information sharing. Creating this ecosystem for the commodities market working with two world leaders in this industry will help create an entirely new approach to managing the global commodities trade.”
The platform will soon be expanded to allow all parties in the 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.
More importantly, the distributed ledger for crude oil transactions is designed to be adopted at scale across the entire industry. By creating a shared permissioned ledger for use across all trading partners, including multiple buyers, sellers, banks and trading partners, even further efficiencies can be anticipated.
“Together with Natixis and IBM, we have analysed the workflow of crude oil transactions in the US, detailing the different steps of a transaction, our interactions with the financial institutions and the documents exchanged among the various parties,” said Rodney Malcolm, Trafigura Trading’s North American chief financial officer.
“The goal is to replace paper-heavy manual processes with blockchain-based workflows to improve transparency and data sharing. 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.”
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