BCG Report Says Blockchain Could Transform Commodities Trading
Blockchain technology could be a godsend for the commodities trading industry. Transparency between market participants, real-time tracking of goods, and the possibility of proactive regulation are among the benefits that make the blockchain a perfect fit for the industry. Threatening the profits of some traders, inconsistent regulatory frameworks between different jurisdictions and costly implementation were some of the challenges that the company outlined. In the report, BCG outlined few of the stumbling blocks that face the execution of blockchain technology, with some threatening to derail the execution altogether. Nevertheless, according to a report published by the Boston Consulting Group, it’s not so straightforward.
Taking a Reality Check with Blockchain
The report recognized the many challenges that face the existing commodities trading market like the lack of universally accepted industry standards, inefficiency, and the lack of a tracking system for the goods. Blockchain technology could be a solution to these problems, but there are essential factors to be considered first before the execution.
One of the areas of application of blockchain technology is the comparison of prices between participants. Nevertheless, with this comes decreased profits for traders who depend on pricing inefficiencies to make money. With blockchain networks being accessible to all, participants can spot price discrepancies and make sure that they get the best deals. The report, that was appropriately named ‘A Reality Check for Blockchain in Commodity Trading,’ also remarked that other entities that depend on these inefficiencies such as price-reporting agencies will have to restructure and find out other ways to make their money.
Blockchain technology could also transform the regulatory process for the industry. In the current setup, regulators need to await compliance information from participants which are submitted at set intervals. When suspicious activity occurs, a regulator could be proactive and attend to it instantly. With blockchain technology, this inefficiency could be corrected, as it provides regulators a real-time view of the market. The challenge is based on establishing industry standards, as many jurisdictions and markets have their own sets of rules which don’t always align.
Implementing blockchain technology is a costly process, the report noted. Making the migration even more tedious is the fact that the whole industry would have to be in contract on integrating blockchain technology into operations, as the full advantages of a distributed system can only be realized if all the market stakeholders participate. While in recent years many commodity trading firms have invested in new IT systems and processes to keep up with an evolving market, they would be asked to invest much more money in order to move their operations to a blockchain-based system.
The report also sought to distinguish between blockchain technology and cryptocurrencies, 2 ideas which it mentioned are difficult to distinguish for many traders. This usually leads to misconceptions about blockchain technology. This is because there is a higher level of trust between participants, making it simpler to reach consensus. One idea that’s largely misunderstood is energy usage by blockchain systems. As the blockchain technology underpinning Bitcoin consumes plenty of energy, permissioned blockchains consume way less.
The size of a blockchain ledger and the capability to maintain it have also been of concern, the report noted. Bitcoin’s ledger presently stands at 150 gigabytes, and it’s likely to continue growing. They include power and gas, iron ore, and diamonds. The report concluded by pointing out the areas of commodity trading that may be the most affected by blockchain technology. Nevertheless, with commodities trading, the number of transactions is way less, and the ledger is therefore smaller and simpler to maintain.
BCG is the 2nd-largest consulting company globally, behind only McKinsey. The new platform, called Bakkt, also has the backing of Microsoft and Starbucks and is probably the most significant attempts to take crypto trading mainstream. Two weeks ago, the firm made headlines by partnering with ICE, NYSE’s parent firm, to develop a worldwide digital assets trading platform.