Blockchain is upending the world’s financial markets with the rise of bitcoin, and now the digital-ledger system is poised to do the same next year for raw materials like food and energy.
Companies, including BP PLC, ABN Amro Group NV and Mercuria Energy Group Ltd, last month said they would adapt blockchain to streamline physical energy transactions.
In October, four banks joined a venture started by UBS Group AG and International Business Machines Corp to use the technology in a platform for the global goods trade. Natixis SA and Trafigura Group Ltd in March announced they would employ the system to finance buying and selling oil.
“We’re talking about this massive change in the way that business is being done,” said Eric Ervin, chief executive officer of Reality Shares Inc, a San Diego, California-based fund manager that created an index to track returns of companies adopting the technology. “Everything happens automatically, without a bunch of paperwork, processing and transferring.”
Blockchain is an online ledger that records transactions using encryption to ensure security, while allowing a network of users to verify them. Its most prominent use is in bitcoin, which became a global sensation this year.
Over the past year, as investors became more comfortable with how bitcoin and ledger systems work, the price of the cryptocurrency has surged more than 2,000 percent and on Sunday touched a record of US$19,783.06.
While the bitcoin market relies on the blockchain to transmit and store the value of each token, the transparent tracking technology has “much greater potential” across businesses that increasingly need to store and exchange massive amounts of data, Bloomberg New Energy Finance said in a Sept. 12 report.
Farmers already see the possibilities. The Ukrainian government in October said it would use blockchain technology to manage its registry of crop land, because the current system is vulnerable to fraud that leads to ownership disputes.
In sub-Saharan Africa, a fertilizer company and an exchange owner are using the technology to develop an agricultural commodity platform.
FINDING THE SOURCE
The technology is a big selling point for the global food industry to identify counterfeit ingredients and to trace the source of contamination during product recalls.
Michigan State University estimated that fraud costs the global food industry as much as US$40 billion a year, while IBM in August said it is working with a group of companies, including Wal-Mart Stores Inc, Nestle SA, Tyson Foods Inc, Unilever NV and McCormick & Co to identify ways they can incorporate blockchain.
In most food supply chains “it might take weeks to figure out where it went from source to destination,” and in some cases, the source might not be known, IBM director of research Arvind Krishna said at a Dec. 5 technology conference in Park City, Utah. “On a blockchain, it takes just seconds.”
De Beers is investing in a blockchain platform to track the origin of diamonds to avoid selling gems from war zones.
Blockchain also is becoming a key tool for shipping companies. A.P. Moller-Maersk A/S in March disclosed a ledger system with IBM that would help manage and track the paper trail of tens of millions of shipping containers.
About US$16 trillion of physical raw materials are transported around the planet each year and better tracking offers the promise of big reductions in record-keeping costs. Current spending on documentation alone accounts for 7 percent of global trade, according to the Global Alliance for Trade Facilitation.
POTENTIAL RISKS
However, widespread adoption of blockchain systems might take a while, because the transition to new systems will be disruptive and require some investment.
There is also concern about the potential risk of putting all that data online.
In July, CoinDash, a blockchain technology start-up, said its Web site was hacked and US$7 million was stolen from investors trying to participate in the company’s initial coin offering, while Tether Ltd last month disclosed on its Web site that a “malicious” attacker swiped US$31 million in tokens and sent them to an unauthorized bitcoin address.
“So many things could go wrong,” said Peter Thomas, a senior vice president in Chicago for Zaner Group LLC, a commodity trader. “Before I have faith in it, we’re going to have to see it work for a while.”
Some are not waiting.
Blockchain “brings some much-needed innovation” in an industry where the process has been “paper and labor intensive,” Natixis head of global energy and commodities Arnaud Stevens said when the new system was announced in March.
ENERGY TRADING
European utility companies Enel SpA and RWE AG joined a project to test blockchain-based trades in the wholesale power and natural gas markets.
TenneT Holding BV is looking at the technology to manage power grids that are preparing to accommodate the growing volume of renewable energy.
Vemanti Group Inc on Tuesday last week said it would invest in a Singapore-based company developing a blockchain-based energy trading platform.
There was even a proposal this month by Venezuelan President Nicolas Maduro of creating digital petrocurrencies backed by the nation’s reserves of oil, gas, gold and diamonds.
Last week, a group announced plans to use blockchain to create OilCoin, a US-regulated digital currency that would be backed by crude.
Consumers could also benefit from wider adoption of the technology. In Thailand, power producer BCPG PCL last month said it plans to use the blockchain to allow customers who produce energy through solar rooftops to engage in Internet-based energy trading.
“The potential is huge to increase efficiency and to create value propositions,” said Harry Smit, a Utrecht-based analyst at Rabobank. “Once you’ve established blockchain and it’s working, you will see faster changes, because then the transformation of the value chain becomes an option.”
With assistance from Lydia Mulvany and Ryan Collins
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