Blockchain technology may seem like a natural fit for the commodity business, but it may spell trouble for certain market participants. Boston Consulting Group (BCG), in its recent report titled “A Reality Check for Blockchain in Commodity Trading”, listed out both the pros and cons of using blockchain technology into the commodity trading space.
The report does highlight the fact that the technology is able to record complex transactions, track goods and reduce fraud. However, the report outlined certain risks involved with implementing this financial innovation.
Firstly, merchant traders will no longer be able to rely on market inefficiencies to make profits. Since all transactions will be recorded in a shared ledger, traders will not be able to rely on price inefficiencies. Moreover, price-reporting agencies would need to figure out how to expand into new businesses.
Another drawback of the technology would be increased scrutiny from regulators. Rather than submitting compliance reports to regulators, authorities will be able to automatically access the shared ledger.
This would allow them to inspect trades while they happen and can immediately follow up on discrepancies. While regulatory oversight is required, the real challenge lies in ensuring that regulatory frameworks in different commodity markets are consistent.
Blockchain tech could cost more, speed at risk
Switching to blockchain technology would mean serious expenditure to add additional IT infrastructure. Moreover, the technology’s full benefits will be realized only if all players in the industry participated.
Another important factor to be noted is the technology’s distributed nature. For a transaction to be verified and recorded, it could take slightly longer – even with the fastest systems. This would pose a serious issue for commodity trading, where speed is key.
In short, the report summarizes different conditions that have to be met before blockchain technology is adopted on a large scale.
The report concluded that this technology may not be the right answer for all players. However, the report stated that it could “foster commodity trading’s transition to more transparent and efficient markets and prepare the industry for hyperliquidity.”
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