Sanne Wass explores an initiative to bring new technology to an antiquated industry.
Tedious paper documents and trails have plagued the commodity trader and financier for centuries. A trade finance deal for a single commodities cargo by sea has been said to require up to 36 original documents and 240 copies from as many as 27 parties. It can often take weeks, if not months, to complete.
That’s the reason why commodity trading is pinpointed as one of the most promising sectors for blockchain. What’s unique about this technology is that it allows for real-time monitoring by multiple parties, and the exchange of documents in a digital, secure and decentralised manner. So far, however, blockchain’s use case for commodity trade and trade finance has been limited to proofs of concepts and one-off transactions.
This is where komgo comes into the picture. Founded by a group of global banks and commodity players in August, the venture is charged with bringing a commercial, fully commodity-focused blockchain platform to the age-old industry. It is the result of two experiments carried out on ING’s Easy Trading Connect platform in energy and soft commodities trading in 2017 and early 2018 respectively.
In late December, just four months after the venture’s formation, the komgo platform went live and delivered its first letter of credit transaction. The intention is to open it to all banks and corporates who wish to join as users.
The hope is that komgo will change the way financiers transact with clients and other parties in the ecosystem. Apart from improving the speed of conducting transactions, benefits include the ability for all parties to monitor the operation’s progress in real time, easy data verification, reduced risk of fraud, as well as a shorter cash cycle.
“What komgo will offer in the first place is a new way for banks and clients to interact with each other,” says Kris van Broekhoven, global head of commodity trade finance at Citi, one of the founders of komgo. “We believe that komgo will offer significant improvements in terms of user experience and turnaround times, all of which are important when servicing the commodity trading industry. It will also reduce risk and bring elements of trust and security to the marketplace. This should benefit both banks and corporates.”
This new development, he says, may well lead to new financing solutions in the future, although this is not the immediate focus. “It is entirely possible that the efficiencies brought by komgo will allow us to do business that we are not seeking to do today. But the prime objective is to better service the clients we already work with,” he explains.
Here, GTR unwraps the details of the new platform and the underlying technology.
How komgo was born
Easy Trading Connect 1
The idea for a commodity trade finance platform came out of ING’s Innovation Bootcamp in 2016, in which employees were challenged to come up with smart ideas for transforming banking. The first proof of concept of the prototype was subsequently carried out by ING, Société Générale and Mercuria in February 2017.
The experiment, known as Easy Trading Connect 1, involved an oil cargo shipment containing African crude, which was sold three times on its way to China. The results demonstrated that the technology has the potential to improve the efficiency of certain processes – financing in particular. The average total time for a bank to complete its role in the transaction was reduced from about three hours to 25 minutes.
Easy Trading Connect 2
The second Easy Trading Connect was completed in January 2018 and involved Louis Dreyfus Company, ING, Société Générale and ABN Amro. It saw 60,000 tonnes of soybeans shipped from the US to China, with the full set of digitised documents – including the sales contract, letter of credit and certificates – executed on the blockchain.
To prove the efficiency that blockchain can bring to this space, Easy Trading Connect 2 mirrored and replicated the traditional, paper-based process. The blockchain-based one was completed seven days before the paper-based documents had reached the negotiating bank.
komgo
komgo was officially incorporated on August 2, 2018, with 15 banks and corporates as shareholders, tasked with bringing a fully-commercial blockchain platform to the market. The venture launched the first live version of the solution on December 20, 2018.
This platform is based on the learnings of Easy Trading Connect 1 and 2, and reuses some of the components tested, explains Mariana Gómez de la Villa, programme director for distributed ledger technology at ING. However, the roadmap and product will ultimately be defined by komgo as an independent entity, whose board will include the shareholders. “komgo is totally independent and should have its own life and journey,” she says. Gómez de la Villa herself has been spearheading the Easy Trading Connect experiments at ING but has now put the future of the platform into the hands of the new entity.
The setup
komgo’s 15 shareholders include a mix of corporate and financial players: ABN Amro, BNP Paribas, Citi, Crédit Agricole, Gunvor, ING, Koch Supply & Trading, Macquarie, Mercuria, MUFG Bank, Natixis, Rabobank, Shell, SGS and Société Générale. That’s a rather unique setup for a banking platform. While trade finance has seen the emergence of an impressive number of technology consortia over the past two years, banks have typically only collaborated with one another. Other well-known trade finance initiatives like Marco Polo, Voltron, we.trade and Wilson remain bank-only members’ clubs.
“In terms of investors, our vision was to have a mix of banks and corporates,” Souleïma Baddi, komgo’s CEO, tells GTR. “Even if we are talking about a financing platform, we think it’s very important to also have corporates as investors, to be sure that the product and the platform will answer the industry needs.”
Baddi joined the company in late 2018 from Société Générale Switzerland, where she was deputy head of commodity trade finance. Meanwhile, Toon Leijtens has left his role as blockchain developer at ING to become komgo’s new chief technology officer.
The technology
While the first Easy Trading Connect experiment was performed on Ethereum, the parties decided to test Quorum, the enterprise-focused version of Ethereum, for the second. At the time, Baddi told GTR that Quorum could better accommodate the agricultural sector’s complex and rigorous documentation chain flows and the greater number of participants involved. Meanwhile, Quorum allows for more privacy and confidentiality.
Following the success of Easy Trading Connect 2, komgo’s founding parties assessed a range of blockchain capabilities and firms in a request for proposal process. They also considered other technologies available, such as Corda and Hyperledger Fabric.
In May 2018, they appointed ConsenSys to build the komgo platform. ConsenSys is a blockchain firm which develops solutions on the Ethereum network, and whose founder, Joseph Lubin, is among the co-founders of Ethereum. The firm will build komgo on Quorum.
Explaining the decision to go with this over other technologies such as Corda and Hyperledger Fabric, Leijtens tells GTR that “Quorum is built on an open standard – the Enterprise Ethereum Alliance standard – and that is what we are aiming for”.
The first products
komgo will initially offer two products: a know your customer (KYC) solution and a digital letter of credit. The KYC module will standardise and facilitate the KYC process, allowing commodity houses and other platforms to securely submit digital trade data and documents to the komgo customer banks. The exchange of documents will happen on a “need to know” basis and without using a central database, meaning that users keep their documents within their own premises.
“We have assessed the biggest pain points that the industry is facing today in the commodities area, and one of them is to perform the KYC task,” explains komgo CEO Baddi. “The first very challenging part of KYC is the exchange of documents. The beauty of blockchain is that it allows you to exchange documents on an encrypted basis, which is not the case today – they are often exchanged by email, which is not secure or efficient, and it’s very difficult to find the information when you need it.”
The digital letters of credit, meanwhile, will enable commodity houses or other players to submit digital trade data and documents to banks on komgo.
komgo and Voltron – what is the difference?
komgo seeks to address a challenge that continues to hound the letter of credit: that it is an extremely paper-heavy process that can take weeks to be completed. But the entity is not alone in its vision to speed up this particular product using blockchain technology. R3, for one, is currently building a platform for trade finance letters of credit together with a number of banks on the Corda platform. The platform is known as Voltron, and was first used by HSBC and ING, together with Cargill, in May 2018 for the trade of a cargo of soybeans exported from Argentina to Malaysia.
The second and third Voltron pilot transactions followed later in 2018, covering shipments of polymers and iron respectively. The consortium behind it, which includes Bangkok Bank, BNP Paribas, CTBC Holding, HSBC, ING, NatWest, SEB and Standard Chartered, is aiming to go into production in 2019.
komgo CEO Baddi has previously emphasised that komgo has “a very strong commodity DNA” and is thus built to facilitate the complex business that is commodity financing. However, it’s probably no big surprise that industry observers are confused about the differences between komgo and Voltron, given that Voltron’s first three letter of credit trials were conducted for commodities.
Mariana Gómez de la Villa at ING, one of the banks involved in both platforms, explains the differences: while Voltron has a niche focus on a specific part of the process, namely the automation of the letter of credit, komgo goes beyond that, with the aim to be a “whole financial platform”.
“They complement each other, so komgo may be able to use Voltron in the future, but komgo will also involve KYC, identity and payments,” she says, adding that it is “a coincidence” that the first Voltron pilots were conducted for commodities.
komgo and Vakt – two platforms, one aim
Vakt is another commodity-focused blockchain platform that went live in late-November 2018. Underpinned by blockchain technology, the platform manages physical energy transactions, from trade entry to final settlement, eliminating reconciliation and paper-based processes.
To begin with, it has been launched privately with BP, Equinor, Shell, Gunvor and Mercuria as users, for BFOET (Brent, Forties, Oseberg, Ekofisk and Troll) crude oil trade only. It is set to open to the wider market in January. Like komgo, Vakt is operated as an independent company. Its founders include the aforementioned firms, as well as Koch Supply & Trading, ABN Amro, ING and Société Générale.
With many of the same shareholders, Vakt and komgo have been closely aligned from day one, but initially being divided into separate platforms allowed them a core focus on post-trade processes and trade finance respectively. However, the two live platforms have since been connected so that banks on komgo can offer blockchain-based financing solutions to Vakt users.
“We work very closely with komgo,” Adam Vile, CTO at Vakt, told GTR at the time of its launch. “They will be directly connected to us so that users of Vakt can request trade finance via Vakt. The request then goes straight onto komgo, and users can get various quotes, select one and then attach that to their cargo on Vakt.”
As such, banks won’t be using the Vakt platform directly, but rather offer financing solutions via komgo.
Vakt’s aim is to extend the platform to all physically traded energy commodities. The company says it is building its roadmap “in response to an industry need” and has US crude oil pipelines and Northern Europe refined product barges slated for launch in early 2019.
