Eight leading commodity players have tested the concept for a new blockchain platform that could transform agricultural commodity trading practices and finance.
The test marked the first live agricultural commodity transaction on the blockchain and saw 60,000 tonnes of soybeans shipped from the US to China.
It was carried out by Louis Dreyfus Company (LDC, the seller), Shandong Bohi Industry (the buyer), and ING, Société Générale and ABN Amro, which issued and confirmed the letter of credit. The parties are now in discussions about a future timeline and expect to present a production-ready blockchain platform in 12 months.
Robert Serpollet, global head of trade operations at LDC, tells GTR that the company “anticipates a potential production phase in 2018, considering the level of interest in the market”.
According to the parties, it is the first time ever in the agricultural sector that a trade included a full set of digitised documents – including the sales contract, letter of credit and certificates – as well as automatic data-matching. The process also involved Russell Marine Group and Blue Water Shipping, which issued all required certificates, and the US department of agriculture, which provided data on phyto-sanitary certificates.
Serpollet acknowledges that more work needs to be done to make the solution scalable, however he views the pilot as a success: “The results of this test have proven a key part of the value proposition – cost reduction, speed and trust. But as the sample was limited, inevitably more tests should follow before it’s ready for large-scale adoption. There are issues related to scalability, security and even the legal framework that will need to be fully resolved, but these will be addressed in due course.”
The proof of concept (PoC) was conducted on an enhanced version of the Easy Trading Connect (ETC) platform – a prototype designed to digitalise and standardise commodity transactions and which was first tested by ING, Société Générale and Mercuria for an oil cargo transaction in February 2017.
With that previous pilot in mind, an ABN Amro spokesperson tells GTR that the technology “is very much transposable. We have done a similar experiment with oil last year, and such a solution can be used for other commodities as well”.
While the first PoC was done on an Ethereum-based platform, the soybean transaction was completed using Quorum’s technology, which uses private blockchains.
According to Souleïma Baddi, deputy head of commodity trade finance at Société Générale Switzerland, Quorum could better accommodate the agricultural sector’s complex and rigorous documentation chain flows and the larger number of participants involved. The platform was used for not only the financing aspects, but also the full set of relevant documents pertaining to a transaction, such as the signing and processing of the sales contract at the start.
“The idea when you do a PoC is to test different technologies, to prepare the go-live of the platform. So we wanted to test another one to compare them. And we have not yet come to a conclusion as to which one we will go live with,” she tells GTR.
More work required
The blockchain-facilitated transaction mirrored the paper-based process, making it easy for the parties to measure the difference.
The full transaction was completed on the blockchain seven days before the paper-based documents had reached the negotiating bank. However, the exact completion time for the full transaction is undisclosed. Baddi says the average time for banks to complete their role in the transaction was reduced from about three hours to around 25 minutes.
Other 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.
Baddi says the next step is currently being discussed with LDC and the various banking partners, which also include other European commodity trade finance banks. These have not been named at this point.
Among other things, the discussion would include making a decision on what technology to go forward with when building the final platform. Apart from Ethereum and Quorum, the parties are also considering the Corda and Hyperledger frameworks, Baddi says.
“But we are also a strong believer that there will be several technologies that will go live,” she adds. “We won’t be in a situation where only one will win. And, as a consequence, we’re also working on how to ensure these platforms can communicate – this is very important.”
She expects the parties will make an announcement on the future timeline within the next few weeks and that the platform will be ready to go into production in about 12 months. The first version will focus on one agricultural commodity (which is yet to be decided) and then expand from there.
In order to bring the technology to full production phase, further work is required.
ING’s global head of trade and commodity finance, Anthony van Vliet, tells GTR: “At the moment, the underlying blockchain technology options are not ready for production use yet. More work is needed to get it ready to support scalability, but also security. In addition, the legal basis needs to be sufficiently robust to support the users in courts of law around the world. And of course regulators need to become comfortable with such a platform. So it will take some time, but it is not unimaginable that some of the parties will want to use it to manage transactions between their subsidiaries or with ‘friendly’ partners.”