Trade finance is one of the most crowded areas for blockchain-based projects. In one of my earlier blogs I gave an overview of them (see my blog: “Blockchain for Trade Finance: a network business”, 23 May 2018). And now, a new one can be added to that list:
A consortium of fifteen of the world’s largest institutions, including international banks like the Dutch ABN Amro, ING and Rabo, a number of trading companies, and oil giant Shell recently have formed a new trade finance venture known as Komgo SA.
Their aim is to develop a decentralized Ethereum blockchain-powered open commodity trade finance platform. This digital marketplace, named Komgo, is aimed to make trade finance for the international bulk goods markets much quicker and cheaper. By digitalising
the processes around the financing of these trades, thereby easing the administrative burden of shifting oil, grain and other products around the world, the partners try to totally transform the global commodities trade and finance sector.
Blockchain and commodities trading
Lack of trust is one of the main factors behind the present high costs to bring bulk goods “from A to B” globally. All involved parties in the chain have their own systems, from transporters to banks, importers, exporters and custom services. Because of the
huge paperwork that involves the time to transfer money is long, insurance costs are very high and there is the chance of fraud.
Commodities trading has long been held up as one of the more promising sectors for blockchain technology. This is because the shipment of goods across the world requires constant monitoring by multiple parties and involves complex financing measures. The
physical-commodities trading industry has long sought a way to use blockchain to modernize the sector, improve security and reduce costs. But the technology has so far been used only for select transactions.
“But having seen many proofs of concept and pilots, the trade commodity finance industry is now ‘ready for’ action with the launch of Komgo”.
Research: Blockchain could boost trade finance by USD 1 trillion
According to research by the World Economic Forum and Bain & Company, blockchain is able “to fill in much of the USD 1.5 trillion-dollar supply-demand gap in global trade finance by easing financing for SMEs in emerging markets”. The research further explains
that this issue largely arises from limited access to credit and loans for SMEs that are looking to expand their businesses.
By deploying blockchain, global businesses can generate an extra USD 1 trillion in trade finance “that would otherwise be missed out”. Distributed networks are able to share business records across financial institutions along the supply chain and bring
transparency to businesses' credibility. The researchers further added that a blockchain-based trade finance system would be particularly beneficial to Asian economies as they account for 7% of the trade finance gap, with 75% of the global document-based transactions
across supply chains.
Proof of Concepts
The launch of Komgo follows on a number of successful experiments. These include two blockchain-based proofs of concept (PoCs) tested on ING’s Easy Trading Connect platform in energy and soft commodities trading.
Société Générale, ING and trade house Mercuria were involved in the first platform prototype completed in February 2017, called Easy Trading Connect 1. It demonstrated how blockchain technology could “enhance real time access to information by all parties,
the efficiency and the security of the process”.
The second platform prototype, named Easy Trading Connect 2, was completed in January 2018 in collaboration with global merchant firm Louis Dreyfus Company, ING, Societé Génerale and ABN AMRO. This platform was used to execute a soybean shipment transaction
from the US to China using blockchain. The transaction showed significant efficiency improvements for all participants in the chain, with much reduced time spent on processing documents.
“The potential that distributed ledger technologies (DLT) have in transforming the commodities sector is clear as evidenced with the success of the Easy Trading Connect experiments. We can now achieve a long-term ambition to improve security and operational
efficiency in the commodity trade finance sector.” Toon Leijtens, Chief Technology Officer of Komgo SA
Komgo SA is an independent Geneva-based company, grouping 15 shareholders in the bank and commodities sector. The Komgo consortium includes most of the organizations that took part in the successfully tested two blockchain-based Proofs of Concept in energy
and soft commodities trading.
The joint venture, that will be run as an independent entity, aims to create a blockchain-based trade finance platform to streamline and optimize the entire process of physical commodity operations. This platform is intended to track commodity transactions
and transform commodity trade finance by enhancing efficiency and strengthening security. This by providing trusted digital ledgers “to limit operational risks of fraud, counterfeiting or human error”.
“The launch of Komgo SA highlights a shared vision for industry innovation and underlines the ongoing commitment among members to build a truly open and more efficient network within commodity trading.” said Souleïma Baddi, Chief Executive Officer
of Komgo SA.
The Ethereum blockchain-based platform will be developed in partnership with ConsenSys, a venture production studio building decentralized applications and various developer and end-user tools for blockchain ecosystems, primarily focused on Ethereum. They
will thereby be supported by the core team of the two successful blockchain based Proofs of Concept (PoC) previously tested in energy and soft commodities trading. Komgo SA will also be working with blockchain-based post-trade processing platform VAKT to explore
synergies between both platforms.
“We are now entering a new era of simple and inclusive access to blockchain technology to advance stronger, more collaborative, business relationships previously out of reach. We are thrilled to see leading commodity trade finance banks and commodity
houses come together to create Komgo SA, which will radically simplify and accelerate trustworthiness, auditability, and accessibility to trade financing across the industry.” Joseph Lubin, Co-founder of Ethereum, and Founder of ConsenSys
The number of partners that have invested in Komgo SA now consist of 15 leading international institutions from different sectors. ABN Amro and ING, in close cooperation with Societé General were the frontrunners in establishing Komgo, after a Proof of Concept
early this year, with the financing of a transport of soya beans via blockchain. Since then, other banks that are specialized in the financing of those trades, joint this initiative, amongst others Rabobank, BNP Paribas, Credit Agricole, Macquarie Group, MUFG
Bank, Natxis and the US Citi. Also oil giant Shell, good controller SGS, trade house Mercuria and commodity traders Koch and Gunvor, took a share in Komgo.
According to the banks involved, this new system will enable to control the whole trade flow. The Komgo platform will as a result “radically simplify and accelerate trustworthiness, auditability, and accessibility to trade financing across the industry”.
Via this new trade finance platform much can be saved in time and money on the most inefficient paper work around trade finance.
With all data available on the same platform, Komgo will in speed up the transaction process. It will firmly reduce time spent on processing and controlling documents and data, thereby heavily reducing the chance of failures and fraud. The new trade finance
system could reduce trade finance costs by about 20-50%, and possibly much more in the longer term, according to the Komgo partners.
“Of the administrative costs over the whole chain, 98% is double”. Karin Kersten, ABN Amro.
Apart from being more efficient applying blockchain technology in trade commodity finance will increase safety and security of the present traditional paper-based administration in trade finance. The main benefit of blockchain thereby is its immutability
– once information is in the blockchain it can never be changed – which prevents cyber attackers from corrupting the database.
The Komgo platform is scheduled to go live before the end of the year. Komgo SA expects to initially start with offering two products to service the energy, soft and metals commodity sectors. One product will focus on standardizing and facilitating the KYC
process in a decentralised way. Thereby the exchange of documents will be executed in an encrypted way over the blockchain on a “need-to-know” basis.
The second will be digital letters of credit (using smart contracts), allowing commodity houses or other platforms to submit digital trade data and documents securely to Komgo SA customer banks of their choice to finance commodity trade deals.
Komgo will be a secured platform that is part of an emerging global blockchain ecosystem aiming to optimise the whole flow of physical commodity operations. This development may intensify competition and increase the use of blockchain in trade finance. The
founders of Komgo try to interest more parties in the chain for this blockchain based trade finance platform, such as other banks, traders, transporters, good controllers and custom services.
But to reach global acceptation, it may ask for interoperability between the various platforms such as Marco Polo, We.Trade, Batavia, HKTFP (Hong Kong), and ITC (India) and for more uniform set of rules and standards. Otherwise, commercial adoption will
remain unpredictable and fragmented for the (long) time being. The inclusion of some of the biggest lenders in trade finance in Komgo however may help establish a universal norm after previous efforts to use blockchain faltered.
Going forward and looking further ahead, we may see a world of a growing number of interconnected blockchain networks. With the Dutch banks as frontrunners. Just like in the Dutch Golden Age!