Potential Impact of Blockchain in Commodity Market: The blockchain technology has long been linked with Bitcoin and cryptocurrency, but has transformed with various potential applications of the technology are under development. Irrespective of the success or failure of cryptocurrencies, the underlying technology behind the Bitcoin has huge potential in several applications which include the potential of impacting and revolutionising how the commodity markets presently function and operate.
The blockchain technology has already been adopted by bullion traders and has the potential of replicating its success in the commodity markets as well.
What is Blockchain?
The Blockchain Technology is a decentralised database which stores a ledger of assets and transactions across its peer-to-peer network and utilises its system to authenticate transactions.The transactionis stored and recorded in such a manner wherein the records cannot be changed or altered,and transactions can be monitored, enforced and verified without the use of an intermediary or a central authority.
Utilising the blockchain technology in the commodity market is not deemed to cause any impact on the commodity prices, but the technology can provide a secure platform of exchange of raw material. The blockchain technology can aid in providing transparency within the market, develop trading channels for sellers and buyers who were viewed as a credit risk and also provide liquidity to a market which has been losing the favour of banks and other financial institutions.
The blockchain technology can offer a secure accounting channel for all financial transactions. The technology was developed to address the vulnerability of centrally stored data. The blockchain technology has already being implemented in one of the most traded and liquid commodities, i.e. gold, allowing traders and investors to own physical gold in their digital wallets as a digital asset. This digital gold can be easily transferred between digital wallets and can be bought, sold and traded in its digital form. Even though, gold having multiple products for trading such as futures, options, spots, indices, ETPs, physical gold etc., the blockchain technology can bring all forms of market participants, i.e. traders, investors, miners, financial institutions, refiners, retail sector etc. on a single platform.
Presently, financial transactions are recorded in accounting entries and ledgers, which are then transferred either to an accounting spreadsheet or accounting software and stored on a computer. These systems are not always secure hence can be risky as these data can be tampered with, deleted, stolen etc. The distributed ledgers of the blockchain technology provide a solution for this issue. All forms of data are stored in blocks on multiple systems across the network in different locations instead of a central database or server. Hence, can change on the data will be reflected across the entire system can be easily spotted.
One of the key advantages of the digital distributed ledger duplication is its security function. The cryptographic proof lock within the perpetuity chain of the transaction order eliminates any form of dispute aboutthe sequence of events. The verification and validation in blockchain are done with the maximum transparency while ensuring consensus. As it is not central intermediately, everyone within a network enjoys equal stature.
The physical commodity market being the least regulated is far behind when it comes to adopting any form of innovation and revolutionary technology. Due to a series of unregulated geographic locations wherein these commodities are produced, stored, processed, shipped etc., many commodities have escaped various forms of regulatory scrutiny faced by the financial markets.
For instance, commodities such as metals, oil, coffee etc. involve multiple shipments at different stages, i.e. from mine/farm to smelter/refinery to the market. These shipments can be involved in various modes of transportation, warehousing, processing, and the ownership of the commodity can change hands multiple times during this process.
With both the Indian and global markets contending to expand the regulatory framework towards including commodities towards scrutiny of participants, enforcing transparency and stability, enhancing the quality of the supply chain etc. require a high degree of transparency and traceability of commodity shipments at every stage.
The Blockchain technology can enable commodity traders to overcome traditional market barriers while ensuring timely settlement, expediting allocation of capital and providing proof of collateral.
The adoption and usage of the blockchain technology in the gold market has paved the path towards increasing transparency and accountability in the commodities market. This could be the beginning of large-scale adoption of the blockchain technology which can revolutionise the commodities market and can also include metals, energy, grains and much more.