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UK-based Vakt, a post-trade blockchain platform for oil, has signed up two-thirds of companies responsible for all deals in North Sea crude oil trading, reports the Financial Times.
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The company, which recently appointed former managing director at Mercuria and JPMorgan Etienne Amic as CEO, says the move illustrates the energy trading industry’s early adoption of the nascent technology.
Vakt went live last December, initially only for its direct backers, including banks ABN Amro and Société Générale, as well as major energy firms BP and Shell, and traders Gunvor and Mercuria. The platform announced that it signed up four new clients ahead of its official launch today at the International Petrolem Week, an annual oil industry gathering in London.
Here’s why Vakt’s blockchain-based platform is gaining traction:
- Commodity trading’s paper-heavy process makes it prime for blockchain adoption. Commodity trading involves a myriad of complex transactions, often including multiple counterparties alongside buyers and sellers, as well as the wide network of parties responsible for moving material along the supply chain. Typically, these various parties exchange information like contracts, letters of credit, and other relevant paperwork through email, fax, or post. In addition to creating inefficiencies, this long paper trail also makes the process vulnerable to human error and tampering. Placing necessary information on a blockchain allows Vakt to eliminate this painstaking mountain of paperwork, streamlining processes and reducing the risk of fraud or tampering.
- The growing democratization of information has resulted in thinning profit margins for traders. In the past, traders’ proprietary knowledge of commodity flows allowed them to take advantage of pricing inefficiencies. However, amid growing transparency of data and access to information, these profits have become increasingly blunted: The return on equity for major commodity trading houses has dropped significantly in the past two decades, per the FT. As a result, firms are increasingly looking to technology — and blockchain in particular — to act as a buffer against these margin pressures by lowering their administrative costs and speeding up their processes.
This isn’t the first time we’ve seen the commodity industry turn to blockchain, and we’re likely to see more players enter the space. Vakt is linked to another blockchain-based platform, dubbed komgo, aimed at digitizing commodity trade financing, founded by a number of Vakt’s backers, as well Citi and BNP Paribas. The fact that so many established financial institutions (FIs) are participating in these two projects suggests a belief in blockchain’s ability to transform the commodity trading industry.
And what’s particularly impressive about Vakt is that it’s managed to get so many key players in the industry collaborating, making scaling of the solution and its long-term success more likely. As FIs across the finance value chain continue to explore a growing range of use cases for blockchain, they would be wise to take note of its ability to bring multiple, and often competing, players together.
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