The idea to use blockchain to assist and transform trading has been picking up steam in the past few years. Commodity firms and banks alike have been jumping on board pilot schemes for blockchain to utilize its technology. However, a report from the Boston Consulting Group (BCG) released on Thursday states that the use of blockchain for most types of trading has been likely over-hyped.
Largely, the market views blockchain as a solution to its problems surrounding inefficiencies, improving transparency and reducing the risk of fraud. However, the report has argued that the potential of blockchain has been over exaggerated, particularly for the commodity market.
Commenting on this, Antti Belt, co-author of the BCG report, said: “there are so many pilot schemes but none have become real production scale systems yet. One of the problems is that it’s not designed for physical trades. The fundamental issue: how do you track a physical entity in a virtual world? It’s two worlds colliding.”
One of the main issues the report highlights is the huge financial cost that switching to a blockchain platform would bring. This is because it would require investment in additional IT infrastructure.
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In addition, switching to blockchain platforms would only be successful if the whole industry switched in tandem, as the full benefits of blockchain would only be realized if all players participated, the report says.
Furthermore, the report states that switching the industry to blockchain platforms would be bad news for merchant traders. This is because blockchain would make pricing more transparent. Therefore, the price inefficiencies and the unequal dissemination of information that merchant traders use to make profits would no longer exist.
Blockchain’s alternative role in the commodity markets
The co-author of the report, Steven Kok, said certifying the source of the asset, as with diamonds, would generate interest in the wider adoption of blockchain technology, rather than efficiency.
The report states: “Simply put, blockchain may not be the right answer for all players. But the technology could perform another, equally important function.”
“It could act as a Trojan horse by enabling industry-wide discussions and aligning market participants around agreed language and standardized trading terms and mechanisms. In this way, it could foster commodity trading’s transition to more transparent and efficient markets and prepare the industry for hyperliquidity.”