Noelle Acheson is a 10-year veteran of company analysis, corporate finance and fund management, and is a member of CoinDesk's product team.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered exclusively to our subscribers.
This past week, European banks ING and Société Générale unveiled a blockchain platform designed to facilitate oil trading.
Far from making a splash on the front page of CoinDesk (or other publications for that matter), the news debuted via a quiet press release, eked out into cyberspace without much fanfare.
It's unfortunate, because this news was worth a second look.
To see why, let's break the development down into three factors that make it stand out:
1. This project is not just a proof-of-concept.
The announcement revealed a live transaction with the commodities trading house Mercuria. A cargo shipment containing African crude oil was sold three times on its way to China.
Traders, banks, an agent and an inspector were all involved.
According to the participants, the result proved that a blockchain-powered system can significantly reduce the time needed to complete a transaction, as well as enhance document reliability, auditability and user experience.
2. The commodities industry needs a logistical overhaul.
Insiders point out that it has changed little over the past few decades and still relies on paper-intensive processes: rife with redundancies, errors and delays.
Letters of credit, bills of lading, shipping contracts, insurance, transport and payment are just some of the components of a commodity trade that could be automated by a digital platform.
And the transparency and immutability afforded by blockchain technology could remove the risks associated with trust and ensure that each phase seamlessly connects with the next.
While the experiment was for an oil transaction, the steps involved in trades of other commodities are not very different, which will allow the platform to easily scale.
3. The nature of the oil trading sector puts it in a unique position to overtake the financial sector in blockchain implementation.
First and foremost, it is dominated by a handful of big players. Some are large conglomerates, but others are independent firms with a lower aversion to risk than most financial institutions.
The implication is that with one or two demonstrating positive results from moving operations to a blockchain platform, the others will quickly follow suit in order to maintain competitive margins.
Furthermore, the need to stay competitive is likely to become more acute as the market heads into an environment of lower profits due to a flattening forward curve.
Finally, the potential impact on the global economy of more efficient oil trade could end up being even greater than that of a more efficient financial system.
While it is pointless to debate the relative importance of money vs oil – both are essential in today's economy – it is hard to deny that financial products are already easier to send across borders. The benefits resulting from gains in speed and cost in the movement of oil are therefore likely to have an even greater short-term effect.
A more efficient oil trading system would not only have a greater influence in smoothing the uneven distribution of such a necessary resource; it could also encourage blockchain experimentation and adoption all the way up and down the value chain.
Fuel tanker image via Shutterstock