WHITE PAPER

CAN BLOCKCHAIN DISRUPT ENERGY AND COMMODITY TRADING?

External Document © 2019 Infosys Limited

Introduction

As Roy Amara the American Scientist

once said - “We tend to overestimate the

effect of a technology in the short run and

underestimate the effect in the long run”,

Blockchain is the new technology trigger

that every other industry is pursuing to

eliminate transactional inefficiencies.

Energy and Commodity trading sector

is looking at using blockchain to reduce

operational risks and costs, bring in

efficiencies in back office processes by

eliminating intermediaries.

Major Energy producers, consumers,

trading firms and Banks such as BP, Shell,

Statoil, Mercuria, Koch, ING are running

pilots to develop Blockchain based trading

solutions. Consortiums like the Energy Web

foundation, Enerchain has been formed

to accelerate adoption of Blockchain

technology in energy trading. This paper

aims to analyze the impact Blockchain

technology has on the Commodity and

Energy Trading landscape and look at

possible use cases in this space.

External Document © 2019 Infosys Limited

External Document © 2019 Infosys LimitedExternal Document © 2019 Infosys Limited

Current Inefficiencies in Energy and Commodity TradingEnergy and commodity trading involves

cumbersome processes and multiple

intermediaries at various points of the

lifecycle which makes it inefficient,

error prone and expensive. Multiple

applications are used for processes

such as Confirmations, Reconciliation,

Trade Finance, Settlement, Operations

and Delivery especially for Physical

and OTC trading which slows down

the exchange of information between

parties. Transaction costs and collateral

requirements are quite high in the

industry due to counterparty risk

involved. Below is the list of indicative

inefficiencies in the energy and

commodities trading space.

Figure 1: Inefficiencies in Energy and Commodities Trading

Inefficient Backoffice Processes

• Confirmation required from both counterparties in OTC trading to agree to the terms of the deal

• Physical trading requires letter of credits and bank gaurantees from third party trade finance firms

• Multiple reconciliations are required with intermediary systems

High Transaction costs

• Brokerage fees, Clearing fees adds to the cost of executing a transaction

• High Collateral and capital requirements for margining has increased transaction costs

• Supply chain bottlenecks and lack of Contract standardisation across counterparties leading to overhead costs

Slow Delivery & Settlement cycles

• Stakeholders use different information systems which makes it difficult to effectively track shipments for delivery due to interoperability challenges

• Transfer of ownership involves paperwork and is slow

• Financial intermediaries involved in payments and settlements slowing down the process

Intermediaries

• Intermediaries like Clearing houses , Clearing brokers , Execution brokers , Banks , Operators involved at

various stages of the life cycle

• Multiple interventions required in intermediary systems to progress deals

External Document © 2019 Infosys Limited

• If all the stakeholders to an OTC transaction are available in the same interoperable network and have access to the same verified

transaction at real time, this eliminates the need for intermediaries and processes currently required to execute various deal lifecycle

events.

How Blockchain can help?

External Document © 2019 Infosys Limited

• Faster exchange of information

enabled by the distributed ledger

technology can reduce the settlement

timescale significantly leading to

faster movement of commodities

reducing counterparty risk.

• Reduction in settlement cycle will

lead to low capital and margin

requirements in order for the

counterparties to enter into a deal

thereby increasing the market

liquidity.

• Improved trade finance availability

as Banks are on boarded on to the

same distributed ecosystem which

enables banks to verify the firm’s

credit worthiness. Digitisation of commodity assets will enable the recipients to transfer assets as collateral against payment.

• Traceability of commodities across the supply chain can be improved.

• Intermediary costs such as Broker, Clearing and Settlement fees will no longer be applicable bringing down the cost per transaction

• Digitisation of commodity assets will enable the recipients to transfer assets as collateral against recipients

Buyer

Shipping Agency

Inspector

Seller

Operator

Bank

Trader A Trader B Smart Contract

Transaction Veri�ed

Block of data

created

Trader based on terms agreed with the counterparty enters the transaction against a Smart Contract

Transac�on is transmi�ed to the decentralised database and is available for verifica�on to all par�es

Blockchain

Transaction is veri�ed based on consensus algorithm and is combined with other transactions in a block

New Block is added to the blockchain and is recorded in the distributed ledger

Smart Contract is programmed to execute automa�cally based on trigger condi�ons. Contract is auto se�led based on the terms

Distributed Ledger

Figure 2: High Level Blockchain based trading workflow

External Document © 2019 Infosys Limited

Figure 3: Key Benefits

Figure 4: Key Industry Use Cases

Figure 3: Key Bene s

Figure 4: Key Industry Use Cases

Leading energy and commodity trading houses believe that 30% of the operational costs can be saved

Banks have found that trade nance availability (which supported 2 trillion $ worth of commodity trade last year) will improve due to blockchain adoption

Banks spend around 100 Billion $ per year on IT and Operational costs for post trade operations which can antly reduced post bl

be

ockchain adoption

Transaction with the agreed terms of the deal is available in real time to both the counterparties forveri cation eliminating the need for paper based or electronic con rmation.Transactions are veri d in real time by the nodes and a treacable block of data is created.

Enables quick transfer of collateral and payment to nance the deals if the trade nance provider and thecounterparty to the deal are in the same distributed ledger.The trade nance provider can also track the deal in real time and settlement will be triggered based onSmart Contract condition and cash s initiated.

Veri ed Transactional data will be available across all the nodes of the distributed ledger and any updates tothe transactions will be made available real time.Multiple rounds of data reconciliation across systems will not be required.

Preprogrammed Smart Contracts are automatically triggered based on conditions enabling auto execution of life cycle events without any manual interventions. Maintaining Contract reference data will not be required as Smart Contract can compute exposures, generate payment instruction and delivery instructions, settle the deals based on the code it holds.

Settlement of contracts will be quick as centralized clearing and involvement of depositiories will not be required.

The data is available to every stakeholder and the Smart Contract can generate payment and delivery instruction. Movement of commodity can be tracked real time and the title transfer done and recorded in the Blockchain post completion of delivery rather than working with physical documents such as bill of lading , Letter of credits , inventory and inspection receipts.

Trade ance

Settlement

Con rmation

Fin

Reconciliation

Smart ontract

Figure 3: Key Bene s

Figure 4: Key Industry Use Cases

Leading energy and commodity trading houses believe that 30% of the operational costs can be saved

Banks have found that trade nance availability (which supported 2 trillion $ worth of commodity trade last year) will improve due to blockchain adoption

Banks spend around 100 Billion $ per year on IT and Operational costs for post trade operations which can antly reduced post bl

be

ockchain adoption

Transaction with the agreed terms of the deal is available in real time to both the counterparties forveri cation eliminating the need for paper based or electronic con rmation.Transactions are veri d in real time by the nodes and a treacable block of data is created.

Enables quick transfer of collateral and payment to nance the deals if the trade nance provider and thecounterparty to the deal are in the same distributed ledger.The trade nance provider can also track the deal in real time and settlement will be triggered based onSmart Contract condition and cash s initiated.

Veri ed Transactional data will be available across all the nodes of the distributed ledger and any updates tothe transactions will be made available real time.Multiple rounds of data reconciliation across systems will not be required.

Preprogrammed Smart Contracts are automatically triggered based on conditions enabling auto execution of life cycle events without any manual interventions. Maintaining Contract reference data will not be required as Smart Contract can compute exposures, generate payment instruction and delivery instructions, settle the deals based on the code it holds.

Settlement of contracts will be quick as centralized clearing and involvement of depositiories will not be required.

The data is available to every stakeholder and the Smart Contract can generate payment and delivery instruction. Movement of commodity can be tracked real time and the title transfer done and recorded in the Blockchain post completion of delivery rather than working with physical documents such as bill of lading , Letter of credits , inventory and inspection receipts.

Trade ance

Settlement

Con rmation

Fin

Reconciliation

Smart ontract

External Document © 2019 Infosys LimitedExternal Document © 2018 Infosys Limited

Market participants and key industry leaders are running pilots and forming consortiums to trial and accelerate the adoption of Blockchain in

energy and commodity trading. Some of the key initiatives are listed below –

Key Industry Initiatives

Challenges in Adoption of Blockchain

Blockchain technology is yet to be rolled

out at an industrial scale which will require

addressing some of the technical, legal and

regulatory challenges before its adoption

picks further pace.• Scalability of the technology is a

concern. Bitcoin platform powered by a public Blockchain can process just a few transactions per second. Fintech firms are trying to solve the scalability issue which is critical for trading firms to adopt the technology

• Performance is hindered due to the complexity of the consensus algorithm required for verification of the peer to peer transactions. Alternate algorithms such as Proof of Stake are being developed to fasten the verification and increase throughput.

• Anonymity of the transactional data is a concern as all the market participants in the distributed network will hold a localized copy of the data. Cryptography is yet to evolve to selectively reveal data to some of the nodes. Private permissioned distributed ledger technology administered by a central

Enerchain consortium formed by a group of market participants has developed a platform for peer to peer wholesale energy trading using blockchain technology

Energy Web Foundation funded by Energy and Commodity Trading majors is in the forefront of analysis and research around ne tuning blockchain technology for use in trading

Tra gura , a leading trading house in collaboration with IBM and Natixis have developed a Block chain based trading platform

Major European Oil producers - BP , Shell and Statoil with other market participants are leading an initiative to develop a blockchain based energy trading platform

HSBC and Mercuria piloting a Block chain based commodity trade application which will facilitate nancing of cross border deals in separate initiatives

Figure 5: Key Initiatives

Figure 6: Challenges in Blockchain adoption

operator with customized set of rules which is currently evolving should address some of these issues

• Legal framework customized for this technology and a distributed system needs to be formulated as the market participants involve in peer to peer trading without a central authority.

• Regulatory and Compliance requirements around trading, mandatory clearing and reporting has to evolve based on the technology advancement. In its current form, market participants using Blockchain will not be able to comply with the regulation

• Legal and Compliance

• Anonymity

• Performance• Scalability

Scalability issues needs to

be sorted out for adoption by

trading �rms

Algorithm used for veri�cation of transactions needs to be �ne tuned

Legal framework with lack of a central authority yet to evolve

Cryptographyto selectively

reveal data tonodes is yet to

evolve

External Document © 2019 Infosys Limited

ConclusionMarket participants are not expected

to adopt the technology across their

transaction pipe. Blockchain based pilots

will be run on specific functionalities such

as Confirmation, Smart Contracts, Trade

finance , Settlement to verify feasibility

and potential savings. In the short term,

firms will look to streamline operational

processes using Blockchain and in the

long term the Blockchain technology is

expected to disrupt entire market structure

removing Clearing, Settlement and

Financial intermediaries making it a peer to

peer trading network.

Market participants are relying on Fintech

firms and consortiums formed by major

industry players to solve various technical

limitations for an industry scale roll

out of Blockchain based applications.

Overcoming legal and regulatory hurdles

and technical advancements enabled by

fintech firms and consortiums are key to

the rate at which firms adopt blockchain

technology.

External Document © 2019 Infosys Limited

© 2019 Infosys Limited, Bengaluru, India. All Rights Reserved. Infosys believes the information in this document is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of other companies to the trademarks, product names and such other intellectual property rights mentioned in this document. Except as expressly permitted, neither this documentation nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, printing, photocopying, recording or otherwise, without the prior permission of Infosys Limited and/ or any named intellectual property rights holders under this document.

For more information, contact askus@infosys.com

Infosys.com | NYSE: INFY Stay Connected

About the author

References

Prasanna Sekar - Senior Consultant, FSDCG- Capital Markets Practice

Prasanna Sekar has over 11 years of experience in IT and Domain Consulting with expertise in Energy Trading, Derivatives Clearing and Settlement, Regulatory Reporting and Treasury Management. Prasanna has worked with major European clients in Energy Trading , Regulatory reporting and Clearing implementation projects and has developed solution accelerators in the area of Regulatory reporting. He holds a Bachelor of Engineering degree. He can be reached at prasanna.sekar01@infosys.com and over Linkedin at https://in.linkedin.com/in/prasanna-sekar-03045099

1. Oliver Wyman, 2016: Blockchain in Capital Markets. London: Oliver Wyman.

2. Deloitte, 2016: Blockchain applications in energy trading. London : Deloitte Publication

3. Gunther Dutsch & Neon Steinecke, 2016: User Cases for blockchain technology in Energy and Commodity Trading .London: PwC.

4. PwC, 2016: Blockchain – an opportunity for energy producers and consumers. London: PwC.

5. Arnaud Stevens, 2017: Blockchain Technology Represents a New Frontier of Innovation in the Commodity Trading Industry. California : CIOReview https://blockchain.cioreview.com/cxoinsight/blockchain-technology-represents-a-new-frontier-of-innovation-in-the-commodity-trading-industry-nid-25269-cid-176.html

6. John Kingston, 2017: Blockchain was hyped for a long time, now they’re getting down to business. London: Platts Publication http://blogs.platts.com/2017/11/21/blockchain-getting-down-to-business/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheBarrelBlogPlatts+%28The+Barrel+Blog+-+Platts%29

7. Michael Merz, 2016: Potential of the Blockchain technology in Energy Trading. Hamburg: Ponton Publication.