Blockchain benefits still murky for most commodities trading

Major companies and banks have tested blockchain across commodities such as in power, diamonds, food and oil. (AFP)
Updated 16 August 2018
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Blockchain benefits still murky for most commodities trading

  • Blockchain, originally the platform behind cryptocurrency Bitcoin, is viewed by some as a solution to inefficiencies
  • Among the obstacles to scaling up the technology include reconciling terminologies and whether the switch to a blockchain platform is even financially justifiable

LONDON: Commodity firms and banks have been diving into blockchain pilot schemes over the last two years but the new technology’s application for most trading has likely been over-hyped, a report by Boston Consulting Group (BCG) said.
Blockchain, originally the platform behind cryptocurrency Bitcoin, is viewed by some as a solution to inefficiencies, improving transparency and reducing to the risk of fraud. But BCG believes its potential has been exaggerated.
A high-tech ledger, blockchain uses a shared database that updates in real-time and can process and settle transactions in minutes without the need for third-party verification.
The volume of trades through various schemes has been negligible so far and it is too early to tell how soon it might reach a critical mass.
“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,” Antti Belt, co-author of the BCG report, said.
Among the obstacles to scaling up the technology include reconciling terminologies and whether the switch to a blockchain platform is even financially justifiable.
“The industry is very old and everyone uses a different language. How do you define quality, shipment schedules ... a lot of reconciliation is currently needed for both sides,” Belt said.
“People have spent millions, sometimes over $100 million, on IT system, do they want to do it again?”
Furthermore, it is uncertain to what degree traders will want to adopt a technology that will erode already razor-thin profit margins.
BCG said that as the platforms take shape, it would be “bad news” for merchant traders as the price inefficiencies and unequal dissemination of information that they rely on to make profits would disappear.
“The use of blockchain solutions would significantly improve transparency ... It would also create a more efficient and liquid market, moving commodity trading away from bilateral deals struck directly between two parties to transactions based on electronic platforms to match buyers and sellers,” the report said.
Co-author Steven Kok said interest in the wider adoption of blockchain technology would start where the primary driver is certifying the source of the asset, as with diamonds, rather than efficiency.
Anglo American’s De Beers said in May it had tracked 100 high-value diamonds from miner to retailer using blockchain, in the first effort of its kind to clear the supply chain of impostors and exploitation.
Nevertheless, major companies and banks have tested blockchain across commodities such as in power, diamonds, food and oil. Last year, a consortium including major banks, trading firms and producers BP, Equinor and Royal Dutch Shell announced that they would develop a blockchain-based platform ready to go by the end of 2018.
Separately, commodities trader Trafigura set up another platform with IBM and Natixis for the US crude oil market last year. Major agriculture traders have also tried blockchain such as Louis Dreyfus Co. with a cargo of soybeans.
“Simply put, blockchain may not be the right answer for all players,” the report concluded.


Bitcoin craze hits Iran as US sanctions squeeze weak economy

Updated 18 July 2019
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Bitcoin craze hits Iran as US sanctions squeeze weak economy

  • Some Iranian officials worry that “mining” is abusing the subsidized electricity
  • Iranian Bitcoin miners are purchasing more affordable Chinese ready-made computers

TEHRAN: Iranians feeling the squeeze from US sanctions targeting the Islamic Republic’s ailing economy are increasingly turning to such digital currencies as Bitcoin to make money, prompting alarm in and out of the country.
In Iran, some government officials worry that the energy-hungry process of “mining” Bitcoin is abusing Iran’s system of subsidized electricity; in the United States, some observers have warned that cryptocurrencies could be used to bypass the Trump administration’s sanctions targeting Iran over its unraveling nuclear deal with world powers.
The Bitcoin craze has made the front pages of Iranian newspapers and been discussed by some of the country’s top ayatollahs, and there have been televised police raids on hidden computer farms set up to bring in money by “mining” the currency.
Like other digital currencies, Bitcoin is an alternative to money printed by sovereign governments around the world. Unlike those bills, however, cryptocurrencies are not controlled by a central bank. Bitcoin and other digital currencies like it trade globally in highly speculative markets without any backing from a physical entity.
As a result, computers around the world “mine” the data, meaning they use highly complex algorithms to verify transactions. The verified transactions, called blocks, are then added to a public record, known as the blockchain. Any time “miners” add a new block to the blockchain, they are rewarded with a payment in bitcoins.
To work, the expensive specialized computers require a lot of electricity to power their processors and to keep them cool. In Iran, “miners” have an edge because electricity is cheap thanks to longtime government subsidies. “Miners” also buy cheaper Chinese ready-made computers to do the work.
But the constant raids and authorities’ conflicting statements on the issue have Bitcoin “miners” in Iran incredibly leery of being identified. Those contacted by The Associated Press refused to speak about their work or to say how much they earn from their “mining.”
But they acknowledge they do this to make some money at a time when Iran’s currency, the rial, tumbled from 32,000 rials to $1 at the time of the 2015 nuclear deal, to around 120,000 rials to $1 now.
“It is clear that here has turned into a heaven for ‘miners,’” Mohammad Javad Azari Jahromi, Iran’s minister for information and communications technology, recently told AP in an interview. “The business of ‘mining’ is not forbidden in law but the government and the Central Bank have ordered the Customs Bureau to ban the import of (mining machines) until new regulations are introduced.”
Ali Bakhshi, the head of the Iran Electrical Industry Syndicate, said earlier this month that the country’s Energy Ministry likely would boost costs for Bitcoin “miners” to 7 cents for each kilowatt of electricity they consume, a massive increase from the current half-cent but still almost half the cost of electricity in the United States, according to the semi-official Fars news agency.
Still, there are concerns, especially among Iran’s religious leaders, that people might try to circumvent paying extra for the electricity as well as using digital currency to hide or move money illicitly.
Tabnak, a hard-line news website associated with a former commander of the country’s paramilitary Revolutionary Guard, quoted three ayatollahs describing Bitcoin as either problematic or “haram,” meaning forbidden. Islam prescribes strict rules about finance.
But Jahromi said clerics became more receptive to the idea after his staff briefed them that Bitcoin had a value in the real world, which is required under Islamic finance. Islamic finance also prohibits gambling, the payment of interest and misleading others.
“Some of our top clerics have issued fatwas that say Bitcoin is money without a reserve, that it is rejected by Islamic and cybercurrencies are haram,” Jahromi said. “When we explain to them this is not a currency but an asset, they change their mind.”
Iran has tried to keep its economic situation in check by controlling foreign currency rates and cutting down on those moving their money from the rial to other currencies, including Bitcoin. Last year, the semi-official Mehr news agency quoted Mohammad Reza Pour-Ebrahimi, the head of the Iranian parliament’s economic commission, as suggesting that about $2.5 billion left Iran through digital currency purchases. He did not elaborate and authorities have not discussed it since.
The US, meanwhile, has been keeping a close watch on Iranians holding bitcoins. In November, a federal grand jury in Newark, New Jersey, accused two Iranian men of hacking and holding hostage computer systems of over 200 American entities to extort them for Bitcoin, including the cities of Newark and Atlanta.
“As Iran becomes increasingly isolated and desperate for access to US dollars, it is vital that virtual currency exchanges, peer-to-peer exchangers and other providers of digital currency services harden their networks against these illicit schemes,” said Sigal Mandelker, Treasury’s undersecretary for terrorism and financial intelligence.
Not so, said Jahromi.
“Cybercurrencies are effective in bypassing sanctions when it comes to small transactions, but we do not see any special impact in them as far as mega-transactions are concerned,” he said. “We cannot use them to go around international monetary mechanisms.”