As with so many other industries blockchain technology will soon have a significant impact on how commodities are globally traded. The technology is already impacting the process of commodities mining and as we have covered in a previous article, the implementation of blockchains will impact every stage of the supply chain. Some of the most interesting and lucrative opportunities will present themselves in the trading of commodities on emerging blockchain markets. Although his actions may not always have matched his eloquence, Barak Obama was correct when he said:
“This is the moment when we must build on the wealth that open markets have created, and share its benefits more equitably. Trade has been a cornerstone of our growth and global development. But we will not be able to sustain this growth if it favours the few, and not the many.”
Trading of digital assets represented on blockchains is growing. Initially, there were exchanges for trading cryptocurrencies but the market has since expanded into a vibrant industry that represents a variety of asset classes. Security tokens represent traditional securities on blockchains and combine the value of securities with the benefits of digitisation. When the trading of commodities begins to take place on digital exchanges we will see trillions of dollars flowing into the sector. We have previously discussed how the valuation of commodities will have a transformative effect on global blockchain valuations that will outshine the valuations of cryptocurrencies.
Gold is a useful example when discussing how commodities can be digitally traded. As one of the oldest asset classes gold is often at the forefront of systemic global changes. The implementation of blockchain technology in the gold industry is two-fold.
Firstly, by registering gold on a blockchain the opportunity exists to track its movement across the supply chain — from miner to consumer. This has the potential to reduce bad actors in the marketplace as educated consumers can choose to purchase gold that has not been mined with child labour or environmentally harmful practices. We have not achieved this vision yet but the structure for such processes is coming into focus through systems like De Beers’ tracking of diamonds on a blockchain.
Secondly, once gold is represented by security tokens on the blockchain it can be globally traded without the physical gold needing to leave the vault. This mirrors what already happens in traditional markets and the LBMA’s bullion vaults but solves additional problems. Manipulation within precious metals markets is not merely conjectured it is fact. When trading of precious metals is conducted on publicly visible blockchains, corruption will be significantly reduced. Trading gold without it leaving the vault reduces the costs of ownership and provides greater liquidity because it can be continuously and globally traded. In these cases, the price of gold-backed security tokens like MetalStream’s MSGLD could carry a premium over physical gold.
The implementation of blockchain technology in commodities trading has the possibility to open commodities markets to a greater number of participants. This will bring liquidity into markets but also allow smaller investors to participate in the sector. This participation has the potential to adversely impact smaller investors but will also bring opportunities to profit and change their economic positions. Security tokens can be fractionalized and do not require a broker to purchase or trade. This fact allows smaller investors to own and trade commodities and participate in markets which until now have been out of their reach.
All of this can be achieved from a smart device in any home and it is in Asia that we expect to see the greatest adoption of the technology. The World Economic Forum estimates that there will soon be 2.4 billion new members of the middle class and that 90% of them will come from Asia. This will give the region the largest global GDP and provide savings which can be utilised for investment purposes. Given the strong belief in wealth creation held by Asian investors the ability to easily invest and trade in blockchain-based commodities markets should be highly appealing.
It is becoming clear that the tokenisation of commodities will have positive impacts for all market participants. By reducing the barriers to entry it will bring greater liquidity into the markets that will benefit miners and logistics operations. Smaller investors will have the opportunity to invest in a sector which has previously been inaccessible. The accountability and transparency of blockchain technology will help reduce the exploitation of both people and the environment and reduce overall costs. It is rare in life that we witness systemic changes which represent improvements for the public, the environment and producers but we see it now in the tokenisation of commodities.
Enegra Group Ltd (LL15959) is a commodity trading company focused on resources in Southeast Asia. Equity in Enegra has been tokenised via the EGX security token. For enquiries related to the purchase of EGX please contact email@example.com.