Critical insights on blockchain use cases and obstacles in the commodities and energy trading markets are explored in an interview with the former CIO of EDF Trading Ltd, Jeremy Lock.
Adjoint: There is this article on Reuters referencing what you were just saying. I’d like to quote it and see what do you think about it. It’s about the difficulty of blockchain coming to full production: “The sector has to hammer out common legal standards and show that there are links between different dealing platforms and persuade scattered elements of the supply chain - from commodity producers to brokers to traders, to consumers to cooperate.” What are your thoughts?
Jeremy: There are very many different parties involved. In recent experience, in the industry around REMIT and other regulatory requirements to report standardized data on trades, there was not a single mandated way to do it. There were a variety of interested groups that formulated opinions on how they were going to do reporting. For example, the banks, the energy commodity traders, and the clearing houses may have a slightly different view. To succeed we need one set of rules.
There is also an underlying requirement for all of these transactional systems to have a common understanding of data. You can not leave that to chance. Nor can you have one group do it one way, and another independent group creating a conflicting process. Many of the industry changes that we have seen over the years have set up central bodies to define the rules, with the industry contributing to the debate.
Lastly, with the motivation of the projects being a reduction in operational costs, you have to ask yourself: what is the cost-benefit of changing operational approach and using blockchain? Is it just a technology change or is it more than that? What are the cost and difficulty of developing process to support the use of blockchain?
Adjoint: Do you believe it will be blockchain companies themselves or the actual companies trying to adopt this to try to overcome these obstacles?
Jeremy: At the moment, what we are seeing, in general, are small syndicates coming together and experimenting. Companies are building out small capabilities on a side-of-desk basis, are experimenting, and then sharing results to galvanize more interest in extending the community. Some of the companies have built their own platforms internally so they can experiment internally between departments within the same company, in order to prove that they can make it work.
If we are going to apply it to deals between companies, then we could perhaps move towards an ‘open source’ approach. But there will still need to be some level of control. Even if you are building open source software, there is still a set of rules about how people contribute to that, how changes to a software get accepted or not into the core, etc. What is also not yet clear is the administrative burden for doing such a thing in a longer term. Who would pay for that? How will the operating model be defined and structured?
Adjoint: So you mentioned earlier you saw that a lot of blockchain projects tackle the back office in terms of settlement, reporting, reconciliation. Do you ever see it going towards the front office in terms of price discovery or trade execution?
Jeremy: Yes. I think there is one particular proposition in energy trading. The unique selling point of that proposition to reduce the cost of transactions by underpinning trading on a blockchain platform. Of course, that can only be of interest to the trading community if liquidity goes to the platform. The bigger question there is if and how the trader community can be changed by these platforms.
We are seeing some prototypes and interest in the front-end of the trading process. It is going to require a significant change of viewpoint in order to make those propositions successful. I definitely think it will come, but it will take time.
Adjoint: Do you have a final suggestions or advice to commodity participants or blockchain companies?
Jeremy: Well I think you would be wrong to ignore it. So I think you would be right to experiment with the toolsets. I think within two to five years, we will see quite a revolution in use of this technology.
The final point that I would make is that from a technology and a CIO point of view: we need to be mindful of the fact that smart contracts and blockchain technology is not trivial to understand and support. CIOs worry about the total cost of ownership, knowledge and skills, support and maintenance. I do not think it would be any different when using blockchain as a technology.
At this stage, there is a very limited set of people with the necessary skills. We have to get to a point where we can abstract some of that complexity away from the people who use, run and manage applications. But like any new technology, people will find a way through it.