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Advantages Of Blockchain In Energy Trading
Energy Business Review | Saturday, January 29, 2022
Smart contracts are one utilization of blockchain technology that will influence all commodity market participants in the distant future.
FREMONT, CA: Blockchain technologies will not just make the current markets more efficient. They can radically disturb and open up the energy markets in ways people have not even considered. Boundaries between asset classes will obscure as cash, energy products, and other commodities, from industrial components to apples, could all turn into digital assets trading inter‑operably. If more value can be received by not restricting activity to a single asset class, then that is where the market will go. Blockchain will offer the platform. Smart contracts are one utilization of blockchain technology that will influence all commodity market participants in the distant future.
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How the blockchain could help
For energy market players, the value derived using blockchain applications is effective. At first, it is unlikely that a whole market, commodity, or deal life cycle will become blockchain-enabled. We will likely see pilot programs with select market participants centered on specific functional applications such as payments or smart contracts. Additional potential benefits include:
• Increases speed of exchange, which minimizes transacting backlog and overall costs
• Improves availability and reliability of data
• Enhances auditability as records are verified in near real‑time
• Can be utilized to convey the title of physical commodity seamlessly between market participants
What are the current bottlenecks or issues?
Transacting energy commodities is presently inefficient. Intermediaries and complex processes influence the speed of exchanging critical data.
Issues that blockchain-enabled applications could address include:
• Reduction or Removal of frictional costs (e.g., broker fees) that make present transactions slower and more expensive
• Facilitates regulatory reporting needs (i.e., EMIR, MiFID II)
• Increases efficiency by standardizing data formats across multiple organizations enabling inter‑operability and ensuring process integrity
• Decreases risk of fraud, error, and invalid transactions
• Decreases credit risk and transacting capital requirements
Implications
We did not begin to touch on how blockchain will impact commodity market participants. Intermediaries like brokers, exchanges, price reporting agencies, and clearing houses' total business models could be disrupted by the widespread adoption of blockchain-based applications. The cost and nature of fee-based transacting will be impacted. The role of regulators and the ability of market participants to meet compliance obligations will need to be examined in careful detail. In some cases, regulation may finally evolve in alignment with new ways of working. The problem of anonymity and payments will need to be addressed, as will the final link between the digital transmission of value over the blockchain and the real conveyance of value using an acceptable payment method (i.e., currency).
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If certain regulatory hurdles can be overcome (which will be no small task), market access will open up significantly. Marketplaces will consolidate, and accessibility will explode, considerably compressing margins at the transactional level. Trading activity may progressively involve direct transactions with members of the public or public 'consortiums.' The trader's role may be disintermediated as end users transact (organizations and/or individuals, and again likely in groups) directly with suppliers.
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