Will the bullion industry embrace blockchain technology?
The old-school commodity sector operates supply chains spanning the globe and is a perfect vehicle to incorporate the benefits of blockchain technology, says Joshua Rotbart
Over the last two years, I've been witnessing the growth of the crypto market and the spread of blockchain technology. The initial application of the technology and the main reason behind the buzz and global headlines is, of course, cryptocurrencies. However, as more people become familiar with the technology, the appetite for finding successful use cases is growing. In this article, we will look at the advantages the technology offers and see whether the bullion industry can enjoy these advantages.
Hostility to change
The precious metals industry is very traditional and hasn't embraced the technological revolution as other industries have. Many transactions are still being conducted over the phone and by emails, and transactions still take a long time to process; for example, changing titles and ownership transfers may take hours to complete due to the documentation involved (and sometimes even more than a day if orders are given after working hours).
Some precious metals industry insiders look at blockchain with suspicion and perhaps even fear. Why?
The main reason is that, as mentioned, the main application associated with blockchain technology is cryptocurrencies, and cryptocurrencies suffer from a bad reputation for a variety of reasons, such as functioning as a tool for criminals and dark web masters, being used as a method for laundering money, and suffering from hacking and cybersecurity issues. Also, as players in a physical world, precious metals professionals don't feel connected with the virtual world. Another more psychological reason is that cryptocurrencies seem to take the limelight from bullion, shifting funds from precious metals companies' pockets.
The benefits of the technology
However, with blockchain, a public, tamper-proof ledger offers benefits: transparency, security, traceability, speed, and efficiency, and therefore reduced operational costs.
Blockchain technology can make a huge impact on all aspects of supply chain management, from reducing or eliminating fraud and errors to improving inventory management.
Consider the journey that a gold nugget or alluvial gold must take along its supply chain, from mine to end consumer. It cuts through several other industries and practices, including legal, regulatory, financial, manufacturing and retail – each of which might have its own ledger system. These ledgers are vulnerable to hacking, fraud, errors, and misinterpretations. They can be forged, for example, to conceal how the metal or mineral was sourced.
Decentralization guarantees complete transparency, meaning anyone along the supply chain can see how, when, and where the metal was produced, and who was involved every step of the way. This could give the industry a huge boost of that essential ingredient key to success: trust, not to mention dramatically increase efficiency.
The main four applications that may be most beneficial to the bullion industry in our opinion are:
One: mining to refining, traceability
These examples show how blockchain technology can assist in tracing gold from its source mine all the way through to refining:
A) Congo's cobalt mining
The soaring appetite for cobalt is a product of today's device-driven tech economy: the metal is a key component in the lithium-ion batteries that power countless millions of smartphones, computers, and tablets. Cobalt provides stability and high-energy density that allows batteries to operate safely and for longer periods.
Blockchain is to be used for the first time to try to track cobalt's journey from artisanal mines in the Democratic Republic of Congo through to products used in smartphones and electric cars. However, about a fifth of cobalt mining is done in informal mines.
The Congo pilot scheme involves giving each sealed bag of cobalt produced by a vetted artisanal miner a digital tag that, along with details of the weight, date, time, and perhaps a photo, is entered in to a blockchain through a mobile phone.
At the next stage, a trader buying the bag would record the details on blockchain and the process would be repeated until the ore gets to the smelter, leaving an immutable record of the cobalt's journey for downstream buyers or third parties to view.
The pilot will involve organizations throughout the supply chain, from on-the-ground monitors checking that sites are not using child labour to refining processes to end users.
B) The TrustChain initiative
IBM is pioneering the use of blockchain in big corporations (more than 1,500 employees are dedicated for their blockchain implementations and partnerships). As one of the leading companies in this field, IBM has formed a consortium with some of the biggest players in the jewelry industry, including Asahi refinery (precious metals refinery), Leach Garner (precious metals supplier), and Helzberg (retail jewelry store) for a unique blockchain collaboration.
TrustChain utilizes IBM's advanced technology developed to improve global provenance in the diamond and precious metals supply chain, in the efficiency and the movement management of precious metals and diamonds.
TrustChain uses distributed ledger technology that establishes a shared, immutable record of transactions that take place within a network and then enables permissioned parties access to trusted data in real-time. By applying the technology to digitize processes, a new form of command and consent is introduced into the flow of information, empowering those in the blockchain network to collaborate and establish a single shared view of information without compromising details, privacy, or confidentiality.
Two: transportation, efficiency in documentation
IBM and Maersk (the world's largest shipping container company) are collaborating in a project known as TradeLens, which they are targeting the logistics industry to adopt for exchanging and storing information, including shipping data and documents.
The solution is designed to bring together many of the parties involved in international supply chains and to support information sharing and transparency. Future participation will include more than 20 port and terminal operators across the globe, global container carriers, customs authorities and brokers, and freight forwarders and transportation and logistics companies.
These parties will execute complex shipping orders with less reliance on middlemen, and we can expect quicker turnaround, fewer mistakes, and reduced costs.
Three: production, security
There are some issues that may arise when dealing with physical holdings, such as the origin of the bars / coins; the authenticity of the bullion, the refineries, and the logistics providers; and how to make sure that the bullion weren't tampered with somewhere along the supply chain.
When producing a gold bar or coin, refineries can use a blockchain to store every specific bar's data for future authentication.
The data that's stored on the blockchain can be the bar's serial number, purity, weight, and brand name. Using blockchain in the production of bullion can prevent forgery of bars and coins since each item's data is recorded on the blockchain and cannot be altered or duplicated, meaning there is only one record of specific data connected to each specific bar. It also records the date and place of manufacturing for the ease of authenticating future transactions.
The London Bullion Market Association (LBMA), the global authority for precious metals, already launched a Request for Proposal (RFP) to enable the international market to further strengthen the gold supply chain's integrity. This initiative builds on the LBMA's Responsible Sourcing programme and focuses on how technology can ensure supply chain provenance. In addition, it will also look at minimizing the risks associated with fraud and security breaches. This is particularly relevant to ensure that bars are exactly what their markings purport them to be and have thus been produced to the high standard associated with LBMA-accredited refiners.
Four: retail market, accessibility, and trading
In order to save time, reduce costs, and improve efficiency, the financial settlements in the precious metals industry can use payments based/oriented cryptocurrencies, such as Ripple.
Ripple is a real-time gross settlement system, currency exchange, and remittance network. Ripple is built upon a distributed open source internet protocol and supports tokens representing fiat currency, cryptocurrency, commodities, or other units of value. Ripple is already used by companies such as UniCredit, UBS, and Santander, and has been increasingly adopted by banks and payment networks as settlement infrastructure technology.
Another form of quick trading can take shape in gold-backed token.
Gold-backed coins, one of the "holy grails" of the crypto industry, refers to a cryptocurrency that is pegged to the price of a numerical gold unit (1 gm, 1 oz, 1 kg, etc.).
This coin can be traded digitally in cryptocurrency exchanges and digital platforms and makes gold or other precious metals very accessible to everyone, specifically to people in countries with limited or no access to the world of precious metals. It can also be used as a "stable coin" - a gold-backed-coin that can operate as a safe haven when the market gets very volatile.
Blockchain technology is much more than cryptocurrencies. The technology is revolutionary in the sense that the data is not controlled by a single individual and/or corporation and is almost immune to tampering when implemented correctly.
The transparency during the life cycle of a product or project is highly important and can remove any doubts a consumer may have regarding the credibility of an industry and an end product.
The physical precious metals market can benefit from blockchain, making its products traceable from the source, insuring the mining didn't involve child labour, and confirming the miners are authorized and reputable. The consumer can be certain that the product is genuine and is able to see each and every step of the supply chain. There would be no need to melt bars and coins for authenticity, and all the processes would be faster and more efficient.
The industry is very traditional but perceptions are in flux and we're at a point where key players are taking active steps towards adoption. The promised benefits for reduction of fraud, errors and misinterpretations are too great for the opportunity to be ignored. The result of adoption will be literally unprecedented boosts in trust, credibility, and efficiency.
Many aspects of bullion supply chains will benefit (bar tracking, inventory management etc.), while others will, by necessity, remain "old school".
Joshua Rotbart, is the managing partner of J. Rotbart & Co., a Hong Kong-based company which specializes in investments in gold and other precious metals.
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7 Dec 2018