Better days for the commodity markets lies ahead. And one of the drivers to that better future is the tokenization of commodities on the blockchain through security token offering (STO).
We are witnessing a resurgent growth in the commodity markets around the globe. And the ASEAN region is among those showing high performance in this area.
The region is a spillover of the ‘world’s factory’, a term used to describe China for its ability to produce and export almost anything at very competitive global prices.
The commodity trading volumes of Singapore alone is in the region of USD 30 billion per year. The government estimate the annual growth to be around 2.7%. This is a representation of what is happening in the ASEAN region.
Because of this boom, governments in the region are putting the necessary infrastructure in place. For example, in August 2018, Vientiane, Laos’ capital city, launched a commodity centre to manage how the local market interacts with the rest of the world.
Security token offering (STO) could play a significant role in modernizing the industry.
An essential aspect of the commodity market is futures. These are contracts that producers and consumers of commodities sign for future settlements. The futures are the tools through which investors and speculators interact with the commodity market.
For example, every airline needs to plan its operations in the long term and increase the chances of getting a high return on investment (ROI). However, this is made difficult by the fluctuations in the prices of oil, a critical cost item in the industry.
To solve this problem, airlines opt to sign contracts with oil suppliers, which stipulate that the airlines will get supplies of oil at a particular price in future dates. This allows them to plan better.
Similar contracts are signed for precious metals, agricultural produce and energy production. These contracts guarantee producers of a ready market at a particular price in the future. They also guarantee consumers supplies at a specific price in the future.
The fact that the prices on the contracts might be different from the prevailing prices in the market at the fulfilment dates makes them great for speculation.
For that reason, the contracts are traded at a marketplace. Those who believe that the price at the time of settlement will be lower than the market price buy them on exchanges with an anticipation of getting the difference as a profit. And this is what is often referred to as a commodity trading market.
Trading in futures has been around for many years. But it has had its challenges. Some of those include lack of transparency, insecurity and difficulty to liquidate.
There is also the high cost of management involved and complicated regulatory oversight processes.
The blockchain technology offers solutions to most of these challenges. And the step to making the commodity market benefit from blockchain is to tokenize the commodities through security token offerings (STOs).
This means creating a digital identity for a commodity or a futures contract on the blockchain and trading at the marketplace. Digital identities of commodity contract certificates have existed for decades. However, the market has had to trust third party exchanges and clearinghouses to maintain reliable and truthful registries for them.
These exchanges and clearing houses have the power to arbitrarily alter the registries and even create contracts out of thin air.
On the blockchain, a futures contract is sovereign once it is created. It takes a life of its own once the buyer and seller create it. Subsequent owners can prove its origin and do not have to rely on a third party to vouch for its authenticity.
The blockchain thus efficiently allows for peer-to-peer trading of commodities through their futures contracts.
It also makes real-time settlement of trades possible through smart contracts, agreements that self execute as predefined terms are met.
Since the role of centralized third parties such as exchanges and clearinghouses are minimized, the cost involved in commodity trading is significantly reduced.
Also important, since records on the blockchain are immutable, a transaction of tokenized commodities is tamperproof. The security for investors is also improved through realtime regulatory oversight. There is no need for periodic reports when the regulator has realtime access to trading.
There is also an increased liquidation process. Through smart contract applications, traders can buy and sell without needing the time-consuming approval by a trusted third party.
There are many startups building platforms that make it easy to tokenize commodities and their trading. Examples of these include Peblik that focuses on minerals, Tradecloud with a focus on all types of commodities and the gold STO tokenizing platform Tokenoro.
As blockchain makes it easy, cheaper, more secure and efficient to tokenize and trade commodities through STOs, we are bound to see even more growth of the markets, including in the ASEAN.
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