Commodities

As the foundation of most supply chains, commodities stand to significantly benefit from a blockchain platform that is designed to enhance collaboration with the supply chain partners furthest upstream. Skuchain has worked extensively with commodities in the mining and minerals, agriculture and energy spaces.
Commodities companies around the world use Skuchain’s EC3 Platform to:

Finance commodities procurement. Most commodities trading houses can execute physical deals in which they finance the inventory itself, not simply a commodities future. EC3 allows them to facilitate such transactions at scale. Traditional invoice factoring or receivables financing is a post shipment invoice-accepted model.

In this model:

  • The financier provides 80% or 90% of the face value of the invoice to the seller and the remaining on final payment by the buyer (minus a discount fee).
  • The financier needs to ensure that (a) The receivables are ‘perfected’ (i.e. do not have any liens, etc. and (b) The buyer has ‘accepted’ to pay the invoice and there are no disputes.

Our BOM Buyer is a completely different way of freeing up capital in the supply chain that turns inventory into financeable assets. A special purpose vehicle governed by a smart contract takes ‘title’ to the underlying good.
There are three main benefits to the BOM Buyer:

  • Lower COGS for Buyers and lower financing costs for Suppliers, compared to both traditional supply chain finance and inventory finance without blockchain
  • Can offer all Suppliers access to the Buyer’s cost of capital, without affecting the Buyer’s credit or having to draw from the Buyer’s credit facilities
  • Ensure a much more financially healthy supply chain with minimal excess inventory on balance sheets

What does a typical BOM Buyer deal look like?

  • Four parties: a Buyer, a Supplier, a Special Purpose Vehicle (can be owned by Skuchain, a bank or by the Buyer) and a Bank
  • Five steps:
    • A Special Purpose Vehicle enters into a JIT sales agreement with the Supplier, and the Buyer assigns their right to make payment and receive title to the inventory from the existing Master Purchase Agreement with the Supplier.
    • A Buyer offers a payment guarantee for any inventory that is part of this deal, subject to quality control, performance, etc.
    • A Bank will fund the SPV at the Buyer’s cost of capital in anticipation of a deal.
    • The SPV will buy inventory from the Supplier at a discount equal to the financing rate, and pay at terms advantageous to the Supplier.
    • The SPV will sell the inventory to the Buyer, possibly at a lower price than the face value of an invoice, and receive payment at terms advantageous to the Buyer.

What does blockchain bring to this deal?

  • Secure attestations allowing for ease of transmission: By placing agreements and trade documentation on the Blockchain, we provide a secure and trustable medium to transmit the details of a trade to various parties. This allows for portability of transaction information.
  • Reduced operational friction: The investment to make any change in supply chain process is small. Supply chain partners are still able to hide information they don’t want to share with others. The ecosystem can have transparency and visibility to the extent necessary to get the best risk profile and lowest cost for financing.
  • Significantly reduced workload: Operators who had to search for, compile and share the same information over and over again to banks, credit insurance companies and transaction participants are now able to streamline the process while adding security. The transaction process is standardized. There is no need to do an in-depth evaluation of each new transaction.
  • Scalability and additional profit opportunities: Allows for buyers and suppliers to participate and run transactions of any size on the same platform. Multiple tiers of suppliers can now be included in the same inventory financing program, whereas only single tiers could participate before because of the expense and lack of visibility.
  • Perpetual audit system: All aspects of the trade are now available to be audited in real time by the appropriate parties.
  • Traceability: Applicable SKU level traceability can be made available to relevant parties in real time.

Track and trace commodities during the transport process. To offer better visibility into the delivery of commodities, Skuchain’s EC3 tracks in real-time both the movement of shipment documents, such as the Bill of Lading, along with the movement of the physical goods as they are transported. Once this visibility is in place, smart contracts can use the updated delivery information, signed on the blockchain, to trigger faster payment for supply chain partners.

Obtain credit insurance on riskier counterparties in the supply chain to increase capacity. While commodities suppliers may offer a good at an attractive price, the riskiness of relying on some of these companies can constrain capacity to purchase from them. Credit insurance is a solution to many such instances where banks or internal treasuries are not best positioned to finance the risk.

Skuchain’s credit insurance platform, called CoverI, offers a buyer of insurance their own marketplace for putting together policies through a syndicate of insurance companies. CoverI manages the bidding and negotiation process for a new policy. Once such a policy is in place, CoverI allows a company to upload information to the blockchain about performance history on the policy. This information will offer greater visibility to insurance companies about the ongoing risk of a policy and open the possibility of much more efficient and dynamic pricing of risk and insurance structures over the life of the program. At the same time, the ability to share this transaction information will dramatically reduce the costs to insurance companies of verifying and paying out a claim, as well as collecting on the defaulted amount from the counterparty.

Ensure the quality of goods to get more accurate pricing. Uncertainty about the quality or grade of a commodity can have a negative effect on its price. If a commodities buyer or trader is able to certify premium quality, then it can offer a higher price for a commodity at much lower risk. Skuchain’s EC3 allows a company to tag the commodities with a Popcode, a digital ID that is logged onto the blockchain.

Notations about the quality and corresponding documentation can be attached to this specific Popcode. Importantly, Popcodes are able to transform just as the commodities transform. That means the ID of the commodity on the blockchain can be transferred, distributed, aggregate and combined with IDs from other commodities throughout supply chain.
Because Skuchain’s EC3 integrates Popcodes with Brackets smart contracts, we are able to tie transactions and paperwork with a specific product across the supply chain. Popcodes may be logged onto the blockchain through the Skuchain smartphone app or industrial scanners of choice. Transactions and records may be submitted to EC3 through an API integration with ERP systems, Excel spreadsheets or other existing technology, or directly into our CRP.

Institute a tolling system. Unless an end buyer has dedicated and segregated operations at a supplier, it is unlikely that it can certify raw materials provided via a tolling system were indeed used to produce the finished good. Skuchain’s EC3 allows a company to tag the commodities at the beginning of a refining process with a Popcode, a digital ID that is logged onto the blockchain.

Notations about the process and corresponding documentation can be attached to this specific Popcode. Importantly, Popcodes are able to transform just as the commodities transform. That means the ID of the commodity on the blockchain can be transferred, distributed, aggregate and combined with IDs from other commodities throughout the refining process.
Because Skuchain’s EC3 integrates Popcodes with Brackets smart contracts, we are able to tie transactions and paperwork with a specific product across the supply chain. Popcodes may be logged onto the blockchain through the Skuchain smartphone app or industrial scanners of choice. Transactions and records may be submitted to EC3 through an API integration with ERP systems, Excel spreadsheets or other existing technology, or directly into our CRP.

Build a blockchain gateway that allows for several bank blockchain networks to be interoperable. With the proliferation of blockchain-based platforms for commodities trading, banks do not see a path of adoption since their customers will not want to become part of a network that doesn’t include their counterparties. Rather than wait to see which platforms achieve critical mass, the trade and blockchain industry should work on bolstering interoperability between different blockchain networks.

Skuchain’s EC3 handles interoperability with other blockchain networks by turning an existing customer node or a Skuchain commerce node into a blockchain gateway that will build a channel between different blockchain networks. We have also integrated systems in a more traditional manner using APIs between applications that sit on top of blockchain protocols.