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Blockchain technologies in the commodities industry

At a glance

The commodities sector is a particular challenge for the achievement of the sustainable development goals (SDGs). Both large- and small-scale mining are assessed critically with regard to their social and ecological sustainability: The extraction of raw materials in regions with political conflict, child labour, tax avoidance and environmental pollution regularly have a high profile in global reporting.
Following the media hype on blockchain technologies, particularly around Bitcoin as a virtual, decentralised currency, countless stakeholders from politics, business and science are endeavouring to identify meaningful applications for blockchain and make innovative recommendations on the use of this technology for the future.

Three possible applications of blockchain have been analysed for the raw materials sector in this respect: (1) Licensing and contracts, (2) Company register and economic beneficiaries and (3) Commodity trading and supply chains. Most blockchain experiments are currently taking place in the latter area of “Commodity trading and supply chains”. This is because blockchain allows the entire supply chain of the commodity to be tracked, from the mine through to the end product. Even though supply chain details are not disclosed, the consumer can at least get an indication of the safety of the supply chain.

Opportunities and risks

In addition, ten general findings on opportunities and risks associated with the blockchain technology have been identified as part of the analysis of this sector, whose effect goes well beyond the specific application in the raw materials industry:

  • Blockchain makes processes transparent for outsiders – but can also have the opposite effect depending on the situation (e.g. access-restricted, private blockchains of industry consortia)
  • Many studies consider blockchain capable of solving problems such as environmental pollution and child labour, but do not consider the socio-economic and political context
  • Countless pilot projects exist, but virtually no scaled-up solutions
  • Studies, impact assessments and peer reviews (especially on the ecological footprint of blockchains) are currently not available
  • It is easier to switch to blockchain solutions if the information to be fed in is already available in digital form
  • Blockchains are only effective if all stakeholders understand the strengths and weaknesses of the technology
  • Overconfidence in individual blockchain providers increases the risk of a lock-in effect, that is to say an over-dependence by the customer on the provision of the blockchain by the provider. This is due to the fact that technical solutions like blockchain are often not available as open source
  • The presence or absence of intermediaries can have a positive or negative effect on the effectiveness of the blockchain depending on the application. As a result, the stakeholders need to be individually analysed for every project
  • Cross-sector research results on the previous and potential use of blockchain should be exchanged.
  • Blockchain technology is currently lacking basic structural guidelines, established procedures and open standards

Principles

This can be used to develop principles that can provide direction for the future use of blockchain solutions:

  • Transparent decision-making structures designed for all stakeholders involved must exist and be used to monitor blockchain solutions
  • All solutions must be reviewed from ethical perspectives
  • Solutions should be developed based on the problem and not based on the technology
  • The ecological costs should be weighed against the benefits of each blockchain project
  • Projects should tie in with and build on existing initiatives
  • Open standards and the interoperability of the blockchain should be taken into account for every project. Interoperability refers to the possible communication as well as combination of different blockchain technologies and applications. This is important to prevent technological lock-ins and long-term patent registrations of blockchain protocols.
  • The content and form of the data entered into the blockchain must be correct and precise, otherwise this technology has no added value (garbage in – garbage out)

It is not yet clear whether blockchain applications will help to achieve the SDGs in future. However, the principles laid down in the study can help to come to grips with this question in each specific case. When looking past the hype and the high expectations, it is worth realistically assessing the applications and challenges to develop sound recommendations for action.