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Blockchain was hyped for a long time. Now they're getting down to business

It's getting near time.

It's getting near time for all the talk of adopting blockchain's distributed ledger technology (DLT) in energy markets to transform itself into some real-life applications. That was an overriding theme at S&P Global Platts first-ever Digital Commodities Summit in London in mid-November, a packed-house event that will be followed by one in the US in March.

James Rilett, Platts director of innovation, kicked off a panel he moderated by saying: "The theme of today is how we move from proof of concepts to market reality."

Echoing Rilett …

Alistair Cross, the global chief operations officer of trading firm Mercuria, a partner in one of the most significant blockchain initiatives: "[This year] is about the proof of concept and 2018 is going to have to be about delivering some real platforms." J Robert "Bo" Collins, co-founder of Matrix Global and founder of Renovatio PR: "We need to develop a use case that becomes executable as a matter of everyday business. That is much more difficult to do than it is to say." Collins has had a long career as a commodities industry leader, including a stint as the president of the New York Mercantile Exchange.

With that as background, here were some of the highlights of the day:

--One of the biggest blockchain-related initiatives in the energy world recently got bigger. BP, Shell and Statoil announced earlier this month that they were joining a consortium that already included trading firm Mercuria and Dutch bank ING and others to bring DLT to the energy world. Mike Leonard, head of strategy for BP's integrated supply and trading division, said on a panel that despite news headlines that said the expanded consortium was targeted at "trading," it was actually what comes after the trade that was the focus of the initiative. "It's about the reliability of operations and it's about the costs," Leonard said. "We need to get better and more efficient. You can walk into back office operations and it feels like it's 1985."

This has been a common theme recently in discussions about DLT and "trading." The expectation is that trading on DLT — defined here as the placing of bid/offer numbers and the ability to transact on them — is still a long way off. DLT technology is either viewed as too slow to handle something like the volumes that course through the ICE or CME contracts every day, or is too small to bother with. But the reconciliation/settlement/back office activities that come after a trade remain stuck in a retro world, costing money and time. The view is that DLT, with its immutability and consensus capabilities, will drastically cut that. Leonard said a calendar for some sort of application coming out of the consortium is end-2018, as the group continues to go through the proof of concept process. "It's about creating a platform, and the idea is to bring that critical mass to bear on this problem," he said.

--Consortia looking to develop new applications harken back to the start of commodity exchanges in the mid 1800s. That’s the view of Craig Pirrong, professor of finance and energy markets director at the University of Houston. "The Chicago commodities exchanges started the same way, with very competitive adversarial people in the grain market realizing they had to come together to collaborate and standardize," he said. It’s different technology now, but the goal is the same.

--There is a segment of the DLT world that can best be described as "blockchain yes, Bitcoin no." Its high priest is Jamie Dimon, CEO of JPMorgan Chase, who has ripped cryptocurrencies mercilessly and said that if you're "stupid enough to buy it, you'll pay the price for it one day." Yet JPMorgan has undertaken significant DLT initiatives, including the development of its own platform, Quorum.

But a question in the development of permissioned (also known as private) ledgers is whether DLT, built to power Bitcoin, will work more efficiently if a cryptocurrency is at its heart, rather than what the industry refers to as fiat currencies: dollars, pounds, euros, etc.

Collins thinks it will, and said the industry needs to consider that. "What I think is extremely important is the conversation in 2018 is to talk about crypto assets as a settlement mechanism, including perhaps fiat currencies that get involved on blockchain," he said.

The "crypto is needed" argument has been heard elsewhere, and the type of back office speed that Leonard talked about seeking is one of the advantages that crypto has, according to its backers. DLT can settle transactions far quicker than the legacy systems in place now, but if fiat currencies are used, they will eventually run smack into the slow speed of the financial system. Cryptos can get around that; that's the theory. But some sort of robust interface with fiat currencies would be needed to make that vision work, because an energy company, at a certain point, is going to need convert cryptos to fiat.

Leonard was asked whether his group would look at crypto currencies. "We're experimenting like everyone else," he said. Cryptos are something "we haven't come to terms with." But he didn’t rule it out, though it’s easy to envision a cautious legal department at a major oil company reacting in horror to the idea of getting involved in Bitcoin or ether; maybe a cryptocurrency designed for a specific platform would bridge the gap.

Collins said the developer of a DLT platform that would have a settlement mechanism and exchange of value "regardless of what [the currency] is," will be as if "you have touched the holy grail."

--The basis for much of the increased speed by which trades would be settled on DLT is smart contracts. We wrote about smart contracts a few weeks ago, but it took a lawyer to bring some perspective on the rush to their adoption.

Smart contracts, according to John Salmon, a partner at Hogan Lovells, are "neither smart, nor contracts." But that doesn’t mean they don’t have value. They are "computer programs designed to implement an agreement." They can deal with all sorts of issues that constantly come up in contract disputes: "deliberate non-performance … third party interference … force majeure." "There is greater standardization and there is a greater chance of avoiding fraud," he said.

Still, as Salmon noted, lawyers love them … sort of: "they’re really good for other people." There are shortcomings: Salmon said it is likely that not all the terms will be in the smart contract, but they aren’t now either. "What about the correspondence between the two parties?" he said. "All of that is effectively the contract." But you can’t build that into the code behind a smart contract.

It isn’t a panacea, but it would still be a significant step forward, according to Salmon. "We will do these things better than we do now, but it will take planning," he said. "It needs governance. The use of blockchain will need to create clear governance rules."