United Bank Africa

Blockchain Can Revolutionize Commodity Trading In Africa

By: Femi Royal

With more than 60% of its 1.2 billion people living in rural areas, Africa’s economy is inherently dependent on agriculture. More than 32% of the continent’s Gross Domestic Product come from the sector (Otavio, 2017), yet it remains challenging to export these products in emerging markets, especially due to inconsistency in exchange rate, lack of trust in the exchange system and reliance on paper-based processes. However, thanks to the advent of blockchain technology, it seems like new solutions are within reach.

This piece is designed to explore commodity trading in emerging markets and how blockchain technology will revolutionize it using Binkabi as a case study.
Agricultural commodities such as grains, cocoa, coffee, diary, livestock products, and latex are a source of food for people and feedstock for industry. The trading of these commodities in emerging markets is driven by the economic principle of supply and demand.

Unfortunately, the agriculture sector of some emerging markets is plagued with a number of challenges across the food value chain, especially the supply chain. These challenges include but are not limited to low farm productivity, food loss, poor financial and market infrastructure, lack of coordination and cooperation among supply chain actors and low legal enforcement in emerging markets. I am convinced that Binkabi’s innovation will salvage this critical challenges on a broader scale.

It is interesting to note that Binkabi is building a network of commodity producers (e.g. farmers), consumers (processors), traders (big and small), investors (institutional and individual), third-party service providers, financial services providers and authorities in this commodity economy with a mandate to achieve decentralized commodity trading for emerging markets by designing a Barter Block™ that enables direct, secure and cost-effective physical commodity trading — all the while leveraging the power of blockchain technology.

Peculiar challenges in the supply chain areexpected to be addressed sustainably by Binkabi. One such challenge is lack of trust in cross-border trading, which in turn creates the need for middlemen who end up absorbing a significant portion of the overall trade value. Binkabi will utilize a public blockchain to ensure the implementation of transparent, secure, fast and cost-effective transactions.

Another such challenge is the dependency on USD as a settlement currency between countries with their own currencies. Currently, over 75% of world trade is settled in either USD or EUR even though only 15% of countries use those currencies as their primary legal tender. This results in significant leakages of value through FX conversions on both sides of the trade. Binkabi’s Barter Block™ will transform physical commodity trading by providing a solution for direct, digital and secure trade with reduced reliance on USD.

Yet another challenge is the high cost of financing. Isn’t it interesting that there is 20%+ interest rates accompanying lending in the agriculture sector while there is the supply chain financing gap of $1.9 trillion around the world. This gap has to be bridged and a better way out is to explore commodity financing using AI-enabled marketplace to connect supply chain actors and finance providers for a range of products on a peer-to-peer basis. This will combat the challenge of funding and loans to commodity producers and SMEs along the supply chain.

I have also observed that commodity prices have been on a downturn trajectory since 2011, with commodity producers often bearing the brunt of any commodity price shocks. When coffee prices decrease, for example, consumers in the West don’t pay less for their favourite coffee drinks but farmers in developing countries receive less for their coffee beans. There is no way to hedge commodity price risks especially for producers in poorer emerging countries such as those in Africa. Commodity hedging through smart contract-based forwards and option contracts that allow peer-to-peer hedging without a centralised exchange will deal sustainably with this challenge. This is yet another issue that Binkabi’s token will resolve. This is one reason I am excited to explore the potentials of this initiative.

Another reason I can’t wait to explore the Barter Block™ is that it will reduce the reliance on paper-based processes that are prone to errors and fraud, especially because the blockchain ledger is immutable and can help to digitise and simplify trade processes and transactions thereby saving time and cost.

I have been able to highlight the key issues that bother supply chain actors in emerging markets and how Binkabi’s innovation will provide solutions to each, while not forgetting that Binkabi’s vision as emphasized in their whitepaper is to empower the Binkabi commodity network to be fairer and more profitable through collaborative efforts of its members leveraging blockchain technology.

If you are a key actor in the supply chain network, this is for you! Take a further step to join the Telegram group (t.me/binkabi_io) to interact with the system drivers and get immediate answers to your questions.

Femi Royal is the Founder, Africa’s Agrictech Enterprise, myfarmbase.com.ng which is using tech tools to promote food security.