Effective Methods to Improve Transparency in Commodity Market

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By K Ashwin Mobile: 09920183006 Email:indianshowbusiness@gmail.com

Commodity trading in India is as old as the Indian civilisation itself. For centuries India has being a destination for traders from all over the world who would come to India to conduct trade and commerce with Indian traders selling textiles, spices, teas, precious stones etc.

 

What is Commodity Market?

The Commodity Market is a marketplace wherein individual trade in commodities. It can be terms similar to the equity market, but traders buy and sell commodities instead of shares.

 

The Indian commodity market has revolved several times in the last few centuries and has transformed into a sophisticated electronic platform from its original roots of the barter system of commodity trading.

The different type of commodities sold on the commodities market is precious and basic metals, agriculture-based products, energy, live-stock etc.

 

Segments of the Indian Commodities Market?

The commodity market in India is divided into two parts, i.e. the OTC or Over the Counter market and Exchange-based market.

The OTC market is spot markets and is utilised in trading of the specific commodity which is grown or processed locally whereas exchanged based commodity market are derivative markets which function similarly to the equity derivative market.

 

Problems with Commodities Markets in India?

The OTC commodities market consist of the majority of the commodity trading in India, which is commodity market being the least regulated is far behind when it comes to adopting any form of innovation and revolutionary technology. Due to a series of unregulated geographic locations wherein these commodities are produced, stored, processed, shipped etc., many commodities have escaped various forms of regulatory scrutiny faced by the financial markets. For instance, commodities such as metals, oil, coffee etc. involve multiple shipments at different stages, i.e. from mine/farm to smelter/refinery to the market. These shipments can be involved in various modes of transportation, warehousing, processing, and the ownership of the commodity can change hands multiple times during this process.

Most OTC commodities market are regional in nature, and hence each market has its own informal rules and regulations, at this moment different OTC commodity markets have different rules of functioning and at this moment lacks standardisation across the nation.

Also, the OTC lacks access to banking finance due to its unregulated nature. A large proportion of trade undertaken at various OTC commodities market across India are done on the basis of verbal commitments, and minimal paperwork and also transactions are done in cash without using any banking channels. Due to such unregulated nature and opaque nature of the OTC commodities markets, these markets are often devoid of finance from banks and other financial institutions.

How to Improve Transparency in the Indian Commodities Market?

Although India has its electronic commodities market, over 97% of commodities trade takes place in the OTC commodities markets which lack standardisation, are highly unregulated and have opaque structures. A wave of transparency can be bought in the Indian commodities markets by merging both electronic commodities market, and the OTC commodities and these markets can be merged with the aid of the blockchain technology.

What is Blockchain?

The Blockchain Technology is a decentralised database which stores a ledger of assets and transactions across its peer-to-peer network and utilises its system to authenticate transactions. The transaction is stored and recorded in such a manner wherein the records cannot be changed or altered, and transactions can be monitored, enforced and verified without the use of an intermediary or a central authority.

How Can Blockchain Technology add transparency to the Indian Commodities Market?

The blockchain technology can offer a secure accounting channel for all financial transactions. The technology was developed to address the vulnerability of centrally stored data. The blockchain technology has already being implemented in one of the most traded and liquid commodities, i.e. gold, allowing traders and investors to own physical gold in their digital wallets as a digital asset. This digital gold can be easily transferred between digital wallets and can be bought, sold and traded in its digital form. Even though, gold having multiple products for trading such as futures, options, spots, indices, ETPs, physical gold etc., the blockchain technology can bring all forms of market participants, i.e. traders, investors, miners, financial institutions, refiners, retail sector etc. on a single platform.

Presently, financial transactions are recorded in accounting entries and ledgers, which are then transferred either to an accounting spreadsheet or accounting software and stored on a computer. These systems are not always secure hence can be risky as these data can be tampered with, deleted, stolen etc. The distributed ledgers of the blockchain technology provide a solution for this issue. All forms of data are stored in blocks on multiple systems across the network in different locations instead of a central database or server. Hence, can change on the data will be reflected across the entire system can be easily spotted.

One of the key advantages of the digital distributed ledger duplication is its security function. The cryptographic proof lock within the perpetuity chain of the transaction order eliminates any form of dispute about the sequence of events. The verification and validation in blockchain are done with the maximum transparency while ensuring consensus. As it is not central intermediately, everyone within a network enjoys equal stature.

The Blockchain technology can enable commodity traders to overcome traditional market barriers while ensuring timely settlement, expediting allocation of capital and providing proof of collateral.

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