By Anoushka Rayner, head of Growth Commodities, Paxos

It would take a brave, and some might say foolish, commodities-focused financial institution to announce that it will convert to blockchain tomorrow. More than five years since the Australian Securities Exchange (ASX) stated it would re-platform with blockchain, little progress has been made. When you take into context that most commodities trading firms still do not have automated confirmations, we must chart a journey to tokenisation and not make commitments to shift the market overnight. It’s clear as day that ASX members were not ready for the shift as this would fundamentally disrupt their operational processes and controls. However, if members are not ready for the impact of blockchain transformation, then the market will stagnate and eventually become obsolete.

Commodities need to take a step-by-step approach. The first step is to start finding ways to increase efficiencies and common standards for commodities settlement – much in the same way that the foreign exchange (FX) market did two decades ago. Traditionally, FX was a bi-lateral world where all market participants netted gross with each other. Then, the Continuous Linked Settlement (CLS) group introduced a central settlement model with net settlement by collecting everyone’s assets and holding them until settlement occurred. Part of the driving force that helped CLS succeed was the appetite to reduce counterparty risk, and the ability to partner with central banks to offer a secure mechanism to settled bi-lateral trades. But as efficient as CLS is, it is only as strong as its network.

So how can commodities take its first step? By replicating the success of other markets and creating a similar model – which involves bridging both the cash and asset settlement networks, as well as collecting settlement obligations in a trustworthy way before creating safe settlement for the market. In doing so, credit risk is reduced, and capital efficiencies can be realised and new market participants can enter. Only with these foundations in place can the real innovation be added on top – including the ability to settle with all counterparties in the same way and not be solely reliant on a network effect.

Commodities market participants need to be realistic. Tokenising all their commodities and putting them on-chain is unlikely to happen overnight. Therefore, the industry must demand more from its service providers today and start the journey to upgrade. The aforementioned ASX experience demonstrates why, instead of trying to shift the entire commodities market to blockchain tomorrow, a more gradual and pragmatic shift is achievable. By using technology providers that can service both traditional and tokenised assets, everyone's journey will be easier.