I recently had the opportunity to talk with Ms. Frances Dean, VP Operations & Corporate Services, and other senior members of the VAKT team. VAKT is a ‘blockchain initiative’ formed via a consortium of oil companies and banks (BP, Gunvor, ABN-AMRO, Equinor, Koch, ING, Shell, Mercuria and Societe Generale) focused on solutions for post-trade processing. It describes itself as “.. a digital ecosystem for physical post-trade processing. Leveraging blockchain technologies, it is a single source of the truth for the trade lifecycle. It will eliminate reconciliation and paper-based processes, enhance efficiency and create new trade finance opportunities. “Recently, the platform went live for the physically traded BFOET crude oil business and is perhaps the world’s first fully operational, enterprise-grade blockchain platform to enter the market.
While most blockchain initiatives are still very much in a POC mode, VAKT is actually being used by its customers. “VAKT is 6-9 months past the POC phase and has taken things to the next level,” I was told.
VAKT was formed to solve specific industry problems and has worked to identify shared problems with its members where technology might be applied to help resolve these issues. It quickly identified the physical post-trade lifecycle as an area where shared ledger technology could be deployed to help to solve issues around data quality and reduce disputes between counterparties. “A shared ledger allows this as you and the counterparty agree on the trade data through the lifecycle of that trade. It is being verified through that lifecycle so that both parties can keep a clean set of trade data and invoicing becomes a non-issue as both parties agreed and verified that data every step of the way.” The blockchain component of the solution allows encrypted, protected data sharing between the counterparties to a trade only on their own nodes.
VAKT is very keen to establish that it is NOT a blockchain company. Rather, it is focused on problem-solving in the energy space where a more traditional approach, such as a third-party service provider, might have difficulties due to the need to share key and sensitive data with it.
The Consortium Model
VAKT also sees the way that it set up the consortium as being key to its success. “We have to get companies that perhaps don’t trust each other to agree to a governance structure.” In fact, this is often cited as a key issue in the deployment of blockchain as, being de-centralized, it does require governance, which can be notoriously difficult to achieve. “VAKT is building a platform for the industry to adopt – and it is absolutely committed to being inclusive of all players in the market as customers because the solution won’t work without them. We have come together as a consortium to provide an industry solution – not starting from the place of trying to sell a technology. We will have a Customer Advisory Board forming in January and that will be a forum for all customers and a channel for feedback from those who wish to be potential customers will also be provided.”
The current solution focuses in on the trade lifecycle after the transaction date through to invoicing. It is not a trading platform nor an ETRM replacement in that trades are still entered into the ETRM and final settlement is also done by the legacy systems in place. Currently, the interface with ETRMs is one-way, but the plan calls for this to become a bi-directional API eventually.
The shared ledger aspect of the solution allows everything to be managed through the post-trade lifecycle so that counterparties can verify in real-time, the details of the trade. Using keys that can be provided to third-parties, a variety of trade data enrichment is also enabled such as inspection and quality data, for example. VAKT believe that the solution will change the dynamics of trade finance as the bank can also confirm that the counterparties agree, that the transaction data is valid and the ability for fraud is more or less eliminated.
VAKT does not see itself as competing in the ETRM space as most companies have invested heavily into their ETRM solutions which anyway cover a much broader set of functionalities including risk management, PnL and so on. Ultimately, bidirectional communication will mean that the data in the ETRMs is more accurate and timelier, while traders will know that all the data is matched and verified and is therefore accurate.
The solution is more than just the blockchain but critically, around 20% of the solution relies on the blockchain. The remainder utilizes standard modern technologies like JAVA and so on. However, it is the blockchain component that provides the key part of the solution in that it allows peer-to-peer communication and transactions that are secure and private. Every participant has their own pod protected in numerous ways that they use.
The reaction to VAKT has been impressive with over 50 companies inquiring after the initial press announcement. “We are now at a stage where we have a real product and the industry can see the functionality and so the focus is on signing customers up to gain critical mass for this (North Sea) market. The November go-live was for the original founders and we anticipate a broader January 2019 go-live for the broader market.” VAKT is not stopping there either, it has kicked off workshops for other markets even including the US crude pipeline market as it is “created by the industry for the industry”. It is also looking at the Amsterdam-Rotterdam-Antwerp barge market. “The model can be replicated across other commodities globally,” I was told as there had been interest already from non-energy entities.
We will be following the VAKT initiative with interest. It certainly has a compelling value proposition and some industry heavyweights behind it. It also has undeniable first mover advantage. From our perspective, it also is utilizing technology to solve industry problems as opposed to flouting a technology looking for a problem to solve. It is beyond the hype.