For all the high-tech wizardry of modern financial markets, there’s one corner of the commodity world that still depends almost entirely on printed paper – making it an easy target for crooks.
Buyers and sellers of base metals such as copper, aluminum and nickel use documents known as warehouse receipts to prove every pound involved in a transaction exists, and who owns it. The receipts, from a long list of issuers who often stamp them with holograms and secret codes, have become the linchpin of bank loans backed by the metal as collateral.
But like most pieces of paper, warehouse receipts can be faked, and there are signs that more lenders are being ripped off by crooks exploiting weaknesses in what commodity businesses refer to as “trade financing”. For the second time since 2014, some banks are facing multimillion-dollar losses after being tricked into making loans secured by goods that didn’t exist.
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There are signs that the industry is moving towards a distributed database known as a blockchain that would improve the way ownership is verified. In March, Natixis teamed up with commodity trader Trafigura BV and information technology developer IBM Corp to set up a system backed by a digital ledger. The platform would be open to all users, and any attempt to alter an invoice or use a document more than once would be obvious to all participants.