The Great Unwinding: Why Commodity Finance Is Ripe for Reinvention

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From Basel Halls to Blockchain Rails

A decade ago, I was structuring barrels-for-dollars trades for traders in Geneva and Singapore. The engine was humming: global banks dominated commodity finance, credit lines were predictable, and relationships were currency. Fast forward to 2025, and the terrain has fractured—systemically.

Traditional banks are in retreat. Liquidity is tightening. Risk costs are climbing. And in the vacuum, a fragmented web of private credit, asset-backed structures, and decentralised protocols is emerging to finance the flow of global commodities.

If you're working in a trading house, a midstream operator, or a national oil company—you’re already navigating the cracks. Here’s what’s really shifting.

A System Built by Banks, Now Left by Them

Commodity trade finance (CTF) was historically architected around the scale, balance sheets, and compliance functions of banks:

• Payments: Settlements were centralised through correspondent banking networks

• Financing: Credit lines were structured bilaterally or via syndicates

• Hedging: Managed via exchange-cleared derivatives or bank OTC desks

• Documentation: Paper-based workflows spanned LC issuers, insurers, and inspectors

The system was robust, but deeply manual—requiring armies of operations staff and a trust-based, relationship-driven ethos. It was global, but not real-time. Complex, but not intelligent.

And it’s precisely this infrastructure that is now breaking down.

The Bank Exodus Is Structural, Not Cyclical

Banks aren’t stepping back because of a bad year—they’re pivoting away from the sector entirely:

• Capital pressure under Basel III & IV has made RWAs on trade books unattractive

• Reputational risks tied to fossil fuels are intensifying under ESG scrutiny

• Operational friction has increased under tightening sanctions and compliance regimes

In 2024, top-tier banks halved their exposure to certain energy credit lines ([Reuters, Dec 2024]). Commodity finance volumes may still reach ~$150 billion globally (Author estimate), but access is becoming exclusive. The rest? Priced out—or left behind.

Operational Workflows: Archaic, Despite Digital Lipstick

Despite attempts at digitisation, core CTF workflows remain antiquated. Platforms like Komgo and VAKT have introduced useful automation layers—digital LCs, tokenised documents—but the underlying business processes remain unchanged.

• Komgo digitises documents, but still mirrors legacy LC flows

• VAKT focuses on post-trade reconciliation, but stops short of financing transformation

What we need isn’t just automation—it’s re-architecture:

• Replace trust-based intermediaries with trust-minimised code

• Replace manual document reconciliation with programmable logic

• Replace dated workflows with composable, interoperable protocols

This is the shift from digitisation to transformation.

Trading Houses Turn to Alternative Financing

Traders are resourceful by nature. As banks scaled back, firms like Trafigura, Vitol, and Mercuria turned to private lenders and securitised structures.

In many ways, they’ve become financial engineers, not just commodity movers:

• Private credit funds are now structuring multi-year deals backed by receivables, inventories, and even future production flows

• Securitisation of oil and gas cash flows is increasingly common—offering non-dilutive liquidity for trading books

• Alternative collateral like storage assets and offtake contracts is replacing traditional reserve-based lending models

But make no mistake: this capital is expensive, and due diligence is ruthless.

The Rise—and Risk—of Private Credit

Private lenders are thriving in the oil financing vacuum. What used to be the domain of energy desks at banks is now increasingly intermediated by funds that once focused on direct lending, real estate, or distressed debt.

The result is a highly bespoke, non-transparent ecosystem—where pricing is tight, but the margin for error is thinner still.

New strengths include:

• Faster structuring cycles

• Greater risk tolerance

• Innovative financing instruments

But new weaknesses emerge:

• Concentration of risk in illiquid, opaque vehicles

• Limited regulatory oversight

• Higher default sensitivity as oil prices fluctuate

It’s not a question of if this model will face stress—it’s when.

Enter Programmable Finance

This is where DeFi and on-chain finance offer a break in the pattern—not as a one-for-one substitute, but as a reengineering of the value chain.

Function	Traditional CTF (Banks)	Existing Blockchain Initiatives	New Blockchain Frontier
Payments	SWIFT / Correspondent Banks	Digitised workflows, traditional payments	Peer-to-peer stablecoin instant settlements
Financing	RBLs, syndicates, bank debt	Digital onboarding, traditional financing	Tokenised, collateralized credit pools
Hedging	CME + bank OTC desks	N/A	Stablecoin-settled derivatives
Documentation	Paper + PDFs	Digitised PDFs	Smart contracts

This isn’t about replacing banks. It’s about redesigning around the next logic of trust: programmable, composable, secure, and globally accessible.

The Bigger Picture: Fragmentation and Complexity

Add to this the macro trends:

• The IEA forecasts a 6% decline in oil sector investment in 2025 [IEA, Apr 2025]

• $2.2 trillion of the $3.3 trillion in global energy capital is now flowing into clean technologies (Author estimate)

Commodity companies are now caught between a retreating banking sector and a fragmented alternative capital landscape. The complexity of financing deals has increased, with multi-tranche debt, layered risk waterfalls, and hybrid instruments becoming the norm.

Risk managers must now master not just commodity volatility, but financial product engineering.

What Comes Next

Here’s where DeFi and on-chain capital markets can make a difference.

No, I don’t believe a protocol will replace JPMorgan next year. But the convergence of blockchain infrastructure, asset tokenisation, and on-chain collateralisation offers real promise:

• Real-time, cross-border settlement

• Transparent risk pricing

• Automated compliance and auditability

• Lower friction for SME commodity players

If you’re in a trading house or midstream company, now is the time to start experimenting on the edge. Not replacing, but complementing.

Traders have already begun using blockchain to address the boring stuff—document tracking, smart LCs, trade reconciliation. It's time to move upstream.

Final Thought: Rewriting the Rails

Commodity finance isn’t dying—it’s decentralising.

What’s needed now isn’t another layer of digitised bureaucracy. It’s a fundamental reimagining of how commodities are priced, moved, and financed—from the ground up.

As someone who’s worked both sides—inside a global bank, and now building decentralised infrastructure—I believe:

• The new commodity finance paradigm will be programmable

• The next frontier won’t be automated—it will be rearchitected

• Smart contracts won’t just support the trade—they’ll become the trade

If you’re operating in this space, let’s connect. Because the future of commodity finance won’t be written in spreadsheets—it will be encoded in smart contracts.

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