Blockchain enables exporters, importers and their respective banks to share information on a private distributed ledger. The trade deal can then be executed automatically through a series of digital smart contracts. The parties involved in the transaction can visualise data in real time on their devices and see the next actions to be performed.
Letter of Credit
Blockchain enables exporters, importers and their respective banks to share information on a private distributed ledger. The trade deal can then be executed automatically through a series of digital smart contracts – contracts written in computer code that can be executed automatically once certain conditions are satisfied. The parties involved in the transaction can visualise data in real time on their devices and see the next actions to be performed.
Application of blockchain to Letter of Credit
Smart contracts running on distributed ledger technology, which provides a single, immutable record of a trade verified by all parties, are seen as a key innovation in the trade finance space, with an increasing number of banks looking into real-world applications.
Using blockchain technology can help streamline the manual processing of import/export documentation, improve security by reducing errors, make companies’ working capital more predictable and increase convenience for all parties through mobile interaction.
The seven steps to a blockchain-based Letter of Credit (LC) transaction:
1: The importer creates an LC application for the importer bank to review and stores it on the blockchain.
2: The importer bank receives notification to review the LC and can approve or reject it based on the data provided. Once checked and approved, access is then provided to the exporter bank automatically for approval.
3: The exporter bank approves or rejects the LC. If approved, the exporter is able to view the LC requirements and is prompted to view through the application.
4: The exporter completes the shipment, adds invoice and export application data and attaches a photo image of any other required documents. Once validated, these documents are stored on the blockchain.
5: The documents are viewed by the exporter bank, which approves or rejects the application.
6: The importer bank reviews the data and images against the LC requirements, marking any discrepancies for review by the importer. When approved, the LC goes straight to completed status or is sent to the importer for settlement.
7: If required due to a discrepancy, the importer can review the export documents and approve or reject them.