Letter of Credit and blockchain technology in a Supply Chain

Abstract:

A letter of credit(LC) is also named a documentary credit(DC) in the globalized international trade.In recent times blockchain technology is utilized by banks regarding formulation of letter of credit. The ICC regulates the market practices (Documentary Credit 600) in this regard.These include the advising bank that will give the documentary credit to the beneficiary or their nominated bank and provide their nominated bank with any amendments to the letter of credit. A certain percentage of the letter of credit value retained by the bank for security purposes. Blockchain technology is available for the letter of credit procedure and trade finance is related to it. Commerce and international trade finance includes products such as issuing letter of credit, indemnifying Bills of Lading etc. Although the letter of credit was created in the old world methods managing the shipping of goods and related accommodations. But there is a great potential to supersede these paper processes with digitized operations utilizing blockchain technology.International trade requires a number of participants to interact with another i.e.,the exporters,importers, banks,shipping companies,port related entities  and customs.Trade finance in supply chain management(SCM) includes products such as lending, issuing letter of credit,factoring, export credit and indemnification.

Keywords: Supply  chain management(SCM), Bockchain technology, Letter of Credit,Export, Import etc.

 

Introduction:

Documentary credit is nothing but an instrument that helps globalized international trade. Sometimes it is used in the same country between different entities also.It entails a payment mechanism. A letter of credit is categorized in the financial law a form of simple document that guarantees derivatives and insurance. It allocates risk from one party to another. In recent times blockchain technology is used by banks regarding formulation of letter of credit. The emergence of integrative trade and global value chains over the past 20 years has changed the competitive landscape in international goods and services markets. They have worked hard with their logistic partners to reduce costs, accelerate delivery times, better manage risks and automate information flows.As a result, the management of materials and final goods takes place very efficiently today that allows the companies to procure with relative ease from suppliers located in multiple and distant markets. They have wrought strenuously with their logistics partners to reduce costs,expedite distribution times,better manage risks and automate information flows.This article aims at discussing various issues of a letter of credit which helps supply chain as a tool.

 

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Blockchain and letter of credit

 

Documentary Credit:

The Uniform Customs and Practice for Documentary Credits 600 (1997 Revision) regulates mundane market practices within the letter of credit related areas. It defines a number of terms cognate to letters of credit that categorize the sundry actors within any given transaction.These are crucial to understanding the role of financial institutions play within.These include the advising bank is the bank that will apprise the beneficiary or their nominated bank, and provide the beneficiary or their nominated bank with any amendments to the letter of credit.To make a letter of credit firstly, it is required to have an updated trade license.Moreover, audit report,Import registration certificate, Chamber House membership, Income tax certificate, Vat registration etc. are required. Before submission of these certificates to bank need to have LC application form,insurance cover note etc. The account holder bank will check all the documents  and confirm within a few days.Need to have certain percentage of the Letter of Credit value to the bank.

Blockchain can help:

Blockchain and letter of credit trade finance relates to the process of certain financing activities in areas of commerce and international trade. Financing includes products such as lending and issuing letters of credit, factoring export credit, indemnification of bills of lading that are old world methods of managing shipping of goods and accommodations. There is a potential to supersede these paper processes with digitized operations utilizing blockchain technology. Conducting international trade requires a number of participants to interact with each other such as exporters,banks,shipping companies,port related entities, and customs.

 

Reduced fraud:

 

A letter of credit usually involve some manual procedures and a possibility of documentary fraud exists. So that the process can be ineffective and extravagant. These challenges can be addressed utilizing blockchain technology.In a blockchain if we consider a typical international trade, we can see that the exporter,custom importer indemnification and importer bank each of them has representative nodes connected to a private blockchain which replicate transformational information as it occurs on the network at any given point and time the information ledger across all nodes is in sync.

 

Submission of docs:

In blockchain there is a genuine solution to initiate the contract. The exporter uploads the indispensable documents such as letter of credit, bill of lading and indemnification documents from the decentralized application.Exporter then submits the contract on the blockchain .Once the the exporter submits the the contract, a transaction is sent to blockchain. Transactions remain pending until the mining is consummated. A miner mines the transaction and integrates it to the blockchain. Once the transaction is prosperously integrated to blockchain a unique address is engendered where information is stored on the ledger. This engenders a unique tamper proof contract engendered by the exporter.The customs authenticates onto the decentralized application. After verifying the relative documents, custom officer approves the contract. The custom fee is processed on the blockchain.Importer authenticates in onto the decentralized application in case the goods are damaged, that is the scenario here. The importer upload the indemnification documents and proof of damage on blockchain insurer authenticated in onto the decentralized application.Insurer checks the indemnification documents and proof of damaged goods.

Conclusion:

From the above discussion it is almost clear that letter of credit is an inevitable tool of business.But when we use letter of credit in the old way, it is sometimes open to fraud and less dependable. Blockchain technology can help us in this regard to make this tool of business and supply chain more dependable.HSBC and some other international banks already started to use this technology in handling documentary credit. It is a good news for the international business community and supply chain managers also.

 

References:

1.Lamourex,J-F.,& Evans,T.(2011).Supply Chain Finance:A new means to Support the Competitiveness and Resilience of Global Value Chains.SSRN Electronic Journal,289-312.https://doi.org/10.2139/ssrn.2179944

2.He,X.,& Tang,L.(2012).Exploration on Building of of Visualization Platform to Innovate Business Operation Pattern of Supply Chain Finance.Physics Procedia,33,1886-1893. https://doi.org/10.1016/j.phpro.2012.05.298

 

 

 

 

 

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