Potential applications of blockchain technology in international trade finance: Case of documentary letters of credit (L/C)

Abstract

This paper explores the application of Blockchain technology in International Trade Finance, with a specific focus on Letters of Credit (L/C), a payment instrument dating back to 3000 B.C. Despite its long history, the L/C process has seen minimal technological innovation, leading to inefficiencies such as high transaction costs, payment and delivery uncertainties, and security concerns. These inefficiencies hinder the smooth functioning of international trade. The study argues that even marginal improvements in these areas could yield significant benefits for trade finance, participants, and consumers. The research begins by outlining the historical evolution of the L/C, its process steps, and its current inefficiencies. It then proposes a series of Blockchain-based applications capable of addressing these inefficiencies. The primary contribution of this paper is a comprehensive set of Blockchain solutions designed to mitigate or eliminate the existing challenges associated with Letters of Credit, thereby enhancing the efficiency and security of international trade finance.