### Exploring the Intersection of Letters of Credit and Blockchain Technology

#### Abstract

A Letter of Credit (LC), also known as a Documentary Credit (DC), is a vital financial instrument in international trade. Recently, banks have begun leveraging blockchain technology to enhance the efficiency and security of LC processes. Governed by the International Chamber of Commerce (ICC) under the Documentary Credit 600 guidelines, LCs involve multiple parties, including advising banks, beneficiaries, and nominated banks. These institutions play a pivotal role in ensuring the smooth execution of trade transactions. Traditionally, LCs have relied on paper-based processes, but blockchain technology offers the potential to digitize and streamline these operations. This innovation is particularly relevant in global trade, which involves exporters, importers, banks, shipping companies, and customs authorities. By integrating blockchain into LC procedures, international trade can become safer, more transparent, and more efficient.

**Keywords:** Letter of Credit, Blockchain Technology, Trade Finance, Supply Chain Management.

—

#### Introduction

Documentary Credit, commonly referred to as a Letter of Credit, is a financial tool that facilitates global trade by ensuring payment security between buyers and sellers. While traditionally used in international transactions, LCs are sometimes employed domestically as well. Classified under financial law as a simple document guaranteeing derivatives and insurance, LCs help allocate risk between parties. In recent years, blockchain technology has emerged as a transformative force in LC processes. The rise of global value chains and integrative trade over the past two decades has reshaped the competitive landscape, prompting businesses to seek cost reductions, faster delivery times, and improved risk management. This article explores the synergy between LCs and blockchain technology, highlighting their role in enhancing supply chain operations.

—

#### Documentary Credit: An Overview

The Uniform Customs and Practice for Documentary Credits 600 (UCP 600) provides standardized guidelines for LC-related transactions. These rules define the roles of various stakeholders, such as advising banks, which notify beneficiaries of LC terms and amendments. To initiate an LC, businesses must provide documents like trade licenses, import registration certificates, income tax certificates, and insurance cover notes. Banks verify these documents and require a percentage of the LC value as security. While traditional LCs have been effective, integrating blockchain technology offers a significant opportunity to modernize and secure international trade processes.

—

#### The Role of Blockchain in Trade Finance

Blockchain technology is revolutionizing trade finance by digitizing processes like issuing LCs, indemnifying Bills of Lading, and managing export credit. These traditionally paper-based methods can now be replaced with blockchain-enabled operations, which offer greater transparency and efficiency. In international trade, multiple participants—including exporters, importers, banks, and customs authorities—must interact seamlessly. Blockchain facilitates this by creating a decentralized, tamper-proof ledger that records all transactions in real time. This innovation minimizes delays, reduces errors, and enhances trust among stakeholders.

—

#### Reducing Fraud with Blockchain

Traditional LC processes often involve manual procedures, which can be prone to errors and fraud. Blockchain addresses these vulnerabilities by providing a secure, transparent platform for recording transactions. In a typical international trade scenario, blockchain connects all parties—exporters, importers, banks, and customs—via a private network. This ensures that all transaction data is synchronized and tamper-proof, significantly reducing the risk of documentary fraud.

—

#### Streamlining Document Submission

Blockchain simplifies the submission and verification of trade documents. Exporters can upload essential documents, such as LCs and Bills of Lading, to a decentralized application. Once submitted, these documents are stored on the blockchain, where they are verified by customs and other relevant authorities. The process is secure, transparent, and efficient, with transactions being validated through blockchain mining. This creates a unique, tamper-proof record of the contract, ensuring accountability at every stage of the trade process.

—

#### Emerging Trends in Contract Management

The integration of blockchain into LC processes is part of a broader trend toward automation and digitization in contract management. Smart contracts, which execute automatically when predefined conditions are met, offer enhanced efficiency and transparency. Additionally, cloud-based platforms enable centralized storage of important documents, further streamlining operations. These advancements are transforming contract management, making it more efficient and reliable than ever before.

—

#### HSBC’s Blockchain Experience in Bangladesh

HSBC Bangladesh has pioneered the use of blockchain technology in LC transactions, marking a significant milestone in the country’s trade finance sector. According to Md Mahbub-ur Rahman, CEO of HSBC Bangladesh, blockchain offers unparalleled transparency, security, and speed. The bank successfully completed Bangladesh’s first cross-border blockchain trade finance transaction, reducing processing time from 5–10 days to under 24 hours. This achievement highlights the potential of blockchain to revolutionize international trade.

—

#### Conclusion

Letters of Credit remain indispensable tools in global trade, but traditional methods are increasingly being replaced by blockchain-enabled solutions. Blockchain technology enhances the reliability, security, and efficiency of LC processes, addressing longstanding issues like fraud and inefficiency