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The low hanging fruit in international trade that blockchain developers have identified as suitable for modernisation is the documentary credit. However, even this highly inefficient area of international trade has not proved easy to change. Although the first proof of concept blockchain LC transaction took place in September 2016 and internationally agreed rules for electronic documentary presentation have existed for over 15 years, the reality is that in 2018 the vast majority of all LC transactions are still executed using paper. However, despite every effort, establishing a globally accepted digital alternative to the paper bill of lading has proved a very difficult proposition. The governing UK statute dates back to 1885 and a range of different uncoordinated electronic solutions have been tested – some on a commercial scale. The problem has been caused by a mix of (a) a lack of political will globally to introduce legislation into a constantly evolving and highly technical sector and (b) the difficulty in persuading a majority of the world’s traders, banks and governmental agencies to agree a common legal approach. Investors, including trade stakeholders have committed money in various directions, unsure which, if any, system might succeed. Solutions providers have often been reluctant to share with competitors’ their standards and technology which they feel embodies their USP. An additional peril facing participants in international trade is that despite contractual agreement that certain processes will be followed through during the performance of a contract, which might include the service of notices or the formal transfer of title, parties either choose not to or simply fail for operational reasons to do what was agreed. Disputes often arise and are an additional unwanted cost - ultimately passed on to the consumer. If some, at least, of those processes could be automated that would likely save significant time and money. “An additional peril facing participants in international trade is that despite contractual agreement that certain processes will be followed through during the performance of a contract, which might include the service of notices or the formal transfer of title, parties either choose not to or simply fail for operational reasons to do what was agreed.”
The potential gains from the introduction of effective technologies are therefore many. Cost efficiencies, compliance, accounting, speed of settlement, reduction of operational risk and default of performance, increased security and avoidance of fraud and standardisation of contract terms are all benefits achievable by digitization. In letters of credit, just one discrepancy in a paper document can cause a letter of credit not to pay. That still occurs in well over 50 % of LC transactions. The appearance of blockchain or distributed ledger technology has therefore raised hopes that a more lasting and global breakthrough might be achieved, and there have been numerous projects taken through to proof of concept stage. Document checking and the “5 day” rule for inspecting documents could become a thing of the past if the market embraces automation fully. An automated process that could address some or all of those issues should have significant value and support. In a current paper LC transaction, the paper trail fulfils that function, but often imperfectly and not without the potential risk of fraud. The blockchain verified information could, in addition, automatically trigger the performance of a “smart contract” – a pre-loaded and coded application which can then electronically deliver either a physical contractual step – such as the issuance or activation of a contract - or the issuance or satisfaction by payment of a payment instrument, such as a letter of credit. In the performance of contracts generally, parts of the process ought to follow automatically once conditions precedents have been met. Introducing automation of such steps need not be controversial. Blockchain driven solutions can in fact do as much or as little as the parties want them to, depending on the goal to be achieved and is more likely to take hold if the goals set for it are realistic ones. With such evident advantages, why hasn’t this solution for trade and trade finance met with success before now? The reasons are multiple but not all that surprising: 1. The introduction of a technology which has the effect of further “commoditizing” a business under some pressure can frighten some participants. Will the introduction of a disruptive technology such as blockchain expose the parties to greater risk of loss and/or lack of control. Some parties enjoy the ability/flexibility to stray off the contractual path when the opportunity presents itself – particularly where the path of contractual performance can be affected by events outside the parties’ immediate control such as weather, strikes etc. 2. The regulatory piece in international trade requires individual responsibility for certain compliance risks. Delegating some of these functions to a machine won’t entirely shift that risk. With or without Brexit, compliance is here to stay and blockchain solutions
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