Insight & Analysis

Blockchain LCs and what they can offer

Published: Feb 2020

Blockchain is continually heralded as the new technology that’s going to revolutionise treasury departments, trade finance, and the wider corporate world. But what are the need-to-knows: the challenges, the risks, and the benefits?

Chain with data on it, symbolising block chain

The concept of blockchain is no longer new to many in the trade space, but it’s still one that is yet to be fully utilised. For Carl Wegner, CEO of Contour, a blockchain-based trade finance platform backed by eight banks, the lack of uptake around technology in the trade finance space is surprising, considering the advances in electronic payments through platforms such as PayPal, for example.

But, he accepts, implementing these new technologies is difficult due to the different standards and regulations in various countries. “I was an advisor to a committee in the APEC region, and they announced that APEC was going have paperless trade in 2005. Then they announced it would be 2007, and then they gave up on it because it was just so hard to do.”

The current focus

Contour currently focuses on letters of credit (LCs) – documents renowned for their unwieldiness. Wegner explains that the majority of LCs are actually discrepant because there’s usually a change in orders – amendments – that can take two to seven days to process.

Within the current volatile geopolitical climate, various trade wars mean that more LCs are being issued. “People are sourcing from new companies, new factories, new manufacturers that they didn’t know before, and there’s this trust deficit, so LCs are a way to manage that, especially for smaller vendors.”

Using digital LCs that utilise blockchain could save time and money, as well as ensure there are no delays due to discrepancies – as amendments can be completed within an hour. Wegner notes that short distance shipments are incredibly fast now – but the LCs are not. “Imagine if you ordered a package, it came the next day but you can’t open it until someone mails you a letter that says you can. That’s what a LC is now for a short distance shipment,” he explains. These documents could easily be transferred electronically, so why isn’t it being done?

In an ideal world…

Wegner believes that the cheapest and easiest way to manage multiple parties sharing data is having one central database. With all parties in a trade or transaction having access to the same data, the paper-heavy processes would be redundant. The problem, he says, is that no one wants to do that.

Whilst technology might be the answer, it also creates more risk, and Wegner points out that central databases are hard for businesses to trust. “Competitors are not going to want to put all their data in a central database. From a nationalistic standpoint, what countries are going to let another country hold all its data? What if it gets hacked? What if someone else sees it? How can you trust a third-party firm to hold it? And how much insurance does that third party have if it gets hacked? How many billions of dollars are you going to get sued for?” As a result, central databases might be effective in theory, but they’re now an unlikely solution.

Security in blockchain

To combat the cyber-security issues of a centralised database, Wegner believes distributed ledger technology (DLT), of which blockchain is a form, holds the answers. To access a blockchain system and change something, a hacker would have to instantaneously access every user in the system and change the data at exactly the same time – something that’s virtually impossible.

A blockchain-based system also removes the risk of having a single point of failure. If you have a central database and it goes down, then what do you do? Blockchain, in contrast, works independently.

From the nationalistic standpoint, blockchain can also help. “It’s like an Excel spreadsheet that we can share the cells that relate to our transaction,” says Wegner. “It’s a ledger, but why should someone else see that if they’re not involved in our transaction? DLT or blockchain allows us to exchange the information that we need to see – share that corner of the Excel spreadsheet without sharing the whole thing.”

You don’t have to go all in

With such an abundance of solutions and platforms being offered to treasurers, some may feel the pressure to adopt one as soon as possible. This isn’t necessary. “A corporate treasurer can decide what type of business they want to upgrade first,” says Wegner. “If you’re going to update some software and move it onto a blockchain solution, it definitely doesn’t mean you have to change everything, because you can’t. This process is a journey, not everything is going to change overnight.”

Indeed, to be able to implement new solutions, one of the biggest challenges for internationally trading companies is that counterparties must also be able to access it. Additionally, it means getting the head of sales on board, because they’re the one dealing with the counterparty customer, and the CTO or CIO because on the technology side they have to buy into it and trust the technology. It may even require the buy-in of those who will use it every day.

Looking to the future

Once other documents and processes than just LCs are incorporated into blockchain-based systems, Wegner believes that both corporates and banks will be able to revolutionise all systems. Banks, for example, will be able to offer more services to customers, as a richer data set will be available to make a stronger risk judgement. “Credit risk is based on a small amount of data. If the banks have a bigger, more robust set of data, they can offer more products, maybe cheaper financing, and certainly more effective financing,” he says. “And that’s a whole new world that we can move into once we start building that ecosystem.”

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