How edeXa brings more security and transparency to international trade
In times of maximum globalization, the letter of credit is regularly used by companies to carry out international purchases and sales. It is considered to be a very reliable payment instrument as it minimizes the risk with new trading partners. However, this minimized risk also has its price – not only in the form of monetary issues, but also some circumstances and (too) many different parties involved.
A letter of credit is a commitment by a bank to provide a standard banking service, such as payment or invoice, to a third party for a client’s account, usually with the participation of another bank, subject to the fulfilment of certain conditions and within a certain period of time. Through this trading instrument, the seller has the certainty that the payment for the delivery of the goods will take place. The buyer, on the other hand, can be sure that the delivery of the goods and the payment will only take place if the entire contractual agreement is adhered to. The letter of credit process is explained below:
An importer and exporter conclude a business contract (1). The financial agreement is summarised in an invoice, stating the quantity, delivery date and price (2). The importer forwards the financial agreement to his bank for verification (3). The bank contacts a correspondent bank (4), which in turn establishes contact with the exporter (5). The export bank hands over the financing data (6) to the exporter and the exporter can start sending the goods (7). An external company checks the invoice and the goods for conformity (8). The goods are transported from country A to country B and inspected by the relevant customs authorities (9). Finally, the goods are handed over to the importer (10) and the import bank initiates payment to the export bank via a correspondent bank (11, 12).
It is now obvious that such an 11-step process also entails some transaction costs and requires a minimum of seven to ten working days. Blockchain technology can use smart contracts to reduce the process to a fraction of the time and cost. All documents can be displayed using a Smart Contract and can therefore be accessed by all participating parties at the same time. The importer and exporter sign the documents digitally and as soon as the importer receives the goods in the agreed form, he releases payment at the push of a button. The longest step in this process is the delivery itself, the remaining steps can theoretically be completed within a few hours. This saves both the banks and the importer and exporter time and money.
The edeXa Business Blockchain can serve as a transparent, decentralized basic network for all participating parties. Each step can always be checked by each party in the network. As a result, the risk at each interface can be minimized and the correspondent bank as a trusted intermediary becomes superfluous, which again saves time and money. Automation can also increase efficiency and regulatory transparency (AML).
Finally, it can be seen that the blockchain is particularly important for international trade. Processes so far have been lengthy, cumbersome and expensive for all parties. Here the blockchain has the potential to maximize security, transparency and especially efficiency and thus make a valuable contribution to general economic development.
In times of maximum globalization, the letter of credit is regularly used by companies to carry out international purchases and sales.
There are countless applications for the blockchain — our next use case is about the support of notaries and lawyers.