Blockchain Technology for Letters of Credit and Escrow Arrangements

Abstract

In this article, the author considers the implications of the blockchain technology for trade finance, in particular the letter of credit transaction and the escrow arrangement.

The blockchain technology was invented to create the Bitcoin cryptocurrency around 2009. Since then, various types of blockchains have been developed. In common to all of them, the technology generates, via a chain of blocks, append-only ledgers, which are distributed on an online network and maintains them in sync with each other without the involvement of any trusted intermediary.

This article consists of five sections. The first section, “Two Aspects of the Blockchain Technology,” will highlight two particular aspects of the blockchain technology that are relevant to the subsequent analysis. The second section, “Blockchain for the Letter of Credit Transaction,” will then examine the implementation of the technology for trade finance, looking in particular at letter of credit transactions and, in the third section, “Blockchain for the Escrow Arrangement,” escrow arrangements. This analysis will explore the question of whether the blockchain technology with its ancillary functionality brings about any advantages over the current practice. Before concluding in the fifth section, “Recapitulation,” this article will consider in the fourth section, “The Potential of the Multisig-Fortified Escrow Service for Making an Inroad into the Market of the Letter of Credit,” whether an escrow service fortified with the blockchain technology has the potential of making an inroad into the market of the letter of credit and other methods of payment.

Keywords: blockchain, trade finance, letter of credit, escrow, multisig