INTERNATIONAL PAYMENTS

THE USE OF BLOCKCHAIN TECHNOLOGY IN THE PAYMENT METHOD OF

LETTER OF CREDIT.
I. INTRODUCTION
1. The application of technology in international payments

In today's business, international payments are becoming more and more popular. Traditional
payment methods such as cash have been gradually replaced by more modern and faster payment
methods. With the trend of strong application of technology in all aspects of life today. The
application of technology in international payments has become increasingly popular and easy to
implement. More importantly, this form of payment brings many benefits to both the buyer and
the seller.
The explosion of information technology and the Internet has created a premise for the
development of e-commerce. With its rapid development over the years, the Internet has become
a popular medium for communication, services and commerce. The Internet and e-commerce
have changed the traditional way of shopping for consumers. Consumers will no longer be
limited in time and place, they can buy products and services anywhere and anytime. Along with
the development of information technology and digital has changed the business environment in
the world, so business transactions also change from cash transactions to cryptocurrency
transactions. Transactions between business partners continue to develop on e-commerce
platforms, electronic payment solutions appear to replace cash payment systems. In particular, in
the current world context, when the Covid 19 epidemic is complicated, all countries have social
distancing policies, restricting people from going out and carrying out normal forms of purchase
and sale.
The continuous development efforts of the international community to apply technology for
international payments, it has actively contributed to the construction and simplification of the
way international payment transactions are made between countries.
There have been many technology applications launched to help us easily pay for school fees,
health insurance, living expenses, allowances for relatives or send money to family abroad or
many kinds of expenses or other fees.Technology applications are the optimal solution in the
context of the current covid-19 epidemic because they are suitable applications for personal
transactions, restricting movement and close contact, reducing the risk of COVID-19 pandemic
is still complicated in the world.
In particular, the application of this technology also proves to be a safe, secure and simple
payment method. Current popular payment technology applications are known as Visa or Master
card, mobile applications, or QR code.

As the risk of disease transmission through cash is quite high, non-cash electronic payment with
the advantages of fast, compact, convenient, safe, etc. is becoming an effective solution to reduce
the possibility of infection and infection. is a general trend in the context of the industrial
revolution 4.0. Therefore, the application of technology in international payments has become
indispensable and necessary in our daily lives.

Advancing payment technology

Instant and invisible payments are also trends that we have seen in recent years, but ones I expect
to grow even more in 2020. As Gen Z has matured around technological development in
payments, there will be no turning back.
Invisible payments, admittedly, is further behind but 2020 will see huge advances in this
technology. As legacy financial companies grow less afraid of their fintech counterparts and
begin to adopt new technology we will see huge advances in payment technology.

2. International payment by documentary credit (L/C)

“Currently, the method of documentary credit (Letter of Credit–L/C) is a popular tool in

international payment activities, ensuring maximum convenience for both the seller and the
buyer.” (Law firm, 2020).
Along with the trend of opening up and integrating with the world economy, economic activities
in general and foreign economic activities in particular are increasingly expanding. The
exchange and trade of goods between different countries with increasing volume has required the
process of importing and exporting goods to be quick and convenient for the parties. With the
increasingly open and open foreign economic policy of the Government, import and export
activities are developing more and more. Therefore, the form of payment for documentary credit
is increasingly developed and perfected.
The documentary credit is a payment method invented in the beginning of international trade
during antiquity. It was intended to secure Mediterranean trade at a time when delivery times
were very long with large uncertainties (wars, diseases, risky transport ... etc). Nowadays, the
"documentary credit" has changed considerably but the basic principle is similar to that which
existed 2500 years ago. It is widely used and provides, under certain conditions, an excellent
level of securing business.
It is both a means of payment and a bank guarantee that protects the supplier and the buyer and
force both parties to fulfill their commitments. It requires a binding formal with which
compliance is the condition of its validity.
L/C is a common form nowadays, this is the form that the Bank commits on behalf of the
Importer to the Exporter/Supplier of goods to pay within the specified time when the
Exporter/Supplier issue the goods presenting the documents in accordance with the provisions of
the L/C opened by the bank at the request of the importer.
Why using the documentary credit?
The objective of the documentary credit is to reconcile the conflicting expectations of the seller
and the buyer:
Seller: Be paid the agreed amount on the date specified in the contract.
Buyer:

 Being delivered with goods ordered in accordance with what was expected at the opening
of documentary credit..

 Make sure not to pay the seller before it has fulfilled its contractual obligations.

 The documentary credit is legally independent of the commercial contract. In case of

dispute, it is the terms of the documentary credit which will be considered by the count.
II. Theoretical Basis
1. What is blockchain technology?

Blockchain technology is the concept or protocol behind the running of the blockchain.
Blockchain technology makes cryptocurrencies (digital currencies secured by cryptography) like
Bitcoin work just like the internet makes email possible.
This technology is considered to create a new step in the banking and finance industry.
Following the internet and cloud computing technology, blockchain is said to be the next tool to
help businesses remove many barriers for faster transactions, the cost can be reduced by up to 20
billion USD/year. Global. The biggest advantage of blockchain is that it helps the parties
involved in a transaction not need to trust each other, but everything is still smooth, ensuring
security, without the risk of fraud or financial crime. In June 2017, IBM built blockchain
technology exclusively for the 7 largest European banks (Deutsche Bank, HSBC, KBC, Natixis,
Rabobank, Societe Generale and Unicredit) to increase the efficiency of international trade for
businesses. small and medium.

Start-ups and banking institutions around the world are investing heavily in blockchain and on
paper it seems like the perfect solution to fixing banking systems, which often times lag behind
current technology trends and in some cases were created before the internet.

 Blockchain has the potential to completely change the financial transaction processing cost
model amongst its various applications. It also enables all processing to be done over a
distributed system network or in the cloud, avoiding the usage of costly data centers or
mainframes.
  Types of Blockchains
There are four types of blockchains:

1. Public Blockchains
Public blockchains are open, decentralized networks of computers accessible to anyone wanting
to request or validate a transaction (check for accuracy). Those (miners) who validate
transactions receive rewards.

Public blockchains use proof-of-work or proof-of-stake consensus mechanisms (discussed later).

Two common examples of public blockchains include the Bitcoin and Ethereum (ETH)
blockchains.

2. Private Blockchains
Private blockchains are not open, they have access restrictions. People who want to join require
permission from the system administrator. They are typically governed by one entity, meaning
they’re centralized. For example, Hyperledger is a private, permissioned blockchain.

3. Hybrid Blockchains or Consortiums

Consortiums are a combination of public and private blockchains and contain centralized and
decentralized features. For example, Energy Web Foundation, Dragonchain, and R3.
Take note: There isn’t a 100 percent consensus on whether these are different terms. Some make
a distinction between the two, while others consider them the same thing.
4. Sidechains
A sidechain is a blockchain running parallel to the main chain. It allows users to move digital
assets between two different blockchains and improves scalability and efficiency. An example of
a sidechain is the Liquid Network.

II. LETTER OF CREDIT

1.What is L/C
LC (letter of credit) or letter of credit. A letter made by a bank at the request of the importer. To
commit to paying a certain amount of money at a specific time to the exporter (beneficiary). In
case this exporter presents to the bank a set of payment documents in accordance with the terms
and conditions stated in the letter of credit.
2. Types of L/C
Commercial LC : A standard LC also called as a documentary credit.
Export/Import LC :The same LC becomes an export or import LC depending on who uses it. The
exporter will term it as an exporter letter of credit whereas an importer will term it as an importer
letter of credit. 
Transferable LC: A letter of credit that allows a beneficiary to further transfer all or a part of the
payment to another supplier in the chain or any other beneficiary. This generally happens when
the beneficiary is just an intermediary for the actual supplier. Such LC allows the beneficiary to
provide its own documents but transfer the money further. 
Un-transferable LC : A letter of credit that doesn’t allow the transfer of money to any third
parties. The beneficiary is the only recipient of the money and cannot further use the letter of
credit to pay anyone.
Revocable LC : An LC that issuing bank or the buyer can alter any time without any notification
to the seller/beneficiary. Such types of letters are not used frequently as the beneficiary is not
provided any protection. 
Irrevocable LC :An LC that does not allow the issuing bank to make any changes without the
approval of all the parties.
Standby LC : A letter of credit that assures the payment if the buyer does not pay. After fulfilling
all the terms under SBLC, if the seller proves that the promised payment was not made. In this
situation, the bank will pay to the seller. In a nutshell, it does not facilitate a transaction but
guarantees the payment. It is quite similar to a bank guarantee
Confirmed LC :Which the seller or exporter acquires the guarantee of payment from a
confirming bank (also called the second bank). This is primarily to avoid the risk of non-payment
from the first bank. 
Unconfirmed LC : A letter of credit that is assured only by the issuing bank and does not need a
guarantee from the second bank. Mostly the letters of credit are an unconfirmed letter of credit.
Revolving LC : When a single LC is issued for covering multiple transactions in place of issuing
separate LC for each transaction is called revolving LC. They can be further classified into Time
Based (Could be Cumulative or Non-Cumulative) and Value-Based. 
Back to Back LC : Back to back LC is an LC which commonly involves an intermediary in a
transaction. There are two letters of credit, the first issued by the bank of the buyer to the
intermediary and the second issued by the bank of an intermediary to the seller. 
Red Clause LC : A letter of credit that partially pays the beneficiary before the goods are shipped
or the services are performed. The advance is paid against the written confirmation from the
seller and the receipt. 
Green Clause LC : An LC that pays advance to the seller just not against the written undertaking
and a receipt, but also a proof of warehousing the goods. 
Sight LC : A letter of credit that demands payment on the submission of the required documents.
The bank reviews the documents and pays the beneficiary if the documents meet the conditions
of the letter. 
Deferred Payment LC : An LC that ensures payment after a certain period. The bank may review
the documents early but the payment to the beneficiary is made after the agreed-to time passes. It
is also known as Usance LC. For more information click on Differed payment LC
Direct Pay LC :A letter of credit where the issuing bank directly pays the beneficiary and then
asks the buyer to repay the amount. The beneficiary may not interact with the buyer.
3. Processing L/C
Step 1: Importer and exporter sign a foreign trade contract, which stipulates payment by
documentary credit method.
Step 2: Based on the signed foreign trade contract, the importer sends an application for
opening L/C to the Issuing Bank (usually this bank is located in the importing country).
Normally, when opening L/C, the importer must deposit to ensure the ability to pay. The amount
of the deposit depends on the relationship, the reputation of the importer according to the bank's
assessment and the credit capacity that the bank grants to the importer. The amount of the
deposit can be from 0% to 100% depending on the value of the shipment as well as the bank's
requirements.
Step 3: The issuing bank (the bank that opens the L/C) considers it, and if it finds it
reasonable, it will open the L/C and send a letter of credit to the bank to notify the beneficiary
exporter.
Step 4: The advising bank (usually this bank in the exporter's country) sends the notification
document to the exporter.
If the letter of credit is sent by telex, the advising bank will conduct telegraphic verification,
open the credit and check the code, and then deliver the original to the exporter in the written
form “Origin of the letter of the letter of credit.” Credit".
If the letter of credit is sent by mail, the advising bank will check the signature, then notify the
exporter of the full text of the notice of opening the credit and upon receipt of the original of the
credit. then immediately transfer to the exporter.
Step 5: The exporter carefully checks the contents of the letter of credit, if accepted, delivers
the goods to the importer (through the carrier), and at the same time prepares a set of payment
documents as required by the letter of credit and notify the bank.
If the exporter does not accept, then ask the importer to adjust the L/C. Any amendments must be
certified by the bank opening the letter of credit to take effect. The revised document becomes an
integral part of the old letter of credit and cannot be repealed.
Step 6: The notifying bank sends money to the exporter when it has received sufficient
documents in accordance with the provisions of the L/C to receive the goods.
Step 7: The advising bank transfers the valid documents to the bank opening the L/C.
Step 8: Issuing bank checks the documents and notifies the inspection results to the importer.
If the L/C is found to be consistent with the letter of credit, the bank opening the L/C will pay the
goods to the advising bank and send a set of receipts to the importer. If not, the bank opening the
L/C refuses to pay and returns the documents to the exporter.
Step 9: The importer receives the receipt of goods from the bank opening the L/C and checks
the documents, if deemed appropriate, pays the bank, if it is not suitable, has the right to refuse to
pay. maths.
Step 10: The importer presents a set of documents to the carrier to receive the goods
4.Advantages
Advantages of Letter of Credit :A letter of credit enjoys various advantages in executing an
international trade transaction. Some of the major ones are below:
Safely Expand Business Internationally: A letter of credit gives the trade partners an ability to
transact with unknown partners or in newly established trade relationships. It helps in expanding
their business quickly into new geographies.
Highly Customizable :A letter of credit is highly customizable. Both the trading partners can put
in terms and conditions as per their requirements and arrive at a mutual list of clauses. It can also
be customized from one transaction to another with the same trading partners.
Seller Receives Money on Fulfilling Terms :A letter of credit makes the issuing bank independent
of the trading partners’ obligations and any disputes arising out of those obligations. The bank
has to just check whether the documents submitted by the beneficiary satisfy the terms and
conditions specified in the letter of credit, and pay the full amount.
Works as a Credit Certificate for Buyer :A letter of credit transfers the credit-worthiness from
the importer or buyer to the issuing bank. The importer can do multiple transactions at the same
time when he is backed by an established and larger institution such as a bank.

Seller is Free of Credit Risk :A letter of credit is safer for the seller or exporter in case the buyer
or importer goes bankrupt. Since the creditworthiness of the importer is transferred to the issuing
bank, it is the bank’s obligation to pay the amount as agreed in the letter of credit. Thus, a letter
of credit insulates the exporter from the importer’s business risk.
Quick to Execute for Creditworthy Parties :A letter of credit is quick to execute. As per the
initial terms and conditions, the seller or exporter has to present the proof of material type and
quantity along with the shipping documents supporting his claim that the goods have been
shipped. The advising bank will verify the documents and give the full payment.
Payment Assured in Disputable Transactions : In the case of a dispute between the trading
partners, the exporter can withdraw the fund as agreed upon in the letter of credit and resolve the
disputes later in the court. The beneficiary’s right to the full amount is described in the phrase
‘pay now, litigate later’ by the courts.
The importer cannot hold or deny the payment to the exporter by raising objections on the
quality of goods because the bank just needs to see the documents satisfying the shipping terms
and conditions as put in the letter of credit.
Timely Payments Leads to Better Cash Flow Planning :A letter of credit provides certainty to the
amount and timing of the exporter’s cash flows. He can plan his financing needs well in advance
which reduces his risk.
Pre-shipment Financing Available to Sellers : The exporter can avail pre-shipment financing
against a letter of credit. This helps him in plugging the financing gaps if any.
5. Disavantages
Disadvantages of Letter of Credit As with any financial instrument, even letter of credit has
disadvantages as listed below:
Additional Cost – Bank Fee : A letter of credit adds to the cost of doing business. Banks charge a
fee for providing this service, and it can increase steeply if the parties want to put some
additional features.
Time-Consuming Formalities :The required documentation and formalities may be more in a
letter of credit. This may also add to the cost of doing business.
Possibility of Misuse –  Fraud Risk :A letter of credit has complex governing rules and some
notorious buyers or sellers can misuse it to take advantage of it.
A letter of credit poses a material fraud risk to the importer. The bank will pay the exporter upon
looking at the shipping documents and not the actual quality of goods. Disputes can arise if the
quality is different from what was agreed upon.
Currency Risk :A letter of credit also carries forex risk. There will be an agreed upon currency in
the letter of credit. At least one of the parties will have a different currency than that, and hence
they will face a risk due to currency fluctuations. It can also work in favor.
Time Bound :A letter of credit has an expiration date and therefore the exporter has time
limitation within which he will have to deliver the goods by all means. At times, this haste
creates a mess.
Risk of Default by Issuing Bank: A letter of credit essentially transfers the credit-worthiness from
the importer to the issuing bank. So, if the issuing bank defaults, there is still a payment risk to
the exporter. Though the exporter can avoid it if the advising bank guarantees the payment, that
will add to the cost of the letter of credit
III. APPLICATION

1. Application of Blockchain technology in LC transactions:

Blockchain is not a new method of payment in commercial transactions but a new

technology used in the process of implementing payment methods to bring differentiation in a
better way than traditional transactions before. Blockchain application in L/C transactions means
the execution of L/C transactions on the blockchain technology platform. The entire steps of an
L/C transaction via the Blockchain are made on a single technology platform with the
participation of all parties, each acting as a node to participate in the Blockchain network.
Although the Government, central bank and IC are not involved in blockchain, they still act as
issuers of legal regulations, supervision, support and advice. In addition, this model has the
added participation of the company providing blockchain technology. It is large corporations
with a network consisting of several banks that use blockchain technology. Voltron and Contour
are two of the corporations currently providing and administering the blockchain network for
application in L/C trade financing and transactions.

Seven steps to blockchain-based L/C trading:

1: The importer creates an L/C application for the importer bank to review and stores it on
the Blockchain.

2: The importer bank receives notification to review the L/C and can approve or reject it
based on the data provided. Once checked and approved, access is then provided to the exporter
bank automatically for approval.

3: The exporter bank approves or rejects the L/C. If approved, the exporter is able to view
the L/C requirements and is prompted to view through the application.

4: The exporter completes the shipment, adds invoice and export application data and
attaches a photo image of any other required documents. Once validated, these documents are
stored on the Blockchain.

5: The documents are viewed by the exporter bank, which approves or rejects the
application.
 6: The importer bank reviews the data and images against the L/C requirements, marking
any discrepancies for review by the importer. When approved, the L/C goes straight to
completed status or is sent to the importer for settlement.

7: If required due to a discrepancy, the importer can review the export documents and
approve or reject them. (Lotto Persio, 2016)

Using blockchain technology to execute L/C can help streamline the manual processing of
import/export documents, improve security by reducing errors, making companies' working
capital more predictable, and increasing convenience for all parties through mobile interaction.
(Lotto Persio, 2016)

It can be seen that L/C transactions applying Blockchain technology have advantages that
are superior to traditional L/C transactions, summarized in the following Table:

Impact
Traditional LC transaction Transaction L/C on Blockchain
Dimension

Transparency - Transactions are carried out on - The parties are involved on the
different technology systems, so the blockchain and can capture all
parties involved do not know all the information
information.
- The mechanism of data security by
- May cheat, forge documents or cryptography, information stored on
change the terms of the agreement the Blockchain is immutable and can
without the other parties' knowledge only be changed with the consent of
the parties, helping to reduce the risk
of fraud and forgery.

Documents Paper documents are manually Electronic documents are checked on

 checked the machine

Information Manual processing, centralized data Fast and synchronized according to

transmission manipulation can be subject to cyber automation mechanisms and
attacks or system malfunctions consensus mechanisms.

Time Prolonged, delayed in the transaction Short and fast

stages

Cost Cost of paperwork and transfer of Reduce paperwork-related costs

documents

2. Blockchain application in L/C transactions at banks around the world:

With outstanding advantages, Blockchain technology has been explored and applied by
banks around the world in L/C transactions.

Barclays – a major BANK in the UK has announced a partnership with an innovative

startup, Wave, a decentralized blockchain mixed-asset exchange platform and began its first
global transaction with its blockchain-based L/C project on September 6, 2016. The target goods,
namely cheese and butter, are traded between the Irish agricultural food cooperative Ornua
(formerly the Irish Dairy Council) and the Seychelles Trading Company. Ornua has been
affected by the range of expensive exports across countries, especially for the time-consuming,
complex and lengthy L/C approval and grant process. Barclays reports a significant reduction in
trade finance processing time (in particular, it was completed within four hours).

In November 2017, Banco Bilbao Bank Vizcaya Argentaria (BBVA) in Spain announced a
partnership with Wave to conduct the first trial using blockchain to automate the sending of
electronic documents in import and export transactions between Europe and Latin America.
Thanks to Wave's solution, which uses Distributed Ledger Technology (DHT) and Blockchain,
BBVA has been able to reduce the time it takes to send, verify and authorize an international
trade transaction, which typically takes seven to ten days, to just 2.5 hours.

In May 2018, HSBC Bank also successfully executed the first L/C transaction on R3's
Corda Blockchain platform through voltron. Using blockchain technology, hsbc and ING's
agreement reduced the transaction time from 5 to 10 days, to just 24 hours. This is the first direct
trade sponsorship transaction made on R3's blockchain-based Corda platform, using an app
called Voltron. Developed by Crypto LK, Voltron uses blockchain to make the exchange of trade
finance documents more digital and efficient. This particular agreement involves a shipment of
soybeans exported from Argentina to Malaysia, with Cargill as an exporter and importer. HSBC
has issued letters of credit, with ING acting as an advisory bank. HSBC and ING's inclusion of
Voltron, an application run by a consortium of eight banks, into a direct environment is an
important step toward the wider adoption of blockchain-based letters of credit and other trade
finance documents.

3. Blockchain application in L/C transactions at Vietnamese commercial banks:

Blockchain technology has been applied in international payments in the Vietnamese
market since 2019 with HSBC's first L/C transaction through Voltron.Like banks around the
world, this technology is first and foremost tested with L/C transactions at Vietnamese central
banks.Vietnamese central banks have tested L/C transactions on R3's Corda blockchain
technology platform through Contour.During the research and testing phase, Contour invited
banks to pilot a first and completely free L/C transaction.This pilot program has closed at the end
of 2020.As of the end of February 2021, five Vietnamese central banks have tested blockchain
applications in five L/C transactions (Table 3).
Table 3: Blockchain application in L/C transactions at Vietnamese commercial banks
Bank Blockchain application in L/C transactions at Commercial Time
Banks in Vietnam
BIDV International L/C transactions: L/C release stage 9/2020
HDBank International L/C transactions: L/C release stage 11/2020
Vietinbank International L/C transactions: L/C release stage 11/2020
MBBank International L/C transactions: L/C release stage, presenting 12/2020
documents made by the seller
Vietcombank International L/C transactions: L/C release stage, presenting 12/2020
 documents

BIDV is the first Vietnamese commercial bank to announce the successful implementation
of the transaction and L/C announcement confirming the interbank application of Blockchain
technology in September 2020.This transaction took place between the buyer, Vietnam's OPEC
Plastic Joint Stock Company, and the seller, a large corporation in Thailand.BIDV Vietnam is
the issuing bank, Standard Chartered Thailand is the L/C notification and confirmation
bank.Unlike hsbc Vietnam's L/C transaction on the Blockchain conducted in 2019, this is the
first L/C transaction in Vietnam to be conducted between other banks in the system.In addition,
the special feature of this transaction is the participation of the Asian Development Bank (ADB)
as a guarantee bank (BIDV, 2020).
Following that, HDBank officially announced the first L/C issue and announcement on the
Blockchain platform in November 2020.Participating in this transaction include Century Yarn
Joint Stock Company, a leading importer of Vietnamese yarn industry and Tainan Spinning
Company, Taiwan's leading yarn manufacturer and exporter, HDBank is the issuer and Taiwan's
CTBC Bank is the L/C announcement bank (HDBank, 2020).Also in November 2020,
Vietinbank said it had successfully executed the L/C issuance and announcement transaction on
the Blockchain.
In December 2020, MBBank issued a press release on the application of Blockchain in L/C
transactions, in which the entire L/C business process is implemented, from L/C issuance to L/C
document presentation on the same Contour network (MBBank, 2020).However, the process of
presenting documents on the Blockchain has only been carried out for documents issued by
sellers such as bills, commercial invoices, packaging slips.Documents issued by third parties
such as transport documents, insurance documents and certificates of goods are still presented in
the form of paper documents.
At the end of December 2020, Vietcombank announced that it had successfully conducted
the first blockchain-based domestic L/C transaction in Vietnam.This L/C transaction includes the
buyer, Kirby Southeast Asia Co., Ltd., the seller is Ton Dong A Joint Stock Company, HSBC
Vietnam acts as the issuing bank and Vietcombank is the notification bank and also the
designated bank.This entire transaction process (except for payments) is completed on the
Blockchain platform.The parties have completed the presentation of documents on the Contour
network instead of sending paper documents via delivery (Vietcombank, 2020).However, in
domestic L/C transactions, the set of commercial documents required to be presented is very
simple, consisting only of documents made by the seller without third-party documents.
Therefore, in this transaction, the seller can fully upload these documents electronically to the
Blockchain.
 The application of Blockchain technology in L/C transactions is an important milestone
demonstrating the efforts of Vietnamese central banks in the process of product and service
innovation on the basis of digitizing international payments and trade finance.The banks have
initially completed the pilot of L/C transactions on the Blockchain platform, thereby affirming
the reputation and brand for customers.
IV. CONCLUSION

4. Discussion

4.1 Implementation of the Blockchain

4.1.1 Opportunities

Along with the development of the digital technology era, Blockchain technology has emerged
as the key to remove the bottlenecks in international payment activities in general and the Letter
of Credit (L/C) transaction private. With breakthrough features, Blockchain technology has been
applied in many fields, including international payment and trade finance. The industry can learn
more through Blockchain Technology because it can be seen that L/C transactions using
Blockchain technology have outstanding advantages.
4.1.1.1 Processes’ transparent
Needless to say, the Blockchain platform offers many steps forward in transparency over
traditional storage. Because once data is entered into the Blockchain, transactions cannot be
changed or deleted. With the current way of record-keeping, one person can make changes to the
database and then hide the change from everyone. There are countless cases of large-scale scams
that go undetected because the ledger is not transparent. This lack of transparency allows people
to change input or manipulate data without the knowledge of others.
An L/C transaction model based on Blockchain technology is considered ideal when all steps of
an L/C transaction are performed uniformly on the same Blockchain network, from issuance and
notification. L/C notification to presentation and document checking until payment. In the
process of issuing and announcing L/C, the applicant creates an application to open L/C in the
Blockchain network. Then, the issuing bank reviews and stores it on the Blockchain. After the
issuing bank accepts the offeror's request, access is automatically made available to the other
relevant banks before being sent to the beneficiary. The beneficiary can check the terms and
conditions of the L/C. Once approved by the beneficiary, the L/C is finalized as a contract
between the issuing bank and the beneficiary. Any amendments or updates on the L/C can be
made known and approved by the parties concerned.
Blockchain in the Letter of a Credit payment method will provide transparency across categories.
With a financial transaction, you can observe the status of the transfer on the Blockchain in real-
time, instead of not knowing the status of the transaction until the transaction is finished, a
problem that often occurs in financial transactions. current system. The same transparency
applies to every value recorded on the Blockchain.
4.1.1.2 Security
The data on the Blockchain cannot be edited. Therefore, this increases the security between
transactions. The immutability of the input data together with the connecting blocks leading to
the original block on the Blockchain makes it easier to trace the history of each transaction on
the Blockchain.
Throughout history, there have been countless cases of fraud and data manipulation. Usually,
when a scam occurs, it is very difficult and time-consuming to track down the fraud. Historical
data can be so heavily altered that transactions and scams cannot be found.
With a system built on Blockchain technology, past transactions cannot be changed, leaving a
very clear history of operations in Blockchain. As mentioned in the Blockchain centralization
section, changing an existing transaction would require simultaneous control over 50% of the
computers on the network, which is almost impossible. Even if this was the case, it would be
quickly discovered by other member computers in the network.
The security of Blockchain is not without loopholes, but current Blockchain systems have
continuously demonstrated outstanding security. Blockchain solves many security problems in
conventional systems. While the scam may not be completely eradicated, the Blockchain creates
a very clear history that allows it to be traced back to the starting point to easily identify the
scam.
4.1.1.3 Eliminate Intermediate Units
One advantage of Blockchain technology over existing systems is its ability to eliminate
intermediaries by allowing people to transact directly with each other instead of through a third
party. This helps the billions of people living in countries where they cannot trust intermediaries
because of corrupt governments, high crime rates, lax corporate regulations, business practices,
Manual record-keeping, or very limited legal options.
Blockchain is especially useful in situations where trust in intermediaries does not exist and
direct transactions between people are too difficult or risky.
Blockchain provides trust and transparency and reduces the risk of transactions without the need
for a third party to act as a transaction intermediary. Decentralization The feature of
decentralization in a Blockchain database is a key reason why the chain eliminates the role of
intermediaries while enhancing transparency and reliability. Blockchains are kept in several
common ones, rather than multiple private ledgers managed by different organizations.
Individuals and companies do not have to empower a single organization when using
Blockchain.
This helps to manage the collaboration between the parties quickly and even more.
Theoretically, the L/C transaction model through Blockchain includes all parties such as
businesses, banks, and related parties but without the participation of SWIFT and courier
companies because banks can exchange information, make payments on Blockchain and paper
documents do not need to be transferred but instead are digital documents. The Government,
Central Bank, and ICC are also not involved in Blockchain but still serve as regulatory,
supervisory, support, and advisory roles. In addition, this model has the participation of the
company providing Blockchain technology.
4.1.1.4 Increase Transaction Speed
Another advantage is the faster processing. Traditionally, such transactions can take a lot of time
to process. The use of Blockchain technology helps to reduce the time for the processing to many
times – from roughly 3 days to several minutes or even seconds.
Systems that use Blockchain technology not only reduce transaction costs but also actually
increase transaction speeds. By eliminating intermediaries and establishing transactions on a
common distributed ledger, blockchain-based ledgers can process transactions almost
instantaneously.
If you transfer money from a bank account, you may see the money leave your account, but it
usually takes a few days for the money to reach another account. Similarly, when making
purchases with a credit card, transactions can be in progress for days on an account's transaction
record. For shippers, they deliver the goods to the buyer, but after many days, when the credit
service company has finished processing the transaction, payment will be received.
To overcome the situation as the practical examples on the Blockchain-based construction
system being developed to speed up transactions. However, not only in those situations but also
any type of transaction or value transfer can apply Blockchain technology to enhance transaction
speed.
4.1.1.5 Cost savings
By eliminating intermediaries between transactions, Blockchain technology saves a lot of costs
for businesses in the process of transferring assets.
Maintaining multiple ledgers or databases is expensive and often a very manual process because
many people are in charge of inventorying the consistency of each ledger. But the distributed
ledger is based on multiple costs and replaces individual ledgers with a common number,
enabling real-time settlement and auditing of all network members every time it occurs. a
transaction.
Moreover, reduction costs associated with paperwork are considered. In the process of presenting
and checking documents, unlike the presentation of paper documents in traditional L/C
transactions, documents will be presented in the form of electronic documents

4.1.2 Issues

The application of Blockchain technology in L/C transactions is an important milestone

demonstrating the efforts of Vietnamese commercial banks in the process of innovating products
and services based on digitizing international payment and financing activities. Commerce. The
above banks have initially completed piloting L/C transactions on the Blockchain platform,
thereby affirming their reputation and brand for customers. However, the application of
Blockchain in L/C transactions at Vietnamese commercial banks has some limitations as follows.
4.1.2.1 Global Consensus required
An implementation of the Blockchain would require a global agreement worldwide between all
the concerned actors. Sellers, buyers, banks, inspections companies, customs authorities,
shipping companies, insurance companies, etc. will have to agree with each other on the use of a
single platform hosting Blockchain technology to perform transactions in the future. However,
these parties are not ready to innovate the document transaction method to adapt to participate in
the Blockchain network. This again comes from the issue of issuing and using electronic
documents that have not been implemented yet. Paper documents are still the traditional method
of document transactions in international trade but have not yet switched to digital documents.
Therefore, the main factor which prevents Blockchain’s development is regarding the actors who
will use the Blockchain, and not the technology in itself.
The L/C transaction model on Blockchain that has been tested at Vietnamese commercial banks
is incomplete without the participation of relevant parties such as customs, transportation
companies, insurance companies, and other related parties. competent authority to inspect and
certify matters related to goods. This is also a limitation of L/C transactions on the Blockchain
platform at commercial banks in most countries around the world.
4.1.2.2 Lack of Standardization
There is no specific legal corridor governing L/C transactions on the Blockchain platform,
especially regulations related to electronic documents while documents are the core point of this
transaction.
In international trade, the complexity of a contract and therefore of a transaction driven by its
terms and conditions can vary significantly from one to another. In order to use Blockchain
technology in various commodity trading markets, we will need to establish standards regarding
various aspects related to the creation and understanding of commercial contracts.
Therefore, the naming conventions, for example, Documentary Credits in Europe versus Letters
of Credit in the United States, the rules regarding documents, the function of which may differ
from country to country. , and many other ways of doing things must be discussed and modified
to be more easily standardized. New standards will need to be established across various
industries, which, apart from taking a lot of time, seems highly unlikely.
4.1.2.3 Blockchain's scale has not been applied widely
L/C transactions on Blockchain have not been tested on a large scale in the world as well as in
Vietnam. Although Contour offered free of charge to many Vietnamese commercial banks, only
5 banks agreed to test this new technology in L/C transactions. That shows that banks are not
interested in this issue. Many employees practicing L/C operations at banks do not know about
Blockchain and its application in L/C. The application of Blockchain in L/C transactions has
only completed the pilot phase but has not been widely applied. In general, with the first L/C
transaction tested on Blockchain, Vietnamese commercial banks mainly promote their brands
rather than focus on long-term strategic projects to promote digitalization of international
payment activities and trade finance.
4.1.2.4 The steps in a closed L/C transaction process have not been fully implemented
L/C transactions on Blockchain have not yet performed all stages in a closed L/C transaction
process. Of the 5 transactions that have been piloted at banks, only the issuance and notification
of L/C are done methodically on the Blockchain. Blockchain technology has not yet fully solved
the problem of presenting and checking documents as well as payment in L/C transactions.
Electronic documents presented on Blockchain in L/C transactions at MBBank and Vietcombank
are issued by the seller and third-party documents are still paper documents while these
documents are indispensable in commerce. international. Therefore, the verification of
documents has not been automated but is done manually. Payment is still made through the
SWIFT system for international L/C transactions or through the interbank payment system for
domestic L/C transactions.
4.1.2.5 Human Errors.
You already know that blockchain is immutable, so, information going into the database needs to
be 100 percent sure and correct if any mistake happens with data, then it cannot be edited.
Also, most of the blockchain is access through a Private Key if such key is lost then, it is almost
impossible to access the network, so this technology needs more accuracy than any system.

5. Proposals
The practice of applying blockchain in L/C transactions in the world and in Vietnam poses a
number of issues that need to be addressed to promote international payments and trade finance:
First, complete the legal basis. L/C transactions are primarily governed by ICC international
practices and practices. Basically, L/C already has a set of necessary rules regulating voucher
credit transactions. To create a legal corridor for the application of blockchain in L/C
transactions, the ICC needs to focus on rules that ensure the permission of banks to accept
electronic documents and data. The ICC revised and released eUCP version 2.0 in July 2019
guiding the presentation of electronic documents in accordance with L/C along with additional
guidelines. In addition, the ICC has drafted a draft Uniform Rules for Digital Trade Transactions
(URDTT) that sets out rules and obligations regarding the use of electronic documents to process
digital trade transactions. It is an important legal basis for the presentation and examination of
electronic documents in L/C transactions on the Blockchain. Therefore, the ICC needs to update
the eUCP and officially release URDTT. At the same time, the ICC needs to create a clear
guiding rule on how to automate the examination of documents using new technologies such as
artificial intelligence, machine learning... In addition, the legal support and regulation from the
State Bank of Vietnam are also very important for the operation of blockchain technology into
international payments and trade finance in Vietnam.
Second, international payments in general or L/C transactions, in particular, involve entities in
different countries with different sizes, capabilities, and needs of digitalization. The adoption of
digital technology will be difficult when the links in transactions are not yet digital. For example,
in order to conduct L/C transactions through blockchain, the person who proposes to open L/C
must choose an issuing bank that has participated in the Blockchain. Currently, only a handful of
banks around the globe participate in this network. Therefore, it is necessary to have
synchronization of technology infrastructure and expand to more banks for transactions to take
place smoothly.
Third, the L/C transaction model on the Blockchain platform is complete only when it solves two
problems: (i) Having the full and effective participation of the participants based on the principle
of consensus; (ii) Complete implementation of a closed L/C transaction process from L/C
issuance, presentation, and verification of documents to payment on the same blockchain
network. To overcome these two problems, synchronous solutions from the parties are needed,
which are:
- Vietnamese enterprises need to actively learn information about blockchain and the
applications of this technology in L/C transactions. To do so, businesses need to have a
specialized department to conduct L/C transactions, can actively perform the information
declaration, and enter data related to the transaction. The application of Blockchain in L/C
transactions is suitable for large-scale enterprises, often choosing to pay in L/C in foreign trade
contracts and with a large level of commercial transactions.
- Vietnam's central banks should boldly test and implement the broad application of Blockchain
in L/C transactions, and implement the following solutions: (i) Building blockchain application
projects in international payments and trade finance activities, which regulate how to operate,
organize and manage support resources effectively; starting with L/C transactions and then
applying to other transactions; (ii) Introducing L/C products on the Blockchain platform to
customers, and conducting surveys on the level of understanding and needs of enterprises about
this new product; (iii) Investing in technology infrastructure, selecting and working with
blockchain technology providers; (iv) Disseminate knowledge about the application of
blockchain technology in L/C transactions to employees; (iv) Develop business processes and
issue documents guiding L/C transactions on the Blockchain platform.
- Stakeholders including customs authorities, transport companies, insurance companies, the
authorities that have the right to inspect and certify goods should boldly participate in L/C
transactions on the Blockchain platform. To do so, these organizations need to study how
electronic documents are distributed and circulated as well as data authentication and security
mechanisms. Currently, some commercial documents have been issued digitally such as e-sea
bills of (eB/L), electronic certificates of origin (eC/O) but not yet popular in Vietnam. The
General Department of Customs of Vietnam has also used the system of issuing electronic
customs declarations to enterprises. The point is to figure out how to connect all parties to one
blockchain and issue electronic documents to the same system.
- Blockchain technology providers need to continue to study technical issues and test blockchain
in presentation, verification of documents, and payments. For the presentation of documents via
the Blockchain, it is necessary to involve stakeholders and solve the problem of digitizing
documents along with ensuring data authentication and security mechanisms. For the
examination of documents, it is necessary to research and move towards the automation of L/C
voucher testing with new technologies such as artificial intelligence, machine learning ... To
replace the paper check as it is now. For payments, it would be perfect to perform the payment
function via the Blockchain. However, this is a very difficult problem when SWIFT currently
plays a dominant and exclusive role in international payments. Therefore, in the near future,
blockchain will be used in tandem with the SWIFT system to solve payments in L/C
transactions.

5. Conclusion
We have seen that Blockchain technology could offer large amount of opportunities in the trade
finance industry despite its first purpose and can be adapted in order to fit in today’s
requirements and needs. However, this technology, not fully mastered yet, also creates concern
for people and as we still tend to be confused when it comes to Blockchain’s full exploitation,
people will still need other confirmations. That is why, after years of studies and tests,
Blockchain is still in its early stages.
Blockchain technology opens the door to a change in international payments and trade finance in
the future. In particular, international payments in L/C are the starting choice for experiencing
breakthrough features on the Blockchain. Thanks to its outstanding advantages, Blockchain is
able to remove bottlenecks in traditional L/C transactions in terms of transparency, information
and document transfer, transaction time and cost. Not only that, blockchain is also a wise choice
for banks in this day and age to innovate products to better meet the needs of customers in L/C
transactions, assess the current situation of applying this new technology in L/C transactions in
Vietnam's central banks, thereby making a number of related proposals. In particular, the key
issues are the creation of legal corridors, digitization of documents and the participation of all
subjects on the basis of consensus. Solving this problem, blockchain technology will affirm the
important role in promoting global trade.
Blockchain technology is useful and versatile for our world because it can facilitate most of the
systems in the different industries, but it is new and its implementation is a little-studied issue in
practice. Blockchain technology promises us a bright future without fraud and deception due to
the benefits of Blockchain technology. The developers must devote more time to the practical
application and implementation of the Blockchain into the already existing systems of the main
industrial directions because the Blockchain can bring honest and trusty business, government,
and logistic systems. The challenges of the Blockchain are large, but the results of the
Blockchain, using have a greater preponderance than disadvantages.
It is necessary to keep exploring Blockchain development and application in the different areas
for the nearest future because this new technology can help to solve many difficult problems,
which are disturbing and preventing correctly systems work.
V.REFERENCES
1. 1.LEC ( Logistics enegy connecting). What is L/C? Conditions to open. In Research
What is Letter of Credit, Retrieved Octorber 2, 2021 from https://lecvietnam.com/

2. 2.Finance Management. Types of Letter of Credt (L/C). In Research Types of Letter of

Credit, Retrieved Octorber 2,2021 from https://efinancemanagement.com/

3. NGUYENDUC import – export company. 10 Bước Cơ Bản Trong Quy Trình Thanh
Toán L/C Cần Biết. In Research Process of Letter of Credit, Octorber 2,2021 from
https://ndgroup.vn/

4. Finance Management. Advantages and disadvantage of Letter of Credit. In Research

Advantages and Disadvantage of L/C , Octorber 2,2021 from
https://efinancemanagement.com/ .

5. 5.LEC ( Logistics enegy connecting). What is L/C? Conditions to open. In Research

What is Letter of Credit, Retrieved Octorber 2, 2021 from https://lecvietnam.com/

6. 6.Finance Management. Types of Letter of Credt (L/C). In Research Types of Letter of

Credit, Retrieved Octorber 2,2021 from https://efinancemanagement.com/

7. NGUYENDUC import – export company. 10 Bước Cơ Bản Trong Quy Trình Thanh
Toán L/C Cần Biết. In Research Process of Letter of Credit, Octorber 2,2021 from
https://ndgroup.vn/

8. Finance Management. Advantages and disadvantage of Letter of Credit. In Research

Advantages and Disadvantage of L/C , Octorber 2,2021 from
https://efinancemanagement.com/ .

9. BBVA (2017). BBVA And Wave Carry Out The First Blockchain-Based International
Trade Transaction Between Europe And Latin America. Retrieved from:
https://www.bbva.com/en/bbva-and-wave-carry-first-blockchain-based-international-
trade-transaction-europe-and-latin-america/
10. Global Trade Review (2016). Banks bring blockchain innovation to letters of credit.
Retrieved from: https://www.gtreview.com/news/asia/banks-blockchain-innovation-
letters-of-credit/

11. Global Trade Review (2019). GTR Best Deals 2019. Retrieved from:
https://www.gtreview.com/magazine/volume-17-issue-2/gtr-best-deals-2019/

12. International Business Times (2016). Barclays and Wave complete world's first
blockchain trade finance transaction. Retrieved from:
https://www.ibtimes.co.uk/barclays-wave-complete-worlds-first-blockchain-trade-
finance-transaction-1580086

13. Emad Mohammad Al-Amaren, Che Thalbi Bt Md. Ismail, Mohd Zakhiri bin Md. Nor
(2020). The Blockchain Revolution: A Game-Changing in Letter of Credit (L/C)?

14. Shuchih Ernest Chang, Hueimin Louis Luo, YiChian Chen (2019). Blockchain-Enabled
Trade Finance Innovation: A Potential Paradigm Shift on Using Letter of Credit.

15. Đạo, N. X. (2018). Ứng dụng blockchain trong tài trợ thương mại. Tạp chí Tài chính,
2(691), 9-11.

16. Chánh, N. N. (2019). Ứng dụng blockchain trong ngân hàng. Tạp chí Tài chính, 1+2
(698+699), 66-68.

17. BBVA. (2017). BBVA And Wave Carry Out The First Blockchain-Based International
Trade Transaction Between Europe And Latin America. Truy cập ngày 03/10/2021, từ 
https://www.bbva.com/.

18. BIDV (2020). BIDV tiên phong ứng dụng blockchain trong tài trợ thương mại. Truy cập
ngày 03/10/2021, từ https://www.bidv.com.vn/.

19. Collyer, G. (2017). Guide to Documentary Credits Fifth Edition.

20. HDBank. (2020). HDBank tiên phong hoàn thành quy trình giao dịch L/C trên nền tảng
blockchain. Truy cập ngày 03/10/2021, từ https://hdbank.com.vn/.

21. ISO. (2020). ISO 22739:2020. Blockchain and distributed ledger technologies -
Vocabulary. Truy cập ngày 03/10/2021, từ https://www.iso.org/.

22. Mayeur, J. (2019). Blockchain and Payments.

23. Larson Dakota. (2018). Mitigating Risky Business: Modernizing Letters of Credit with
Blockchain, Smart Contracts, and the Internet of Things.

24. Belu, M. G. (2019). Application of Blockchain in International Trade: An Overview.

25. Tiến, N. V. (2011). Giáo trình thanh toán quốc tế và tài trợ ngoại thương. Nhà xuất bản
Thống kê.

26. Chang, S. E., Luo, H. L., & Chen, Y. (2019). Blockchain-Enabled Trade Finance
Innovation: A Potential Paradigm Shift on Using Letter of Credit.

27. Vietcombank. (2020). HSBC Việt Nam và Vietcombank đồng thực hiện giao dịch tín
dụng thư nội địa trên nền tảng chuỗi khối đầu tiên tại Việt Nam. Truy cập ngày
03/10/2021, từ https://portal.vietcombank.com.vn/.

28. Vietinbank. (2020). VietinBank phát hành thành công L/C đầu tiên ứng dụng Blockchain.
Truy cập ngày 03/10/2021, từ https://www.vietinbank.vn/.