Towards a blockchain and smart contract-based letter of credit

Abstract

Letter of credits are an essential part of trade finance, and the International Chamber of Commerce has developed private international rules, such as the UCP 600 and eUCP 2.0, which govern letter of credit disputes by virtue of contract law. These rules have worked well, though in light of innovation, particularly blockchain and smart contract technology, oracles and the internet of things, letter of credit processes are undergoing changes, which are particularly driven by automation. These changes in the way business, including trade finance, is being conducted forms part of the fourth industrial revolution. As a result, it must be considered whether the existing rules, particularly the UCP 600 and the eUCP 2.0, require revision, as banks and the decentralised finance (DeFi) industry are moving towards adopting blockchain and smart contract-based letter of credits. Revision of the existing rules is arguably essential, as the responsibilities of the involved stakeholders are different when blockchain and smart contract-based letters of credits are conducted. This research, therefore, analyses core legal principles and rules which underpin letter of credits, namely how the independence and strict compliance principles, the duty to examine, the legal presumption regarding original documents and the rules in relation to fraud can be applied to these the new workflows of these technology-enhanced letter of credits. Blockchain and smart contract-based letter of credits also pose new challenges and have certain disadvantages which are considered. However, regulating disruptive technologies is challenging, as rules can stifle innovation and even newly adopted rules may lag behind in the near future due to further technological advancement. Nonetheless, it is important to investigate how blockchain and smart-contract-based L/Cs operate and whether existing L/C law can be applied and what principles and L/C law would need to be amended to facilitate a blockchain and smart contract-based L/C.