The founders of Singapore-based invoice finance provider Incomlend are launching a blockchain-based platform which will allow importers and exporters to issue, amend, track and execute letters of credit (LCs) without the involvement of banks.
LC Lite will use blockchain technology to solve many of the current challenges faced with the existing LC model related to funds, delays, fraud and centralisation.
This isn’t the first attempt at getting LCs onto the blockchain. Last year, HSBC, ING and Cargill executed a digital letter of credit using the Voltron solution on R3’s Corda platform for a cargo of soybeans exported from Argentina to Malaysia, enabling transaction time to be reduced from a standard five to 10 days, to 24 hours. Meanwhile, in October last year, two tech companies and a bank collaborated on a successful pilot programme to digitise standby LCs and guarantees.
However, LC Lite says its solution differs from initiatives such as Voltron in one key aspect: it takes banks out of the equation. Speaking to GTR, a spokesperson for the company says: “Banks currently perform two distinct roles – providing capital and administrating the process. With the LC Lite platform, these roles are disintermediated. Banks will still provide the credit or guarantee to the importer, but the letter of credit management is originated and managed via the LC Lite platform. The trading mechanism of the platform through the use of units of exchange – or tokens – allows early cash flow solutions at no cost.”
In an LC Lite transaction, importers and exporters directly establish smart contracts which digitally replicate the LC instrument. Once the contract is digitally sealed, importers submit the title to the trade to investors in the form of a token for the corresponding value. These tokens serve as a means of payment booking for the LC contract, means of ownership transfer and vehicle to trade that contract between different parties on the LC Lite platform. “The tokens circulate only within the LC Lite ecosystem and are based on the intrinsic demand for opening and processing LC contracts, allowing for an LC contract to become a tradable asset between investors,” says the spokesperson, who explains that investors will include existing trade finance providers, together with funds, institutions and accredited investors.
The contract value is then conditionally credited to exporters. The amount will appear on the exporter’s electronic wallet and will be released once trade conditions are met, guaranteeing payment for the exporter. The title and LC value will also appear on the investor’s electronic wallet as due for payment by the importer.
Once the goods have been shipped, exporters also have the added benefit of being able to sell their units of value through the LC Lite marketplace to other participants within the ecosystem, thereby obtaining early cash on the payment due. Incomlend, which offers factoring and supply chain finance, will partner with LC Lite to enable holders of the contract title to discount it for early cash flow, although the companies will remain two separate businesses.
Dimitri Kouchnirenko, founding partner of Incomlend and co-founder of LC Lite along with Jean Charles Devin and Morgan Terigi, says: “Letters of credit are a huge market, perfectly suitable for implementation on distributed ledger technologies. LC Lite’s blockchain typically replaces intermediaries by capturing the unique data of a transaction in an immutable and transparent chain of records. Its smart, self-executing contract features perform transactions automatically upon fulfilment of specified conditions in a digital letter of credit between the buyer and the seller.”
LC Lite says its solution will be released globally in the third quarter of this year, with priority regions in Asia and the Middle East, including Hong Kong, Singapore, China, Japan, South Korea and India.