Blockchain technology as a remedy to the problems of electronic LCs; Smart letter of credit mechanism & Trade asset tokenization. (part 1)

1.A step forward: Are eLCs capable of rendering this paperless undertaking a reality?

Nowadays, the Information Technology Era is an undisputed fact which has influenced a lot every individual’s life. After so many years of continuing growth, it is believed that the digital age is upon us. Subsequently, the International Business could not have been influenced too, in spite of the fact that the LCs adopted themselves to all the necessary changes, adapting innovative ideas which would hopefully substitute the old trade regime. In any way, on the contrary to any other protective mechanism which embodies paper-based procedures, the LC lends its self to a paperless transaction. In other words, neither party shall necessarily or even typically present the original LC in order to honor the mutual agreement, while the transaction is being normally and successfully completed upon a conforming presentation of the required documents which could be undoubtly carried out digitally.

1.1 How do eLCs operate?

It is necessary to describe how this version operates. Every electronic LC’s participant, i.e. the applicant, the beneficiary, the advising bank and the confirming bank have to be connected on the same online platform. This platform would ensure the safety, transparency and integrity of the transaction, while it constitutes the basic tool concerning the electronic presentation and examination of the documents. The importer and exporter would start this electronic transaction by mutually signing a sales contract presumably through the secure online platform. The opening of an eLC would then be issued by the applicant, while the bank at its earliest convenience will issue and send the latter to the nominated bank through a multi-bank platform like for example Bolero. Accordingly, an authenticated copy of the original eLC will be received by the beneficiary through the same platform, while the importer is going to make sure that the transport company will not issue a traditional B/L but a computerized one.All the requested documents, containing lawful information and valid digital signatures will be then electronically presented by the beneficiary to the advising bank. Should the documents correspond to what is demonstrated in the eLC, a second electronic presentation to the Issuing bank will take place. In case that the documentary evidence complies with anything requested, then the latter has to honor its obligation, paying what is agreed, sending all the electronic documents to the applicant who has to reimburse the bank too.

1.2 Were the LCs’ limitations diminished by the use of eLCs?

1.2.1 Which law governs the transaction? Even though this reluctant facelift was considered by a lot of academics since the early Information Technology days, representing a huge step which would facilitate all the cross-border transactions, not only for merchants but for governments, financial institutions and banks as well, unfortunately nothing seems to significantly change.Regardless of the fact that all the core pitfalls had been clearly recognized and addressed, most of the problems remain unresolved, beginning with the law applicable. Particularly, the governing law which is mutually selected by the parties governs the transaction. However, a LC transaction consists of more than one contract and even though these agreements may be related to one another, they do not have to be governed by the same law. In case that a relevant clause is not incorporated therein, the default rules of the country which has the closest and most real connection governs the LC. Most of the times the latter is linked with the issuing bank’s registered offices location or the country, where the beneficiary is located in case of an advising bank’s contribution. The most prominent disagreement has to do with a possible divergence between the related country’s legislation and any incorporated in the LC clause. More specifically, in case of legal discrepancies the exporter will be bearing the risk, knowing that its domestic law may have different provisions against the importer ’s country enacted law. In view of this, a lot of conflicts may be born during the negotiations of such clauses, knowing that a lot of them may lack force or may be contrarily drafted, varying from jurisdiction to jurisdiction. The same phenomenon might be also seen in tax and insurance provisions as well. What is more, in case the agreement is governed by the Uniform Commercial Code, commonly the default choice, its article 5 will provide the applicable default rules. It has to specifically indicated that this is a timeless pain point which the legislative enactment of the new EUCP version 2.0 failed to eliminate, although the latter provides the requirement of the bank’s physical location disclosure in order all the applicable regulations or sanctions as much as the banking days in the relevant country or region to be known. The situation is becoming even more problematic, since the parties have the option of adopting the ‘’Uniform Customs and Practices for Documentary Credits’’ in their eLCs too. Nonetheless, this is not a statute but rather a reflection of modern market Commercial practices which is continuingly amended in response to the parties’ needs, acting as the governing law, should the involved parties specifically incorporate them in their agreement.

Up to the present time, there has been six amendments, starting from the UCP500, i.e. the most prosperous global attempt at consolidating and unifying the law to UCP600 which is the last one and which came into force in 2007. As Boris Kozolchyk stated about its adoption “its worldwide acceptance has grown from a set of practices followed only by the most important banks in western countries to a truly universal normative usage”. An opposite theory reversely alleges that this statement is not accurate at all, because countries which have a different set of conditions, like the United States are not capable of doing business with countries that follow the Civil law system, e.g. Germany, Greece or France. Furthermore, even though a dynamic increase and interest towards the eLCs was observed, an electronic UCP version which would govern this type of credit, specifically drafted for this endeavor delayed unreasonably. After all, not only legal frameworks but also technical expertise did exist in order to make this paperless undertaking a reality. All the interested parties, knowing that “the management of international business is nothing more than the management of international risk” had to merge and integrate satisfactorily all the associated with electronic commerce practices and customs into applicable law. However, this new set of rules will be thoroughly analyzed during the electronic presentation analysis, given the fact that this was the main incentive that actuated its drafting.

1.2.2.1 eLC regime’s core pitfalls analysis

In general, an eLC transaction’s regime can be divided in three subcategories, i.e. the issuance, the payment and the presentation as much as the review of the requested documents. The ICC Banking Commission was aware of the fact that the majority of the banks were already communicating electronically, researching anything around the continuing progression of computerization in relation with the field of banking and finance in order to meet the unprecedented needs of the era. These subcategories, nonetheless, are correlated in different depth and pace with electronification procedures, partially implemented in terms of the reimbursement agreement and payment but not in terms of the paperless documents‘ presentation.

1.2.2.1. The issuing procedure analysis

The eLC issuance refers to the undertaking’s release procedure and its transmission to the beneficiary, enabling that way the latter to act on it. Most credits are issued by telegraph, code books and mostly MT 700 SWIF ; Unfortunately, though, these practices did not manage to adapt themselves to the more recent commercial practices, rendering the process easier, faster or even cheaper than it was before. The above is justified by recent findings which prove that by the time the Global Financial Crisis took place in 2008, indirectly obstructing trade finance’s further development, every credits’ issuance was delayed, due to the fact that the interested parties had to diligently prove that they take specific AML measures and comply with know your customer practices or other varying in nature jurisdictional requirements as part of the Anti-Money Laundering Policies, since the banks operate within a regulatory framework that requires the above. Subsequently, enormous pools of financing were trapped in due diligence efforts, while the lack of assisting credit services in emerging markets in accordance with Basel III regulation impeded even more the situation. Last but not least, as far as the communication with the beneficiary is concerned, this step was also inevitably impossible to be taken by the use of eLCs, unless the risks in a direct communication which would be carried out through an advising bank were known and acceptable.

1.2.2.2. Payment analysis

As far as the honor of any related with the LC obligation is concerned, a payment method reflects a conceded by everyone set of arrangements that serve the needs of the transfer of capital. Thus, the electronic payment system which is hereby used over time, linking all the substantial banks with all the international money centers from all over the world meets the technological progress and sophistication of the era, trying to satisfy all the new challenges, not relying upon the physical currency’s old regime. However, despite the fact that the needs of high-risk transactions are merely served, SWIFT’s repeated hack justifies that instant payment infrastructures have to be digitized, aiming to its pain points’ healing. Given the fact that this payment method abided in the electronic version of credits too, an innovative, more secure and faster payment method that takes into consideration the interoperability which constitutes the regime’s “holy grail” is more than welcome.

1.2.2.3 The electronic documents’ presentation undertaking

The continuing increase in specific practices such as the use of electronic formats, aiming to issue a LC as much as the electronic payment of the agreed amount of money, led the ICC to draft a new set of rules where both parties were capable of utilizing the same e-formats so as to streamline their documents’ presentation. Despite the difficulties, the ICC supported this undertaking not only with words but with actions as well, in order the gap between UCP 500 and all the rapidly changing technological practices to be typically corrected. Its effort started in 2000, drafting the “Supplement to the Uniform and Practice for Documentary Credits for Electronic Presentation” or alternatively “EUCP” which is issued and alluded to by “versions”, currently being 2.0. This attempt would give a so much needed push to a paperless transaction system that would eliminate the documentary’s LC pain points. A regulatory scheme which would be structured on default rules that would reflect the fairness of all the upcoming modern practices among everyone involved in International Trade transactions. The legal experts’ aim was to expedite the transactions’ process, reducing at the same time their costs. They wanted to eliminate the participation of any paper-based procedure, transferring the documentary credits to safe electronic environments which would render these financial instruments even more respectful and accessible to any business, irregardless of its region. A member of the drafting group indicated that “after ten years there will be virtually no paper-based trade documentation”. However, not all researches show at present that this statement was either correct or true, mirroring the necessity towards another radical solution. The working group initially wanted to simply amend some UCP’s definitions. Yet, with the passage of time, it was understood that substantive changes needed to be done towards the utilization of electronic formats by all the market participants as much as its effect on the preclusion rule. The nature as much as the timing of every electronic presentation, the documentary evidence’s originality examination process and every other anti-corruption method had to be properly addressed in the light of the fundamental principles of the UCP 600. The most commonly viewed in a LC transaction problem, i.e. the “error rates” that most of the times take place on a traditional paper-based first presentation had to be resolved but sadly the commercial practice still proves that the lack of trust is unquestionable. Yet, it has to be stated that the articles as much as the terms of the EUCP were “technological neutral”, not being based on present procedures that are tied to particular technologies. The drafters had a point thinking like that, providing and reassuring the flexibility by allowing the participants of the market to define the electronification procedure. The transition to the electronic presentation took place progressively. In other words, a combination of hard copies and electronic documents was eligible. Plenty of terms which may appear in EUCP 2.0 and UCP600 as well had to be defined, introduced for the first time or readdressed. The majority is already used in electronic commerce, although some of them do not have the same meaning, when applied to an electronic record which is presented under the EUCP 2.0 version. Thus, the drafters tried to align these definitions with each domestic legislation, using as a model the most widely imitated in electronic commerce legislation, i.e. “The United Nations Commission on International Trade Law”. In any event, every party should not leave this matter to its own fate, considering the applicable legislation which is going to be contractually implemented. The ICC once alleged that the EUCP amounts to “nothing less than a revolution in Trade Finance” but was that statement eventually accurate? Could this commonly acknowledged organized attempt be characterized as successful from an objective perspective or is it still obstructed by a lot of malfunctions which render it as a failed digitized attempt that only few practitioners may adapt in their daily practice, since the only thing that facilitated was the bureaucracy’s partial abolishment? As far as the presentation and examination of the documents are concerned, these procedures involve various problematic phases like the process of the related documents, their submission to the named bank, their forwarding to any person who undertook the obligation to pay and finally their examination. Notwithstanding the above, the notification of refusal or any possible subsequent cure should not be neglected. In any event, the eUCP’ s 2.0 enactment presents a lot of omissions in case of data corruption, not addressing successfully any ambiguity in relation with the electronic presentation. More specifically, article e5 stipulates that in case the electronic record’s format is not specified in the credit, the risk for this omission is up to the bank. The enmeshed commercial bank or any other credible financial institution may be unable to view the documents, while paradoxically this cannot not stand as grounds for rejecting the documents. As Mr. Cronican believes “it is unlikely that the risk management model of a bank would allow the express incorporation of a regulatory scheme where the result of a somewhat trivial omission may lead to the bank’s exposure to substantial liability”. Based on the fact that every party is likely to be sending, receiving, viewing and editing documents, an unprecedented distress for a widely accepted formatting system arises. The new EUCP version should have embraced the idea that it is the beneficiary’s duty to confirm that every bank is capable of receiving and viewing the requested documents as a precaution against extraordinary circumstances where the format is not explicitly specified. The existed provision abstains from any logic, because the bank’s role in this dealing is conspicuously supplementary, meaning that not only the advising bank but the nominating bank as well solely participate in order to facilitate the transaction for a fee on the contrary with the importer and exporter who would be much more benefit from the dealing. Thus, ar.5 had to shift the burden of a universally accepted formatting to the exporter. The adoption of a corresponding provision might had increase the low EUCP’s adoption rate. One more problem which strengthens the perception that EUCP has created a cult of digital amateurism that undermines the notion of expertise is correlated with article e6. Despite that both types of documents can be used, should the place of presentation be properly referred in the LC, important flaws are exposed. Particularly, there are no special provisions concerning the remotely storing of documents or their electronic sending to the bank. Article e6 should have incorporated detailed instructions in regard to the virtual storage as much as the documents’ retrieval procedures, because any error could render the delivery noncompliant and defective. The bank would not be able to ascertain, if the documents were received in time in case of file corruption or the system’s failure, without even being proficient enough to decide, should the credit’s undertaking must be honored or not. The parties ought to be properly informed in regard to the documents’ transmission and verification, given the fact that everything has been proven to be extremely complicated in terms of delivery and data retrieval. What is more, EUCP’s 2.0 structure compromises the beneficiary’s obligations. The latter may lose control over the documents/records’ verification, given that any non-compliance issue will not be able to be properly rectified, since the presenter is accountable for providing the “notice of completeness”. However, it is true that some electronic records, e.g. the transport records cannot be produced by the beneficiary itself. In any case, what would the ramifications be, should the notice of completeness falsely take place; or what would have happened if the records failed to be sent, knowing that there is no related provision; Of course, it is a third’s party failure to successfully submit the data, but this is not capable of standing as a defense in court, especially knowing that the carrier for instance is not a contracting party. Consequently, the beneficiary would lose the guarantee, provoking extra costs to itself, while a minor in contrast with the eLC transaction’s value recovery will be probably lodged against the liable party;

In conclusion, on the contrary to Mr. Cronican’ s proposed wording which states that : “Unless expressly contracted otherwise, both electronic and paper documents must be received exclusively from the beneficiary and delivered in one installment”, i tend to believe that neither solution would ensure transactions’ security, because a lot of unnecessary errors are allocating either the beneficiary decides to eliminate any uncertainty , doing everything by itself or in case of transferring the responsibility to any other trusted party that would transmit the documents on its behalf. The aforementioned hurdle justifies that the industry desperately needs to be further modernized, considering the possibility of testing new innovative solutions that have been proposed by the field’s experts and which are thoroughly presented in the upcoming chapters below.Another crucial fact that justifies that the current electronic environment is less than perfect can be found in Article e.12 with reference to the receipt of corrupted electronic records.A clearer wording would provide more safety, since the beneficiaries would be able to securely resubmit any debased document that they unintentionally sent, not breaching at the same time the timeline for presentment.The article could be amended this way: “the time for presentation is suspended and resumes, when the presenter represents the electronic record”. The EUCP would allow a fifteen day time period to make sure that the beneficiary would not act carelessly upon this suspension, abusing the newfound latitude. Last but not least, the blame is also not apportioned, since the document are re-requested and the relevant rules address the corruption by the time the records are received, presuming that any possible corruption is upon the presenter’s liability. Finally, the term ‘’corruption’’ is not specifically addressed, as it should be, hypothetically encompassing damages, distortions and loss of data.1.3 Independence principlePart of the LC community considers the EUCP as an “untried theory”, although its rules are grounded in L/C practices’ principles. However, the limited existing practice of e-Commerce principles as much as the recently applied electronic documents’ presentation simply justifies that it solely reflects the current L/C practices. Since eLCs are being regulated by UCP 600 the “principle of autonomy” applies. More specifically as it is stipulated in article 4 of UCP600, the LC is irrelevant with the underlying contract of sale or any other contract upon which the issued LC may be grounded on.Thus, any enmeshed bank is not by any means bound by that contract irregardless the fact that it may be incorporated in the credit, being legally obligated to honor its duty, not being liable to possible defenses or claims that have been inserted by the applicant, deriving from any other contractual relationship.nbsp;Ιndeed, notwithstanding the fact that the new EUCP version 2.0 explicitly states for the first time that banks do not deal with the goods, services or performance to which a paper document or an electronic record may relate, a lot of instances in relation to the electronic records’ presentation may provoke worries and complexities to anyone who consider to become electronically active. Besides, every time new procedures are presented, all the conceivable new risks should be looked closely. For instance, there is a fine dividing line regarding the possible use of a hyperlink, aiming to get any electronic record that is not directly presented to the bank as much the examination of data which may be contained in messages concerning the authentication, transmission path or dates for sending and receipt. In this case, the relevant realities shall not be examined in order not to interfere with the independence of the credit.There is only one exception for the independence principle, i.e. the “fraud exception” rule and there are no gateways or related provisions in this set of rules in case of fraudulent behaviours. More specifically, article 34 of the UCP600 states that “Financial institutions assume no liability in case of forged or false documents or goods that are exchanged under the LC. Authenticity of the documentation or signatures thereon lies outside their scope of action and responsibility”. National legislators tried to stop the current situation, by enacting domestic fraud rules to fill the existed “gap” of utilizing a LC as a “fraud vehicle”, giving to the underdog party the right and opportunity to block the payment, obtaining the relevant by the domestic court injunction. However, besides the fact that the aggrieved party can have legal protection against the misappropriation of equity, resorting to its domestic tribunals, the requirements that each judge has to look into in each jurisdiction may be different from legal world to legal world, bringing impediments and chaos in a worldwide process of harmonization of the regulatory scheme, leading at the same time to more injurious legal procedures. The legal framework is also complicated with respect to other exceptions which are not related with a fraud that is being committed by an importer but any other third party who may break the law. For example, as far as nullity is concerned, two diametrically opposed judgments must be mentioned. In United City Merchants Ltd v Royal Bank of Canada, the judges held that this exception could not be a part of the common law system, while, on the contrary in Beam Technology Ltd v Standard Chartered Bank the nullity exception was judicially approved.1.4 Strict compliance principle One more principle which could be analysed together with the abovementioned one and still creates complexities over time, is the “strict compliance” principle. Even if UCP600 attempted to increase the flexibility of this doctrine, guidelining any individual concerning its compliance conditions, it could be still sadly considered as one of the most crucial pain points of the LC mechanism, as a lot of intermediaries are being involved, namely export administrators, shipping firms and banks.More specifically, each bank involved, either a confirming or an advising one, aims to provide confirmation as much as payment assurance. Yet, a lot of difficulties are observed, due to the lack of required attention and observation during the drafting procedure. In general, the data mismatches as much as the contractual discrepancies are the primary reasons that led to the exceptional increase of disputes between the parties. As far as the discrepancies that may come into surface during the documents’ presentation, multiple types of them exist. Some of them can be corrected within a short time that the UCP600 provides, causing nonetheless delays and extra costs which will come as a result ,due to the necessary drafting, while others nbsp;are not allowed to be waived at all. It has to be noted that more than half LCs are being rejected on first attempt, because they enclose some type of ambiguity.Notwithstanding the fact that a lol of cases such as Carter Petroleum Products v Brotherhood Bank amp; Trust Co and Beyene v Irving Trust Co demonstrate that the strict compliance doctrine may have become way much more flexible, UCP600 and particularly ar.14(d) justifies that its negative impact has not been abated yet. Even if the banks may not be misled to their detriment by syllabic abbreviations and typographical errors, the compliance is being undoubtly infringed, something which is depicted in Judges’ adjudication in Hanil Bank v. Pt. Bank Negara Indonesia case. The financial institutions are definitely not in a position to efficiently criticize, should the submitted paper based documents or digital records comply with the credit’s requirement, not having any authority upon the products that have been sold. Additional complexities can be found in regard to the “hyper technical” reading of the LC and the “strict preclusion principle” as it is being stipulated in article 16(f) of the UCP600. As far as the “hyper technical” reading is concerned the Exotic Traders Far East Buying Office v. Exotic Trading U.S.A., Inc case inspirited the adjudication being held by the Judges in Boston Hides v. Sumitomo Bank, where they found that any type of this reading should not be followed, due to the reason that the applying rules do not provide anything affiliated with technical deviances.Finally, article 16(f) of the UCP600 specifically states that: “If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation”. nbsp;The drafters incorporated this provision, i.e. the strict preclusion principle in order to apply some pressure to the banks, ensuring their compliance in case they might think of protecting their clients. Nonetheless, Voest Alpine USA corp. v. Bank of China case shows that this discretion may be used differently than it was aimed to do. In that related with fungible volatile assets case, the issuing bank, i.e. the Bank of China, showed its discretionary determination surrounding contractual ambiguities, deciding not to pay despite the conformity of the documents, because the agreed price was significantly decreased in relation to the original contract price and Voest Alpine refused to consent in a price reduction. In conclusion, except the new provision which was added in eUCP 2.0, underlining that a link’s or system’s failure would amount to a discrepancy, should the electronic presentation does not reassure that the hyperlink to the external record or system which holds the record actually works, the only thing that the Eucp’s 2.0 enactment improved so far is the reduction of bureaucracy alone.

2. Purposed reforms

2.1 Smart Letter of Credit mechanism. The features analysed in τηε previously uploaded article named Blockchain technology as a solution to Trade Finance are likely to “cure” anything that all the previous LCs’ transformation attempts did not assuage, starting from the lack of a common accessible communication centralized platform, in order all the relevant procedures to be efficiently coordinated based on strict regularity.nbsp;Particularly, the blockchain technology’s utilization on a distributed consortium or permissioned ledger, consisting of the related with the LC transaction participants namely the buyer, the seller, the facilitating banks or any other trade finance entity like shippers or insurance companies, acting as participating nodes, would enable the lc issuance.nbsp;This would be formed as a smart contract, incorporating codified terms and conditions as much as contractual clauses in regard to the place, time and manner of delivery of shipment.nbsp;Supplementary, other contractual terms which are related to the quantity or description of the goods would be also stated in detail , comprising together with everything mentioned above the text that has to be initially drafted by the buyer. The latter will be immutably stored on the network, while the applicant’s bank would be able to edit and digitally sign it, in order to signify its consent.nbsp;Accordingly, any other participating bank would be able to review it too, in order probable existing legal or data discrepancies, arising from contract ambiguities to be observed, before sending it to the beneficiary. By the time a final review and approval on behalf of the exporter takes place, the current LC would constitute the final contract among the exporter and the issuing bank, saving a lot of money and time compared to a typical lc issuance. Hereupon, the “single truth” version of the LC would be then verified through the consensus mechanism, rendering all the parties capable of viewing and working upon this, always according to their access rights.nbsp;In general, the prevention of possibly arising disputes which are provoked by contractual ambiguities and shipment’s delivery or payment delays will be eliminated, since transparency will be enhanced, given the fact that the LC issuance would be able to be seen at any time by all the trading and facilitating parties.nbsp;As it is understood, this method would reveal every documents’ discrepancy much earlier, confirming the perception that “prevention is the best form of treatment”.nbsp;At the same time, the codification of clearly precise and exact lc requirements through smart contract templates would eliminate further implications, reducing the related risks, rendering a real-time forecasting available.nbsp;The data errors will be prevented, because the initial sales contract would be automated too, ensuring certainty and uniformity throughout the trade community. What is more, unprecedented fraudulent behaviours and any unspoken acts of conspiring would be entirely diminished thanks to the purposed ecosystem’s unique amenities.nbsp;nbsp;nbsp;Beside the instant digital issuance, a “multisignatory mechanism” will likewise contribute to the cost reduction as well, enabling updates and modifications to the LC, safeguarding in the meantime the supervision of pending actions.nbsp;It has to be stressed out that the relevant amendments and corrections can be conducted earlier than the presentation of the documents to the bank itself, being instantly approved or countered by the parties.nbsp;To be more specific, every incident would be dealt in real time, e.g. a shipment’s two-week delay could be either mutually permitted to be waived by the bank or alternatively provoke other terms’ alteration upon both parties’ consent.nbsp;nbsp;Equally significant benefits are correlated with the payment method automation which ensures commercial rapidity as much as assured payments.nbsp;On the contrary to what is happening in today’s commercial practices, where the banks have to first evaluate anything submitted for compliance with the LCs, the fact that every party is able to check in real-time which conditions are obstructing the funds’ freeing, saves time and money, also leading to the avoidance of grinding litigation procedures. This changes everything in the background, especially in case of third parties’ documents like B/Ls which in many countries represent a “fraud vehicle”.nbsp;Finally, the artificial intelligence’s contribution via IoT and oracles would facilitate the LCs’ limitations abolishment too. For instance, when the commodities do not comply with the specified in the contract terms, everything around the case would be thoroughly investigated by a regulatory node or a third-party oracle, ascertaining if the performance should be reversed, enhancing that way pioneeringly the so much needed security and predictability.nbsp;The adaptable in relation to modern needs and trade practices character of this new technology seems to be the reason why this revolutionary step is anticipated to radically change everything.As an alternative solution to the purposed ecosystem, three different blockchain enabled smart contracts could be used for this operation as well. A trading one (TSC) which would replace the traditional paper-based sales contract, incorporating relevant terms and conditions. A second one, representing the LC (LCSC), being eligible to update the process status through communication with the TSC and last but not least a logistic one (LSC) which would replace the original B/Ls, rendering the exporters able to get paid, without physically representing the B/Ls. Finally, an oracle could be concurrently used in order all the relevant updates to be provided to the major actors of the network, triggering every corresponding procedure like forwarding the agreed amount of money in the respective escrow account.nbsp;nbsp;2.2 Smart Bill of LadingA B/L, either documentary or electronic, constitutes the most crucial document which the exporter has to present to the nominated bank in order to get paid in a LC transaction, acting not only “as a receipt for the nature and quantity of the goods” shipped but also as a document of title.nbsp;nbsp;Nevertheless, despite its importance,nbsp;a lot of pitfalls can be easily observed throughout the present practices. Particularly, various business hazards loom large, notwhistanding every endeavor that tried to improve the relevant hurdles through digitization processes.nbsp;Additionally, as it is justified in Hadley v. Bexendalenbsp;case, losses, bearing from related delays are not easily recoverable, also triggering a domino effect of legal consequences.nbsp;nbsp;Yet, this case scenario may be even worse in the event of a sensitive delivery, should the buyer have to follow on its contractual duties.nbsp;Furthermore, the documentary B/Ls are easy to get stolen , being merely responsible for the continuation of free trade, promoting fraudulent behaviors by replicating or exploiting any information contained therein.nbsp;nbsp;In particular, amended B/Ls may be forged by fraudulent third parties who claim delivery ahead of their rightful owner.nbsp;Last but not least, as it is stipulated in Sanders Bros v. Maclean amp; Co,nbsp;their possible discrepancies provoke extra costs e.g. storage charges and demurrages,nbsp;delaying the corresponding payment, while these instruments are already considered by the industry participants to be quite expensive, due to their physical need of transfer. Finally, the fact that not only B/Ls but every other requisite that is requested in a LC transaction has to be distributed and certified by multiple parties which have to reconciliate in different stages led also to importers’ inability to claim upon the goods, given that the documents are individually cleared out the chain. Despite the above-mentioned flaws, documentary B/Ls did not lose their dominant in the Lcs’ regime position, since the community did not actually support the attempts towards paperless practices through telex releases or electronic trading systems. The participants’ size combined with the lack of sophistication e.g. technical implementation and security issues, led the banks to maintain their old paper-based processes, not investing in this endeavor since the adoption was far from universal. However, three electronic trading systems named “Bolero International Ltd”, “E- Title Authority Ltd” and “essDOCS Ltd”, each one having its own user agreement, defining rights and duties in relation to electronic titles, are currently supported by the International Group of Clubs. Notwithstanding the above, the fact that Bolero signed an MOU with Fintech consortium R3nbsp;though, in order to redesign its eB/L, utilizing blockchain technology, demonstrates its major impact to electronic credit facilities, especially ,should this solution be sturdy enough to incorporate the fundamental attributes and properties of their paper equivalents. Blockchain technology would be the only applicable remedy, given the situation that its consensus mechanisms would secure that all LC participants would access the single B/L final version, since the main struggle is still related with the differentiation among a genuine B/L and its electronic reproductions.nbsp;In general, the use of anbsp;Smart B/L or every other “single version” record that would be directly issued and transferred on the blockchain platform will probably replace eLCs’ analysed pain points like multiple copies existence, the re-entry or authentication of data and the diminishing of manipulative behaviours and documents’ errors, since only authorized parties would be able to modify or add specific information on the network. Finally, particular blockchain’s features, i.e. its data immutability, transactions’ traceability and consensus mechanism for any possible necessary alteration would also eliminate illegal documentary fraud activities that every prior attempt did not entirely resolve, due to the buyer’s and bank’s inability to review in real time the transport operations.

2.3 Trade Asset Tokenization

The huge step towards commercial reliability and risk mitigation in the eLCs’ regime would be held through “Trade asset tokenization”; Cryptoassets like crypto-tokens could be used in a decentralized and distributed ecosystem which utilizes smart contracts to signify and protect ownership, custody or any other limited property right. That way blockchain’s ability to create decentralized asset ownership and distribution rights offers a new contractual way, participating in commercial transactions. Every asset token would constitute a digital trade asset that represents the transferred goods or the reward which is to be paid by the time the smart contracts’ terms and conditions are met. More specifically, each asset’s data parameters will be public and private. The public ones would disclose encoded information about the asset e.g. its ownership, value and transaction history to every participant of the network, while the private ones, meaning the private key would permit transfers or other related to the crypto asset dealings, being cryptographically authenticated by digital signatures. In the smart LC case scenario, the physical assets’ conveyance would be conducted at the same with the tokenized unit’s transfer in a permissioned blockchain network, where everything around the shipment and delivery would be finalized and immutably stored. Thereby, every party would be enabled to view anything related to the token holder (e.g. the freight forwarder, the carrier or any inspection agency) who would be also eligible to update any asset related information in real-time on the blockchain network, e.g. customs delays together with other transport information that may be posted in the context of the shipment’s transit route, its duration or any further conditions, possibly deriving from sensors devices. Finally, the transfer of the token would be immutably stored on the network through the consensus mechanism, in order to provide a tamper resistance record of shipment and delivery. That way the trade cycle in an eLC transaction would be completely reformed, ensuring the sale contract’s compliance, since clear visibility into the current status and movement of merchandise would provide the establishment of a clear chain of asset provenance and delivery assurance, also mitigating possible costs and cargo releases’ delays through real-time updates.nbsp;Nonetheless, should the parties decide to transact, using crypto assets in their smart contracts, legal and regulatory interpretation regarding their nature and identity will be deemed necessary, given the fact that mostly in the U.S, they are considered to be a security or commodity, while, contrarily in Europe they do not comprise neither a financial instrument nor currency or commodity. Cryptoassets’ design might create some practical impediments to legal intervention, but this will not mean that they will be outside of the law or that they will be disqualified from being property as some experts do believe.

Stavros Zoumpoulidis

Legal Counsel LLM MSc