Blockchain-Enabled Trade Finance Innovation: A Potential Paradigm Shift on Using Letter of Credit

Shuchih Ernest Chang, Hueimin Louis Luo and YiChian Chen
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Shuchih Ernest Chang: Graduate Institute of Technology Management, National Chung Hsing University, Taichung 40227, Taiwan
Hueimin Louis Luo: Graduate Institute of Technology Management, National Chung Hsing University, Taichung 40227, Taiwan
YiChian Chen: Graduate Institute of Technology Management, National Chung Hsing University, Taichung 40227, Taiwan

Sustainability, 2019, vol. 12, issue 1, 1-16

Abstract: This paper explores a potential paradigm shift in trade finance utilizing blockchain technology. Traditionally, the centralized operating model has governed trade finance and the manner in which traders handle business processes. However, such heavy reliance on centralized authorities has made for poor performance, the lack of flexibility and transparency, and vulnerability to malicious alteration. The blockchain, as a distributed ledger technology (DLT), has attracted growing attention and has the potential to disrupt legacy finance procedures such as payment by letter of credit (L/C). International trade players may benefit from the technological reengineering of financial processes through the implementation of blockchain- and smart contract-based platforms. From the conceptual perspective of a paradigm shift, this study analyzes the feasibility of blockchain innovation in trade finance through modern blockchain-based L/C initiatives. Moreover, this study also explores blockchain applications in terms of logistics tracking and how it integrates with trade finance procedures. This study contributes to the understanding of a blockchain paradigm shift with a multi-case study. The results may illuminate the potential future application of blockchain finance and provide researchers with an illustrative example of other finance-related capabilities. Studies of trade-related topics such as customs clearances, insurance, and logistics applications need to be addressed in the future to create a comprehensively trustless environment and facilitate the automation of trade.

Keywords: blockchain; trade finance; letter of credit (L/C); smart contract; distributed ledger technology (DLT); paradigm shift (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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