Blockchain technology has a bright future in the world of finance. It remains to be seen how different institutions plan to embrace this technology, though. China CITIC Bank and Minsheng bank use the blockchain to create a letter of credit system. Both companies announced this system not too long ago. One of the first transactions of this kind saw a 100 million letter of credit transaction be completed without a hitch.

Launching a blockchain-based letter of credit system makes a lot of sense. It allows participants to transfer value immediately without any downsides. It is also the first major financial project of its kind which is accessible right now. Using private blockchains has become somewhat of the norm among financial institutions. Then again, those blockchains only work for approved parties, which is not the right way to go. Connecting different businesses of similar size in a decentralized manner needs to be the ultimate objective.

Blockchain-based Letter of Credit System Makes Sense

Both China CITIC Bank and Minsheng Bank feel this letter of credit system will accomplish that goal. Rather than using paper and mail delivery, blockchain technology makes a lot more sense. It also means this system will become a big competitor for both SWIFT and CIPS in the future. The blockchain-based system provides a way for users to track the status of transactions in real time. More importantly, there is no requirement for mutual trust, which is one of the main selling points.

As a result of this new system involved parties will save both time and money accordingly. Furthermore, the blockchain guarantees the authenticity of businesses and documents alike in a decentralized and trustless manner. It is even possible for regulators to keep a close eye on this system. All they have to do is become a network node to keep an eye on things. Regulatory authorities can collect business data in real time without disrupting the system altogether.

It is worth mentioning this letter of credit system is based on Hyperledger Fabric. Any allied bank becomes a VP node to achieve blockchain-based consensus. Small and medium-sized institutions can also get involved, indicating the system is open to anyone and everyone. This project is designed to serve as a building block for an inter-bank blockchain system in the future. It will be interesting to see how that situation plays out in the coming months.

Header image courtesy of Shutterstock

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About Author

JP Buntinx is a 30-year old FinTech and Bitcoin enthusiast living in Belgium. His passion for finance and technology made him one of the world's leading freelance Bitcoin writers, and he is working to achieve the same level of respect in the FinTech sector.

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