Blockchain and letters of guarantee

Paper-intensive financial instruments, especially those that require back-and-forth negotiations between parties, are ripe for digitization and blockchain. Add in the potential for fraud with paper processes, and the rationale for blockchain is even greater. The bank guarantee, or letter of guarantee, is just such an instrument.

Bank guarantees facilitate doing business by adding trust to a contract between two parties, such as a seller and a buyer or a landlord and a tenant. The bank guarantees that the beneficiary — the seller or the landlord — will get paid if the buyer defaults or the tenant fails to meet the rent. A letter of guarantee can also cover performance, protecting the beneficiary if the other party fails to deliver a product or provide satisfactory services.

While the concept of a bank guarantee is standard across the industry, the execution is anything but. Individual banks have their own standards, forms, and processes. There can be numerous drafts and negotiations before reaching an agreement, and if changes are required, the whole process begins again. All in all, it can take up to a month to issue what is typically a one-page agreement.

The paper document itself is another major pain point, particularly for beneficiary companies that deal in thousands of guarantees. That final paper document has to be managed and securely stored. Once the final guarantee leaves the bank, maintaining an audit trail is challenging. And because a paper document is easily faked, fraud and forgery are not uncommon.

Proven Benefits of a blockchain-based solution for letters of credit

Standardizing and digitizing the entire process and using a blockchain-based solution for letters of credit can:
Streamline the process end-to-end
Eliminate the costs of printing, issuing, exchanging, and retrieving physical documents
Reduce the risk of disputes and manual data entry errors
Increase security through encryption and tamper-evident distributed ledger technology
Lessen the risk of fraud with a transparent process auditable by any permissioned participant

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