International commerce depends on trustworthy payment mechanisms. At Contura Energy, we know this well. We export 8 to 10 million tons of metallurgical coal annually, adding up to more than $1 billion in revenue. Metallurgical coal is made into coke, the main fuel used in making steel. This commodity plays a vital role in enabling modern manufacturing around the world. Though we employ many people in the United States, we depend on international trade. We export coal to countries as diverse as Ukraine, Turkey, South Korea, and several EU-member states. This allows us to drive transformation in international trade. To do this, we are partnering with Amazon Web Services (AWS) to leverage their Amazon Managed Blockchain platform.
There’s ample reason to pursue this transformation. The way our products are paid for is outdated in this digital world. International trade such as ours relies on letters of credit. A letter of credit is a credit instrument issued by a bank on behalf of its client. The bank promises to pay the beneficiary upon presentation of the required documents. This substitutes the bank’s creditworthiness for that of the buyer. It is a guarantee of payment.
Today, letters of credit cover 13 percent of world trade amounting to $2.3 trillion. However, these instruments have changed little over the years. The Uniform Customs and Practice for Documentary Credits (UCP) governs letters of credit. The International Chamber of Commerce published it in 1933. The last major update to UCP took effect in 2007. Although we exchange information using Excel spreadsheets and email rather than parchment or telegrams, the basic process is the same. Documents are created, verified, transmitted, and approved using manual processes. Automation and digitization remain out of reach for this basic instrument of international trade.
It’s not for lack of trying. As part of the most recent update, the ICC created a standard for the electronic exchange of documents related to letters of credit. This standard has seen low adoption. One reason is the “principle of strict compliance.” Documents presented in fulfilling a letter of credit must conform exactly to the letter’s requirements. A misplaced comma or an extra character can result in the rejection of a document, causing delays and raising costs. In the absence of automatic verification of compliance, human intervention remains the norm.
We deal with these issues daily. We see there is a dire need to transform the letter of credit system. Today, if a letter of credit is valid for 10 days, 5 of them can be consumed with document preparation. Errors and back-and-forth communication can delay shipments and create significant costs.
We want to be at the forefront of creating a more efficient system with less risk and more transparency. The information contained in letters of credit and the workflow of exchanging documents are easy to digitize. The challenge is enabling mutual trust and verification.
That’s why we are pursuing blockchain-based innovation to transform how letters of credit work. Blockchain enables parties to execute transactions without the need for a central trusted authority. It ensures that transaction records cannot be changed and provides each party with an up-to-date copy of the appropriate data. In the ideal world, this would enable end-to-end digitalization and automation of the letter-of-credit process by cutting down more than 50 percent of processing time. Verification of strict compliance could be accomplished without manual review, and errors flagged could be corrected quickly and automatically. Smart contracts enable business logic to be embodied as part of a blockchain, supporting the back-and-forth workflows of international payments.
This would result in lower costs because less human labor would be required to examine paperwork. Banks would have the assurance that documents meet contractual standards. Smart contracts would provide a strict, mutually-agreed-upon framework for compliance, reducing the potential for disputes and delays. Most importantly, a blockchain-based system would provide transparency to all parties. Because everyone has the same data, everyone knows where the letter is in the process and what the issues are. Rather than emailing across time zones and hoping for a timely response, everyone would always have real-time data available.
Partnering with AWS is helping us overcome two key challenges. First, building a scalable blockchain network is a complex and highly specialized undertaking. It requires each party to manually provision hardware, install software, configure networking, and so on. Asking our trade partners and banks to accomplish this individually would be impossible. With Amazon Managed Blockchain, we can create a fully functioning Blockchain Network with just a few clicks. Because the network is based in the cloud, our partners can easily join from anywhere in the world.
Another major challenge is overcoming the regulatory hurdles inherent in this type of change. Working with a company as respected and well known as AWS in a cloud space gives us a head start in terms of credibility and scalability. AWS has consistently demonstrated its enthusiasm and engagement for solving this type of potentially game-changing issue.
To date, our partnership with AWS, leveraging its technology platform and the expertise of the AWS Professional Services team, has enabled us to build a successful pilot of a blockchain-based letter-of-credit system. We expect to have a fully functioning pilot application up and running by early 2020. We believe that by demonstrating the potential of this system to our partners and financial institutions we can accelerate the modernization of international trade payments via letters of credit. The potential for reducing costs, speeding transactions, increasing transparency, and reducing risk is too good to pass up.