Bank of America has revealed progress on a blockchain application designed in association with Microsoft that automates the process of managing standby letters of credit (L/Cs).

Instead of L/Cs being manually sent between multiple parties, they are being translated into smart contracts in what is known as an ethereum based application.

The application aims to make it easier for global treasuries to do business with new customers.

Smart contract

The smart contract essentially aims to detect errors in documentation instantly and at any time during an L/C transaction process.

In conventional L/C management systems, documentary errors all too often emerge only at the end of the process when a bank is called upon to pay out on a transaction.

Treasury benefits

The blockchain facilitated smart contract routes the documentation, triggers events and contains the terms and conditions of parties to the transaction.

The application is designed to help Microsoft's treasury, which has over 1,000 different bank accounts held not only by Bank of America, but also by several other financial institutions.

Scale and compatibility

Both Bank of America and Microsoft realise that to make blockchain work in L/C contexts, there needs to be a sufficiently large pool of banks, suppliers, buyers and other parties to the transaction that are able and equipped to participate in transactions.

Compatibility with other L/C focused blockchain initiatives such as Hyperledger and Enterprise Ethereum may also be essential for a roll out of blockchain-processed L/C transactions.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.