China CITIC Bank and Minsheng Bank Launch the First Blockchain-based Letter of Credit System
Recently, Minsheng Bank and CITIC Bank announced the launch of Blockchain-based Letter of Credit System, or BCLC). A 100 million letter of credit transaction was conducted on the system on the first day, marking the establishment of another heavyweight blockchain application in the financial industry.
At present, most blockchain projects of the financial sector are private blockchain that serves within the institutions. A few other consortium blockchain projects are backed by a leading organization. Therefore it is difficult to reflect the equal and mutual trust nature of blockchain technology. The BCLC system is the first consortium blockchain that connects two national business bank of similar size. With the decentralization, consensus and traceability mechanism of blockchain, the two banks are free from issues like data storage location, identity identification, data-tampering etc. The launch of BCLC is a landmark on the development of blockchain applications.
For a long time, domestic L/C business between banks are conducted via paper and mail delivery method, along with SWIFT plus test key. Such method is neither efficient nor safe. Customers can only query the progress within his opening bank system and unable to track the status of counterparty bank. Meanwhile banks also lack sufficient means to verify the authenticity of the business. It is difficult to prevent duplicate use and counterfeiting of invoices, third-party documents and other paper vouchers.
In order to solve these problems, Minsheng Bank partners with CITIC Bank to build the first blockchain project – BCLC system. The successful launch of the system represents that domestic L/C business breaks the constraints of traditional banking system. Through the blockchain technology, BCLC system has achieved the functions like teletransmission, electronic delivery, Chinese message transmission and others. Issues like mutual trust and electronic data transmission have been resolved between banks. Compared with the traditional business system, the new system has transformed the issuance and delivery of L/C into electronic format, saving time and delivery cost. Customers can track progress through online banking and other channels in real time. Transparency of the business has been enhanced. At the same time, the authenticity of business and document can be guaranteed with the introduction of logistics, tax and other relevant agencies. Regulators can get involved as a node. The open and transparent bank transaction ledgers can help regulatory authorities to collect all business data and real-time management. With the improvement of bank processing efficiency, enterprises can also enjoy cheaper, more efficient services and don’t have to wait for issuance and delivery of L/C so that the capital flow could be accelerated.
BCLC is based on Hyperledger Fabric and highly customized with the structure of “business system of institutions+ frontend blockchain+ blockchain node” to ensure the efficiency of consensus and network performance. Allied banks and big institutions will act as VP node to form consensus. VP node is connected through TLS to ensure transmission safety. Small and medium-sized institutions can get involved through authorization by core institutions. Common customers can join through API of the union and as a external chain. The frontend blockchain is responsible for encrypting the business data in accordance with the national standard encryption algorithm. Only the transaction participants can decrypt the data to ensure the validity of the digital protocol. The transaction sender must sign the data with ID private key to when sending data to the blockchain to ensure the authenticity of data.
The system is based on real business scenarios with solutions when integrating blockchain technology with practical applications. The Fabric’s consensus algorithm is optimized to enhance the efficiency of smart contract execution and add the dynamic data failure recovery mechanism. When the business rules are changed, the smart contract is seamlessly upgraded without data migration. Data encryption, identity signature, access control, privacy isolation and other means are adopted to improve data security. The visual monitoring platform supports node monitoring, block monitoring, contract management, transaction data viewing, horizontal expansion of data storage, regular automatic archiving and improved log management mechanism.
It is reported that Minsheng Bank and CITIC Bank intends to take this as an opportunity to establish an inter-bank blockchain technology alliance to attract more other banks to join. The effort is to achieve blockchainization of inter-bank letter of credit business and financing business. Eventually, all of the financial instruments involved in the life cycle oc L/C could be migrated to blockchain. In addition, the system may faclititate the establishment of industrial standards at alliance level.