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Is a Letter of Credit (L/C) a dying product?
| 13-10-2020 | Ger van Rosmalen | treasuryXL
In this blog , Ger van Rosmalen explains why you need to ask for a Transferable Letters of Credit when your bank doesn’t want to increase credit limits but even want to lower credit limits.
This blog continues in Dutch language…
Is een Letter of Credit ( L/C) een uitstervend product? Nog steeds worden wereldwijd door importeurs en exporteurs risico’s afgedekt met L/C’s. Als ik kijk naar de afgelopen jaren met het toenemende aantal bedrijven dat ik mocht helpen met het structureren van L/C deals dan ben ik ervan overtuigd dat L/C’s het bedrijfsleven nog lange tijd zullen helpen om de kloof tussen onbekende importeurs en exporteurs financieel te dichten. Ja, er zijn alternatieven en daar moeten we onze ogen niet voor sluiten maar deze zijn (nog) geen gelijkwaardige vervanging voor deze in mijn ogen uitstekende betalingsinstrumenten.
Transferable Letters of Credit
Bijzondere aandacht verdienen daarbij de Transferable Letters of Credit. Een speciale vorm van een L/C die uitkomst biedt als de bank kredietlimieten niet wil verhogen of zelfs verlaagt. Je doet bijvoorbeeld mooie deals met een prima winstmarge, maar je bank beweegt niet mee.
Stel je verkoopt een machine aan een klant, en die machine koop jij weer bij een producent. Hoe kun je een dergelijke deal structureren zonder dat het ten koste gaat van je beperkte werkkapitaal? Een Transferable L/C kan hier uitkomst bieden. Je ontvangt een Transferable L/C van je koper voor een machine ter waarde van EUR 100.000. Je koopt de machine bij een producent voor EUR 90.000 en die vraagt zekerheid van betaling. Het L/C dat je hebt ontvangen kun je overdragen naar de producent voor EUR 90.000 die op dat moment zekerheid van betaling krijgt. Als de producent heeft geleverd zal de financiële afwikkeling als volgt plaatsvinden: de documenten voorgeschreven in het L/C worden door de producent via zijn bank bij jouw bank aangeboden. Zijn de documenten goed, dan mag de bank de inkoopfactuur vervangen door de verkoopfactuur en zal de marge op jouw rekening achterblijven.
Klinkt simpel, toch is het dat niet, want er gelden belangrijke spelregels. De in- en verkoop condities moeten naadloos op elkaar aansluiten dus inkoop in EUR dan ook verkoop in EUR, verkoop op CFR basis dan ook inkoop op CFR basis. De goederen mogen evenmin bewerking ondergaan. Hier moet je even voor gaan zitten, maar het maakt deals mogelijk die je anders misschien moet laten lopen. Hoewel het een bancair product is, bieden banken het in mijn ogen te weinig aan als alternatief voor kredietverlening. Soms omdat de bank er weinig of geen ervaring (meer) mee heeft of het niet wil doen omdat de exporteur hier niet veel ervaring mee heeft en de bank daarom een reputationeel risico denkt te lopen.
Conclusie
Met een goed onderbouwd verhaal kun je dergelijke L/C transacties heel goed gebruiken om jouw groeidoelstelling te realiseren, met comfortabele zekerheid van betaling.
Mijn advies is om expliciet te vragen om een Transferable L/C en neem niet te snel genoegen met een afwijzing.
TradelinQ Solutions kan je daar heel goed begeleiden. Neem vrijblijvend contact op voor meer informatie.
Ger van Rosmalen
Trade Finance Specialist
Smart working with blockchain-based smart contracts
| 12-10-2020 | Carlo de Meijer | treasuryXL
Smart contracts are one of the most popular and talked about subjects being built in the blockchain industry. As processes are increasingly digitalised, it is becoming necessary to find a way to make reliable, digital business agreements. Smart contracts are a great alternative for replacing traditional contracts, that are often complex, slow and expensive.
Smart contracts are gaining widespread use and ease of creation. Today, smart contracts are available to optimize many financial and business processes, thanks to the contribution of blockchain consortia such as Hyperledger.
This blog discusses some of the current opportunities and challenges facing the adoption of smart contracts.
What are smart contracts?
A smart contract is a self-executing, self-enforcing protocol which is governed by its explicit terms and conditions, which stores and carries out contractual clauses via blockchain.
To enter into a blockchain based smart contract, the parties first negotiate and agree to the terms of the agreement before memorialising the terms (either in part or entirely) in smart contract code that are stored inside the blockchain.
Smart contracts allow the performance of dependable transactions without the engagement of third parties. It is a decentralised method, which means that intermediaries at the moment of confirming deals are not required.
Smart contracts automatically execute when predetermined terms and conditions are met, based on the rules it was programmed to do.
Smart Contract Key parts
Smart contracts consist of a number of essential parts: signatories, subject and specific terms. First of all the signatories i.e. two or more parties that use the smart contract and give their final ‘go forward’ regarding the proposed terms via their digital signature. Second the agreement’s subject itself that is limited only within the smart contract’s environment. Third the specific terms of the smart contract. They have to be described in detailed mathematical terms and implemented in a programming language that is compatible with the smart contract’s blockchain. Based on these terms, the contract will execute itself.
Smart Contracts and Blockchain
The key to these contracts is the decentralised network known as blockchain. Smart contracts use blockchain technology to verify, validate, capture and enforce agreed-upon terms between multiple parties.
Smart contracts on the blockchain allow for transactions and agreements to be carried out among anonymous parties without the need for a central entity, external enforcement, or legal system. The transactions are transparent, irreversible, and traceable.
Blockchain is the perfect environment for smart contracts, as all the data stored is immutable and secure. The data of a smart contract is encrypted and exist on a ledger, meaning that the information recorded in the blocks can never be lost, modified, or deleted.
Where could smart contracts be used?
Smart contracts can be used to perform functions in a great variety of industries. Whether regulatory compliance, contractual enforceability, cross-border financial transactions, property ownership, home buying, supply management, material provenance, document management and many other applications.
Today, smart contracts are relevant in areas such as trade in digital financial assets with legal transfer of ownership, banking and credit services, logistics processes, tracking the origin and path of goods, decentralized storage, and use of renewable energy.
Supply chain management
An area where smart contracts could be used is in supply chain management. Making supply chains more transparent via smart contracts is helping to smooth out the movement of goods and restore trust in trade. Smart contracts can record ownership rights as items move through the supply chain, confirming who is responsible for the product at any given time. The finished product can be verified at each stage of the delivery process until it reaches the customer.
Insurance
Smart contracts could also be used in the insurance sector. This sector nowadays lack automated administration. It can take months for an insurance claim to be processed and paid. Smart contracts can simplify and streamline the process by automatically triggering a claim when certain events occur. Specific details could thereby be recorded on the blockchain in order to determine the exact amount of compensation.
Mortgage loans
Smart contracts could also simplify the mortgage process. The terms of a mortgage agreement are based on an assessment of the mortgagee’s income, expenditures, credit score and other circumstances. The need to carry out these checks, often through third parties, can make the process lengthy and complicated for both the lender and the mortgagee. By cutting out the middle men, parties could deal directly with each other.
Financial industry
The most widespread use of smart contracts remains in the financial industry, as money and accompanying documents become electronic. In the financial services sector the opportunities for smart contracts include, for example, payment processing, clearing/settlement of financial instruments, trade finance, as well as regulatory technology such as streamlined ‘know your customer’ certification.
Smart contract platforms
There are nowadays a number of smart contract platforms. They could be subdivided on the basis of technology, end-user (banking, government, supply chain, real estate, insurance etc.) and region (Europe, North America, Asia or rest of the world oriented).
Their differences are in programming languages, blockchain consensus, the cost of maintaining an application’s smart contracts, differences in blockchain security, transaction confirmation speed, trust in the main network nodes, and much more.
Ethereum was the first blockchain platform to develop codes specially made for dApp development. Their appearance has prompted the arrival of many other platforms including names like Aeternity, Cardano, Qtum, Stellar, and Waves.
Ethereum
Ethereum, the well-known global blockchain platform was the first to introduce smart contracts to a more wide-spread crypto community. Ethereum is still the most advanced platform for coding and processing of smart contracts. This open-source platform has one of the largest networks of developers available, and due to this, it can keep up with the continually changing environment in the blockchain industry.
Aeternity
Using a hybrid of Proof-of-Work and Proof-of-Stake model, Aeternity offers a method for powering so-called Turing-complete smart contracts that are capable of being executed off-chain. Thereby they deliver both privacy and security.
Cardano
Cardano is a decentralised blockchain and cryptocurrency project. Like many crypto projects, Cardano is open source. The Cardano platform is working towards implementing smart contract functionality with the Goguen update this year. This should bring their smart contracts a step further to ‘smarter contracts’.
Qtum
Qtum is an open-sourced blockchain application platform, where security and flexibility are two of the most essential components. The Qtum team has worked intensively to assure that smart contracts can be executed safely, making the platform perfect for businesses and their enterprise clients. Qtum uses Proof-of-Stake and a Decentralized Governance Protocol.
Stellar
Stellar, unlike many crypto coins, was created by developers for developers. That means that it is capable of handling extremely complex smart contracts. For simple smart contracts, Stellar offers a clean, easy-to-use alternative for developers that want to build smart contracts delivering greater efficiency.
Waves
Waves is an open blockchain project, strongly focusing on dApps and using Web 3.0 technology. To keep their smart contract project simple, Waves offers many online courses, and other methods of support for developers that may want to work with Waves. Like many smart contract projects, Waves uses Proof-of-Stake.
Benefits of Smart Contracts
Smart contracts provide many benefits over traditional contracts for a wide range of industries. In theory, they are more efficient and trustworthy than traditional contract law, and are also thought to offer better security as all actions are recorded and verified. As a result they may reduce unnecessary costs and time expenditure while enhancing transparency.
Greater efficiency and speed
Smart contracts are able to improve the efficiency and speed with which commercial arrangements are carried out. Smart contracts are automated so there is no need to spend a lot of time on the paperwork and also correcting the errors that are manually written in the documents. They can be executed in minutes, for a fraction of the cost, from wherever the involved parties are, and without the need for lawyers.
Accuracy and transparency
As the codified terms are fully visible and accessible to all relevant parties, there is no way to dispute them once the smart contract is established. This facilities complete transactional transparency and may removes the likelihood of manipulation, bias or error. This, in turn leads to decreased monitoring costs and risks of opportunistic behaviour.
Trust
Smart contracts may provide parties with a degree of trust. They automatically perform transactions following predetermined laws, and the encrypted documents of these transactions are distributed over participants. The information on the contract and the terms of the contract is straight. Specific validation by everyone and the immutability of the work guarantee that the smart contract can never more be broken.
Security
Smart contracts are also thought to offer better security as all actions are recorded and verified. Blockchain transaction documents are encrypted. That makes them extremely difficult to hack. Security features can also be integrated into a smart contract to automatically generate backups and duplicates in the event of damages, data losses to the original one or hacks.
Challenges
Smart contracts could also bring a number of challenges that may prevent more massive adoption.
Human errors
Like paper contracts, smart contracts could still experience fraud, because of human errors. Smart contracts are codes, and these codes are written by people (coders). As such, there is a (high) chance of a smart contract code having many bugs. They can be delayed, intercepted and corrupted. Some mistakes have proven to be very costly.
Confidentiality, security and privacy
Unlike traditional contracts, all transactions executed via a smart contract, are propagated across all of the nodes in the network.
This may create privacy issues, particularly when the accounts of the parties are associated with known entities. Even when the parties rely on pseudonymous accounts, certain identification techniques can be used to discern the identities of parties who transact with a particular smart contract.
Lack of engineering experience
As smart contracts begin to proliferate, there will be a need for new types of cryptography experts, and forensics experts, to verify software code and to translate the code into human-readable form. A lot of engineering expertise is required to make perfectly operational smart contracts. Experienced coders however are hard to find, and costly.
Legal and regulatory challenges
There are also a number of legal and regulatory challenges, which are preventing the more widespread utilisation of smart contracts. Smart contracts lack a clear legal status. There is no official government regulation that applies to them.
Interpretation and enforceability
If there is a dispute about whether a smart contract accurately memorialised the parties’ intentions or whether one party has breached the contract, the parties may still bring legal proceedings or engage in alternative dispute resolution processes. As contract law varies between different jurisdictions, so too will the enforceability of smart contracts.
Jurisdictional issues
Smart contracts also raise jurisdictional issues. Because blockchain operates as a decentralised ledger, smart contracts can be formed and accessed anywhere across the globe. They do not reside in any one location, but exist across multiple locations at the one time.
Yet existing laws are jurisdiction-based. The differences in laws across jurisdictions can be highly problematic, and may result in incongruent rights and responsibilities, and confusion regarding the consequences if there is a contract violation.
What steps are needed?
Comprehensive/clear picture of business/operational practices
Vague contracts allow space for argument. This can lead to claims, disputes, high legal expenses, project and operational delays, as well as invoicing and payment delays. To prevent these situations (as much as possible) a comprehensive and clear picture of the business and operational practices for involved parties is necessary when defining and agreeing on terms in order to automate contracts. Participants need to agree on “specific data,” which may include the exact time zone to be used along with the specific time, the location and what that means for contractual terms and fulfilment. Legal departments drafting contracts need to consider details like this in advance.
Creating Logic Parameters
Parties should also ask themselves a number of questions. What data source will the companies use for their contract? And what are the tolerances? Furthermore, what type of rounding will the smart contract act on? These types of questions must be discussed prior to translation for smart contract codification.
Legal contracts must contain terms on parameters including sources, tolerances, frequency and time frames of data capture methods among others. Specificities such as location, time, and rounding decisions inform logic parameters around data. These impact how contracts translate into code. Incongruent readings can’t be automated.
Clear, non-conflicted contract terms
Problems may arise when an older contract that is used as a starting point has irrelevant or inapplicable clauses that have been forgotten to be removed. This may result in terms and conditions that are either disparate or contradictory. The code of a smart contract cannot be made to execute contradictory terms.
Smart contracts execute exactly what they are programmed to execute and are incapable of judgment. Rules of engagement, particularly those regarding fee calculations and billing practices, must be able to be encoded from clear, non-conflicted contract terms.
Anticipating Data Glitches and Gaps
There will always be technology glitches and failures that may result in data gaps or errors. These occasions can be reasonably anticipated and protocol for them can be incorporated into both natural language and smart contracts.
With agreed-upon terms for these events, a smart contract can be programmed to navigate data tolerances and triggers that automatically recognize when a glitch or failure has occurred. It can then execute the correct predefined action, agreed upon upfront by both parties resulting in zero delays or downtime to the relationship.
Going forward
The potential market for smart contracts is great. Smart contracts can actually change the way agreements are made across various industries.
It however will take some time and require more development before it reaches its mainstream approach. We cannot implement smart contract technology en-masse, as more experimentation is needed at this point. At the moment, smart contracts are still a technology in its early stages. And existing challenges esp. the legal and regulatory ones should be solved first.
That asks for smart thinking|
Carlo de Meijer
Economist and researcher
How Can Xe Help Your Business?
08-10-2020 | treasuryXL | XE |
From simplifying international payments to monitoring the currency markets, Xe is ready to help your business make the best foreign exchange solutions.
At Xe, we don’t just facilitate individual money transfers between individual banks accounts. While we do help our customers make money transfers to pay bills, prepare for international travel, or send money to loved ones back home, we also provide a number of money transfer products and services to our corporate customers.
Each year, over 13,000 businesses in over 100 sectors turn to Xe for help managing their international money transfer and foreign exchange processes. What can Xe help with? We’d be happy to tell you.
Save on currency conversion costs
We’ve said this before, but it always bears repeating. When you’re consistently making international payments or exchanging to foreign currencies, if you aren’t prudent in your transfer method, you can easily find yourself on the hook for a lot of additional costs. Bank fees, wire fees, unfavorable exchange rates, and hidden transaction fees are just a few of the extra costs you can potentially incur when making international payments.
Don’t have time to watch the markets? Don’t know how to analyze market volatility, or figure out the best time to transfer money? No problem. When you work with Xe, we’ll watch the markets for you. We’ll help you to get the best exchange rates possible for your transfers, and let you know when you should be making your payments to minimize the added costs. You can also integrate our Currency Data API into your existing systems to easily access exchange rates for your chosen currencies.
Simplify and effectively manage your payments—all of them
When you’re making frequent—and numerous—global payments, it’s important that they clear on time, are free of any errors, and meet all necessary regulatory compliance standards. Fortunately, this isn’t something that has to be done manually and payment by payment. Our systems can help you to simplify and streamline your international payments, without sacrificing quality in the process.
Our Mass Payments solution will enable your business to process, execute and deliver multiple payments on a global scale from a single gateway or integrated into your own systems, easily and securely. This solution will vastly reduce the amount of time and manual work in your international payments, which will then allow you to devote more time and resources to other areas of your business.
Get advice from someone who knows the markets
If you don’t have a background in foreign exchange, trying to make sense of the financial markets can seem an impossible task. And when you’re a business owner, you likely don’t have the time to sit down and familiarize yourself with every minute detail of the foreign currency markets.
We’ve been in the currency business for over 25 years. We know the markets, and we can help you to understand them, recognize the issues they may present to your businesses, and determine the best solutions to navigate the markets and make the best decisions for your business.
Get in touch with XE.com
About XE.com
XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.
Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.
Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.
Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.
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