A Comprehensive Guide to Digitizing Letters of Credit On DLT With Circularity Finance

7 min readJan 5, 2025

In global trade, the Letter of Credit (LC) process has always been a cornerstone of trust between buyers, sellers, and financial institutions. Yet, managing LCs often involves mountains of paperwork, long approval times, and intricate coordination among various banks and trading parties.

Circularity Finance offers a revolutionary solution which harnesses the power of blockchain technology to innovate this traditional process, providing a secure, transparent, and efficient platform for issuing and managing Letters of Credit.

Below, we’ll walk you through how our web-based LC management interface — powered by CIFI’s decentralized technology — can deliver unprecedented clarity, trust, and efficiency in trade finance to compete in today’s global economy.

Circularity Finance’s DID Ecosystem: A Foundation for Trust

Competing in today’s fast-paced global economy requires compatibility with the latest technology, as businesses seek faster, more secure, and more transparent methods of conducting trade — blockchain becomes the obvious solution.

Traditional processes, such as issuing Letters of Credit, often involve extensive paperwork, multi-party coordination, and manual checks that can be time-consuming and costly. By combining blockchain technology with a robust Decentralized Identity (DID) system, Circularity Finance is revolutionizing how companies manage digital identities, tokenize trade documents, and streamline access to capital.

A Decentralized Identity (DID) ecosystem provides a secure and tamper-proof mechanism for managing identities on the blockchain. Instead of relying on a centralized authority that holds all user data, DIDs enable individuals and organizations to maintain control over their information. This is particularly critical for financial transactions, where Know Your Customer (KYC) and Know Your Business (KYB) processes must be robust and compliant.

Circularity Finance acts as an identity relay service provider, issuing KYC- and KYB-compliant credentials on-chain to registered users:

KYC NFT: Verifies that an individual user has passed identity checks.
KYB NFT: Verifies that a corporate entity has passed business verifications.

These NFTs function as digital identity badges, signaling compliance to other platforms and smart contracts that require verification. This builds a trusted network — once you pass KYC/KYB checks through Circularity Finance, you don’t need to repeat the process across partnered platforms.

Security: DIDs store only cryptographic proofs on-chain, minimizing data exposure.
Portability: A single identity verification can be used across the ecosystem, reducing onboarding friction.
Compliance: Regulated industries can trust that participants have the necessary credentials and are compliant.

The Smart Contract Platform for Letters of Credit

Circularity’s document tokenization platform’s core purpose is to provide users and institutions with the ability to leverage blockchain technology to manage LCs through a secure, transparent, and efficient system. Streamlining and securing the issuance and real time analytics of any LC document deployed via the platform.

The interface interacts with the CIFI Trade Finance smart contracts, which have been tested on both, the XDC Network and Hedera Testnet.

This allows for multiple parties — banks, applicants, and beneficiaries — to actively participate in the LC workflows while ensuring the security and transparency of every transaction. Here’s a breakdown of the key features and technological components that make this platform so powerful.

Key Features

A. User Management

One of the most crucial elements of the platform is the role-based access control system. It ensures that each participant has appropriate permissions and can only access relevant functionalities:

Issuing Bank: The primary LC issuer responsible for initiating and overseeing the LC process.
Advising Bank: A secondary bank that provides assistance to the issuing bank, typically acting as a middleman.
Applicant: The LC requestor, usually the buyer, who applies for the LC.
Beneficiary: The LC recipient, typically the seller, who receives payment under the terms of the LC.

Each participant is given a personalized role-based dashboard, where they can manage documents, monitor the LC status, and execute actions based on their permissions.

B. Document Handling

Managing documents securely is one of the platform’s top priorities:

Secure Document Upload and Encryption: Documents uploaded to the platform are immediately encrypted for confidentiality.
Blockchain-Compatible Format: Uploaded documents are converted into a format compatible with blockchain technology.
Document Hashing and Verification: The platform hashes documents and stores these hashes on-chain for verification, ensuring data integrity.
Digital Signature Collection and Verification: All participants can digitally sign documents, and these signatures are verified to ensure authenticity.

C. LC Workflow Management

The LC process involves multiple steps and approvals, and this platform automates these workflows efficiently:

Multi-Party Approval Process: All parties involved in an LC must approve various stages, including the issuance and presentation of documents.
Amendment Proposals: In the case of any changes to the terms of the LC, the system allows amendments to be proposed, reviewed, and approved by the relevant parties.
Document Presentation and Verification: Beneficiaries present documents to the issuing bank, which must verify them before proceeding.
NFT Minting: Once an LC is approved, an NFT representing the LC is minted, symbolizing the completion of the process.

D. Security Features

The security of sensitive financial transactions is paramount. To this end, the platform integrates the following robust security features:

Web3 Integration: Interacting with the blockchain is made easy through Web3.js integration, ensuring smooth and secure operations.
MetaMask Wallet Connection: Users connect their MetaMask wallets for secure interactions and transactions.
Document Encryption/Decryption: All uploaded documents are encrypted, ensuring that only authorized parties can decrypt and access them.
Role-Based Access Controls: Ensures that only authorized participants can perform actions based on their role.

This combination of blockchain, digital signatures, and role-based access not only reduces turnaround times but also strengthens trust among international trading partners.

Advantages of Tokenizing LCs

Reduced Paperwork: Smart contracts handle approvals and confirmations digitally.
Lower Fraud Risk: NFTs and hashed documents on-chain leave a clear, auditable trail of every transaction.
Faster Settlements: Automatic state transitions on the blockchain minimize delays caused by manual processes.
Global Reach: Participants can operate across borders without worrying about siloed identity data or separate onboarding processes.

Extending the Ecosystem with CIFI’s No-Code Tools

Circularity Finance (CIFI) offers its community access to no-code technology that allows businesses and developers to create, customize, and deploy blockchain applications without writing extensive code. This accelerates innovation — allowing companies to spin up new decentralized apps (dApps) or services that integrate with the LC platform and the DID system in record time.

Once participants are onboarded to Circularity Finance’s ecosystem and verified via NFTs, they can:

Raise Capital

Tokenize assets or future revenues, and list them on compatible marketplaces.
Access decentralized lending and financing options by leveraging verified identities.

2. Build A Decentralized Micro-Economy

Purchase additional Web3 technology or modules through CIFI, integrating them seamlessly with their existing operations.
Use these tools to create extended functionalities — like automated dispute resolution or advanced analytics on trade documents.

From identity verification to LC issuance and capital-raising, everything happens under one umbrella. Companies can add features, services, or use cases as they grow without re-engineering fundamental identity and compliance layers. Participants can easily partner with others in the Circularity Finance network, knowing everyone has passed KYC/KYB.

Practical Steps to Using the Technology

Step 1: Identity Registration

Sign Up on Circularity Finance: Provide your personal or corporate details.
Complete KYC/KYB Verification: Submit required documentation (ID scans, business licenses, etc.).
Obtain Your NFT Credentials: Post-verification, Circularity Finance issues a KYC NFT or KYB NFT to your wallet.

Step 2: Apply To Access the LC Platform

Connect Your Wallet: Use MetaMask or any compatible Web3 wallet that holds your NFTs.
Role Assignment: The smart contract reads your NFT to determine your access to the platform based on your registered role (Bank, Applicant, Beneficiary).
Issue or Request an LC:

Issuing Bank: Initializes the LC with terms, such as amount, expiry, and beneficiary.
Applicant: Confirms details and pledges payment.
Beneficiary: Reviews LC terms, uploads relevant documents (invoice, bill of lading, etc.).

Step 3: Tokenization & Approval

Upload Documents: Documents are encrypted, hashed, and stored (off-chain or via IPFS), with hashes kept on-chain.
Multi-Party Sign-Off: Authorized parties use their wallets to sign and confirm.
NFT Minting: The LC is tokenized as an NFT once the LC terms are fully agreed upon.

Step 4: Ongoing Management

Amendments: Propose changes to LC terms if needed — these amendments go through a transparent approval process.
Dispute Resolution: If disputes arise, they are flagged on-chain, and resolution processes can be initiated.
Closure: Upon fulfillment of terms or expiration, the LC status updates automatically — completing the cycle.

Step 5: Expand with CIFI No-Code Solutions

Build Custom Dashboards: Create specialized user interfaces for your internal teams.
Raise Capital: Leverage verified identity to obtain financing or issue digital assets to fund new trade opportunities.
Purchase Additional Modules: Acquire more Web3 functionalities, such as advanced analytics or AI-based compliance checks, all integrated seamlessly via CIFI’s ecosystem.

Benefits to Different Stakeholders

Corporate Entities (Importers/Exporters)

Streamlined Compliance: Automated KYC/KYB ensures quick onboarding.
Lower Operational Costs: Automated LC issuance cuts down on paperwork and manual tasks.
Enhanced Security: Identity verifications and document hashing reduce fraud risks.

2. Banks & Financial Institutions

Unified KYC: Integrate with Circularity Finance’s DID system to reduce repeated identity checks.
Efficient LC Processes: Lower cost and faster processing, resulting in higher customer satisfaction.
New Revenue Streams: Offer tokenization and Web3 services to corporate clients.

3. Entrepreneurs & Developers

No-Code Innovation: Quickly build and scale dApps for specialized trade finance solutions.
Seamless Identity Layer: Focus on new functionalities without worrying about compliance from scratch.
Network Effects: Tap into a growing ecosystem of verified users, banks, and corporations.

4. Ecosystem Partners (Insurers, Logistics, etc.)

End-to-End Visibility: Access real-time status of LCs, shipments, and documents.
Reduced Disputes: Clear, on-chain record keeping fosters trust between parties.

The synergy between Circularity Finance’s DID ecosystem and the blockchain-based Letter of Credit (LC) platform offers a glimpse into the future of trade finance: one where identity, compliance, and contractual commitments converge in a frictionless, secure, and transparent digital environment. By coupling robust KYC/KYB NFTs with tokenized LCs, businesses can significantly reduce risk, cut operational costs, and open up new avenues for growth — be it raising capital, expanding into new markets, or accessing specialized Web3 functionalities.

Whether you’re a global bank, a rising SME, or an entrepreneur looking to innovate in the trade finance space, now is the time to explore how a decentralized identity layer and smart contract-driven Letters of Credit can transform your operations.

With Circularity Finance at the helm, you can confidently navigate the complexities of digital identity, compliance, and blockchain technology — ushering your organization into the future of global commerce.

To get started with Circularity Finance’s decentralized technology, register to join our 100 Day Incubator — CLICK HERE