Trade Finance DLT: How Swiss Banks Are Digitising Letters of Credit and Receivables

Trade finance — the financing of international trade through instruments such as letters of credit, bank guarantees, documentary collections, and receivable financing — is one of the sectors where distributed ledger technology offers the most compelling case for transformation. Switzerland, as a global centre for commodity trading and international banking, is at the forefront of this transformation. Swiss banks are deploying DLT-based solutions that digitise paper-heavy workflows, reduce fraud risk, and unlock new financing models for cross-border trade.

The Trade Finance Inefficiency

The global trade finance market, estimated at approximately USD 10 trillion in annual flows, remains remarkably dependent on paper-based processes. A typical letter of credit transaction involves the exchange of physical documents — bills of lading, commercial invoices, certificates of origin, inspection reports, insurance certificates — between the buyer, seller, issuing bank, advising bank, and transport providers. These documents are manually created, physically transported, and independently verified at each stage, resulting in processing times that can stretch from days to weeks.

The inefficiency of this system is well-documented. The International Chamber of Commerce (ICC) has estimated that documentary discrepancies — errors or inconsistencies in trade documents — affect between 60 and 75 per cent of first-presentation documents under letters of credit, triggering costly amendment processes that delay payment and increase financing costs. The Asian Development Bank has identified a trade finance gap of approximately USD 2.5 trillion, representing trade that does not occur because financing is unavailable or too expensive, partly due to the operational costs and risks of the current system.

For Swiss banks, which handle a disproportionate share of global commodity trade finance, these inefficiencies translate directly into operating costs, processing delays, and fraud exposure. The digitisation of trade finance through DLT addresses each of these pain points.

DLT-Based Letters of Credit

The letter of credit (LC) is the cornerstone instrument of trade finance, providing the buyer and seller with a bank-guaranteed payment mechanism that mitigates the counterparty risk inherent in cross-border transactions. DLT-based LC platforms digitise the entire lifecycle of the instrument — from issuance through document presentation to payment — on a shared ledger accessible to all parties involved.

In a DLT-based LC process, the issuing bank creates the LC as a smart contract on the ledger, specifying the terms and conditions that must be satisfied for payment to occur. The beneficiary (seller) uploads digital versions of the required documents to the ledger, where they are automatically verified against the LC conditions. If the documents comply, the smart contract triggers payment; if discrepancies are detected, the system notifies the parties and facilitates the amendment process.

The benefits of DLT-based LCs for Swiss banks are substantial. Processing times are reduced from days to hours or even minutes, as the elimination of physical document exchange and manual verification accelerates each step of the process. Fraud risk is mitigated by the immutability of the ledger, which prevents the retrospective alteration of documents, and by the transparency of the process, which enables all authorised parties to view the current state of the transaction. Operational costs are reduced through the automation of compliance checks, document matching, and payment processing.

Several Swiss banks have deployed or piloted DLT-based LC platforms, either proprietary solutions or through participation in multi-bank consortia. These deployments have demonstrated the viability of the DLT-based approach and are expanding from pilot to production scale.

Receivable Tokenisation

The tokenisation of trade receivables on DLT represents another significant innovation in Swiss trade finance. By converting trade receivables — the right to receive payment for goods or services delivered — into digital tokens on a distributed ledger, Swiss banks and trading companies are creating new financing instruments that can be traded, factored, or used as collateral with greater efficiency and transparency than traditional receivable financing.

In a tokenised receivable structure, the seller records the receivable on a DLT platform, specifying the debtor, the amount, the maturity date, and any supporting documentation. The tokenised receivable can then be sold to a financier (such as a bank or an alternative lender) at a discount, providing the seller with immediate liquidity. The financier receives payment from the debtor at maturity, earning the discount as a return on the financing provided.

The DLT infrastructure provides several advantages over traditional receivable financing. The immutable record of the receivable on the ledger prevents double-financing — the fraudulent practice of pledging the same receivable to multiple financiers. The transparency of the ledger enables financiers to verify the authenticity and status of receivables in real-time, reducing due diligence costs and enabling faster credit decisions. The programmability of smart contracts enables the automation of payment waterfalls, notification mechanisms, and default management processes.

Swiss commodity trading houses, which generate enormous volumes of trade receivables through their global operations, have been early adopters of receivable tokenisation. The combination of high receivable volumes, complex multi-party relationships, and the need for efficient financing creates a strong use case for DLT-based solutions in this sector.

Bill of Lading Digitisation

The bill of lading — the document issued by a carrier to acknowledge receipt of cargo for shipment — is perhaps the single most important document in international trade. It serves simultaneously as a receipt for goods, a contract of carriage, and a document of title that enables the transfer of ownership of goods in transit. Despite its centrality to trade, the bill of lading remains overwhelmingly paper-based, creating bottlenecks, fraud risks, and costs throughout the supply chain.

DLT-based electronic bills of lading (eBLs) digitise this critical document, recording issuance, endorsement, and surrender on a distributed ledger that provides the same legal functionality as the paper original. The legal recognition of electronic transferable records — including eBLs — has been advancing through the adoption of the UNCITRAL Model Law on Electronic Transferable Records (MLETR) by an increasing number of jurisdictions.

Switzerland has not yet formally adopted the MLETR, but the Swiss legal framework for electronic documents, combined with the DLT Act’s provisions for DLT securities, provides a foundation for the legal recognition of DLT-based trade documents. Swiss banks and trading companies participating in international eBL platforms must also consider the legal recognition of electronic documents in the jurisdictions of their counterparties, as the legal validity of an eBL depends on recognition by the laws of all relevant jurisdictions.

Regulatory Framework

The regulatory treatment of DLT-based trade finance in Switzerland reflects the technology-neutral approach that characterises Swiss financial regulation. FINMA does not prescribe specific technologies for trade finance processing, and the regulatory obligations applicable to trade finance activities — including AML/KYC requirements, capital adequacy rules, and large exposure limits — apply regardless of whether the underlying processes are paper-based or DLT-based.

The Anti-Money Laundering Act (AMLA) and its implementing ordinances require banks to identify and verify the identity of their clients, monitor transactions for suspicious activity, and report suspicious transactions to the Money Laundering Reporting Office (MROS). DLT-based trade finance platforms must incorporate AML/KYC processes that meet these requirements, with the transparency of the ledger actually facilitating compliance by providing a comprehensive audit trail of all transactions.

The treatment of tokenised trade receivables under Swiss banking regulation depends on their classification. If tokenised receivables are structured as DLT securities under Article 973d of the Code of Obligations, they acquire the legal attributes of securities, including transferability, pledgeability, and enforceability. If they are structured as simple contractual claims recorded on a ledger, they are governed by the general law of obligations. The choice of structure affects the regulatory treatment, the accounting classification, and the capital requirements applicable to banks holding or financing the receivables.

Consortium Initiatives and Standards

Swiss banks have participated in several international trade finance DLT consortia, contributing to the development of standards and platforms that facilitate the digitisation of trade finance across jurisdictions and institutions.

The ICC’s Digital Standards Initiative (DSI) has developed standards for the digitisation of trade documents that are being adopted by Swiss banks in their DLT-based trade finance platforms. These standards ensure interoperability between different DLT platforms and between DLT-based and traditional trade finance systems, reducing the fragmentation that has characterised early digitisation efforts.

Industry-specific standards for commodity trade finance, developed by bodies such as the Commodity Markets Council and the Global Commodity Finance Standards Board, address the particular requirements of commodity trading — including quality specifications, weight and measurement standards, and sustainability certifications — that must be incorporated into DLT-based trade finance platforms serving Swiss commodity traders.

Outlook

The digitisation of trade finance through DLT is progressing from early adoption to broader implementation in the Swiss banking sector. The convergence of regulatory support, technological maturation, industry standardisation, and commercial imperative is creating the conditions for accelerated adoption over the coming years.

The remaining barriers — including the patchwork of legal recognition for electronic trade documents across jurisdictions, the interoperability challenges between different DLT platforms, and the legacy system integration requirements — are being addressed through international initiatives, bilateral agreements, and platform development. Swiss banks, with their global trade finance franchises and their proximity to the DLT innovation ecosystem in Crypto Valley, are well-positioned to lead this transformation.

For related coverage, see our analysis of supply chain DLT and R3 Corda in Switzerland.

Donovan Vanderbilt is a contributing editor at ZUG DLT, covering distributed ledger technology law, regulation, and institutional adoption from Zurich. The Vanderbilt Portfolio AG provides research and analysis on Swiss digital asset infrastructure.