The $14 bln Kasikornbank, a major banking group in Thailand, better known as KBank, established a partnership with IBM to launch a Blockchain-based letter of guarantee service.

By definition, a letter of guarantee is “a type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier.” Conventional bank contracts including a letter of guarantee require a significant amount of paperwork from both sides: the bank’s customer and the supplier.

First, in order for a letter of guarantee to be signed off by a bank, an initial contract must be agreed upon and settled between the supplier and the bank’s customer. Upon the completion of the contract, the bank agrees to guarantee a payout for the customer in the event of default.

Hence, the process of the bank’s evaluation of the credit of customers and the legitimacy of the supplier requires manual verification and approval.

Utilizing smart contracts

Through a Blockchain-based system, IBM and KBank are trying to utilize smart contracts integrated onto a transparent ledger to avoid paperwork and process the operation of issuing a letter of guarantee in a transparent ecosystem.

Parnsiree Amatayakul, IBM Thailand managing director, said:

“Blockchain reduces traditional transaction barriers and can help to improve business processes in the financial services sector and beyond. As IBM continues to support KBank’s important initiatives in Blockchain, the value this technology can bring to the bank and its clients is becoming increasingly clear, and can redefine the way businesses in the region operate and grow.”

In Thailand alone, the commercial banking industry is expected to process of $40 bln worth of letters of guarantee throughout 2017. KBank, the largest commercial bank in Thailand, is set to process approximately $9 bln worth of letters of guarantee this year and by 2018, the bank aims to process five percent of the letters of guarantee through the IBM Blockchain system.

By 2018, KBank is planning on processing $450 mln worth of letters of guarantee through the IBM Blockchain. If the initial trial and implementation phases become successful commercially, KBank will increase the volume of its trades processed on the Blockchain.

Pipit Aneaknithi, president of KBank, notes:

“Blockchain technology is applied to create highly secure networks of document filing and retrieval. As Thailand’s largest issuer of Letters of Guarantee, KBank is working with IBM to implement this innovative technology to further define and articulate our leadership in this market.”

In the upcoming months, as the Hyperledger Fabric Blockchain protocol, a smart contract-based Blockchain network developed by IBM, Intel and other members of the Hyperledger foundation, improves in terms of flexibility and security, KBank will increase the amount of trades and settlements of KBank processed through the Fabric Blockchain network.