1. Multi-Signature Cryptocurrency
Transactions in International Trade
A cryptographic replacement for Letters
of Credit
ADRIAN SMITH
Trinity High School
October 25, 2014
Abstract
A cryptographic replacement for Letters of Credit, specifically
those used in international trade, would reduce the necessity for sev-
eral third parties in large global transactions, in turn creating faster
payment processing and lower fees. This could be accomplished
through the use of multi-signature cryptocurrency transactions serv-
ing as an escrow system.
Keywords: Seller , Purchaser , Carrier , Arbiter , Organizer
Introduction
International commerce has, since the dawn of the modern global economy,
required several banks and complex systems of credit in order to operate
regularly. These systems serve to insure payment for goods, reduce or
transfer risks, and expedite transactions. One such system of credit is the
Letter of Credit used in international trade, also known as Documentary
Credit. This system insures that the Seller will receive payment given that
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2. he ships the product being purchased, that the product meets agreed upon
terms and conditions, and that he presents adequate proof of the two pre-
ceding actions. The Purchaser also receives said proof as a condition of his
payment, and the Carrier can be confident that his payment will be pro-
vided given he meets the terms, without relying on the Seller or Purchaser.
However, this system requires the use of two banks and multiple transfers
of credit, making it vulnerable to non-payment if the banks involved are
unable to make good on their credit. The introduction of multiple banks
also adds in increased cost to the transactions, as each transfer of credit is
likely to involve fees.
This paper proposes that through use of multi-signature cryptoocur-
rency transactions (such as those supported by Bitcoin) and a single arbiter
(or arbitaration pool[1]) agreed on by both parties and the shipper, the risk
of non-payment can be reduced, and fees could be lowered extraordinarily,
as the Bitcoin (or other cryptocurrency) network fees would be insignificant,
and the arbiter only needs to agree to the terms and conditions prepared
by the Purchaser, Seller, and shipper in those cases where intervention by
the Arbiter is unnecessary, which should be the majority of cases.
Example Contract
The following sections detail an example transaction between two parties,
facilitated by the Carrier, Arbiter, and Organizer. It is important to note
that either the Shipper, Seller, or Arbiter would double as the Organizer,
or else software could be used. This example transaction can be used as a
boilerplate, but can and should be changed to fit individual use cases.
Best-Case Transaction
In the best-case transaction, the Seller, Purchaser, Shipper, and Arbiter agree
on a contract which lays out the terms of the transaction. This contract
would include agreements regarding: Cost for items, Organizer, cost of
shipping, necessary proofs for release of items, quality and conditions
of items at the time of shipping, preservation of goods during shipping,
arrival window, arbiter’s action fee (extra payment for the arbiter if they
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3. are required to override a transaction), and authority of the arbiter. Other
terms and conditions could also be included. This contract would be signed
with the Bitcoin private key of the four parties. Upon the contract accruing
all 4 signatures, the buyer would exchange the goods with the shipper in
return for an Electronic Bill of Lading (eB/L) which meets the terms of the
contract. The Buyer would also create three Multi-signature Bitcoin wallets,
or "Lockboxes". The first Lockbox would require signatures from two out of
three parties (Seller, Purchaser, and Arbiter) to broadcast a transaction, and
would hold the funds for payment on receipt of items, and the funds for
payment of the arbiter (This shall be referred to as the Primary Lockbox).
The second Lockbox would require the signature of either the Purchaser
or the Arbiter to broadcast a transaction, and would hold the funds for
payment to the Shipper (This shall be referred to as the Shipping Lockbox).
The final lockbox would require the signatures from three of the four
parties; Arbiter, Seller, Purchaser, or Shipper.(Referred to as the Arbitration
Lockbox). All Lockboxes would then be transfered to the Organizer, who
would collect the necessary public keys. All parties would also be given the
public addresses of the Lockboxes, allowing them to confirm the contents.
The Seller, Shipper, and Purchaser all put in 1/3 of the Arbiter’s action fee
into the Arbiter Lockbox. The/ eB/L would then be transmitted to both
the Organizer (Who forwards it to all parties in the contract, or hosts in on
a server accessible by all parties) and Purchaser. The Purchaser would then
review the eB/L, and upon finding it satisfactory to the terms of the contract
transmit payment for goods/arbitration and shipping to the necessary
Lockboxes. The Seller and Shipper also sends in the agreed upon rate for
the Arbiter into the Primary Lockbox. The Organizer then prepares the
transactions necessary to release the money from the Primary and Shipping
Lockboxes to their agreed upon receivers, and broadcasts them to all parties.
The Purchaser signs a message recognizing the validity of the eB/L, and
transmits it to all parties. Upon receipt of the message, the Shipper ships the
items, and the Seller signs the transaction to release the purchaser’s funds
to the Seller, and his own funds to the Arbiter (1/2 necessary signatures),
which is defined in the contract as equaling a statement confirming that the
goods have been shipped.
Once the good arrive at the Shipper’s receiving area (port/warehouse/etc.),
the Purchaser confirms that the items were received and follow the terms of
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4. the contract. If satisfied that all conditions are met, the Purchaser signs all
transactions, releasing payment to the Seller for goods, and the Arbiter and
Shipper for services. The Arbiter’s Action Fee is returned to the original
owners. Cases in which the Seller refuses to sign claiming failure of Shipper
or Seller to meet terms are discussed in the subsequent sections, as well as
cases in which the Purchaser refuses to sign without claiming a breach of
terms.
Failure of Seller to Meet Terms
In some cases, the Purchaser may refuse to sign the release transactions,
claiming that the Seller broke the terms of the contract. Some examples
would be items not being present, or items being of insufficient quality.
In this case, the arbiter is required to step in and use the authority given
to him by the contract. Should the Arbiter decide that the Purchaser is
incorrect, and that the products do indeed meet the terms of the contract,
the following steps are taken. First, the Arbiter creates the transaction to
release his Action Fee, in this case, the Shipper and Seller will both receive
their payments back, but the Purchaser’s payment will be sent to the arbiter.
The arbiter signs this transaction, and then signs both the Primary and
Shipping transactions. At this point the Seller and Shipper would sign the
Arbiter’s Action Fee transaction (incentivized by the return of funds to
them both). At this point, the Shipper has payment, the Arbiter the Action
Fee, and the Purchaser has received the goods.
However, should the Arbiter decide that the Purchaser is correct, and
that the products do not meet the terms of the contract, different steps
would then be followed to return the Purchaser’s money. First, the Arbiter
creates the transaction to release his Action Fee, in this case, the Shipper and
Purchaser will both receive their payments back, but the Sellers’s payment
will be sent to the arbiter. The Arbiter then prepares a new transaction from
the Primary Lockbox, which releases the payment for the goods back to
the Seller. The arbiter signs both of these transactions. At this point, the
Seller signs to return his funds, to pay the shipper, and to complete the
Action Fee transaction. At this point, the Shipper and Arbiter have both
received payment, the Purchaser receives his payment back, and the Seller
is required to pay the Arbiter’s fee and does not receive payment for failing
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5. to meet the terms of the contract. The Shipper may attempt to return the
goods to the Seller, but this would be dependent upon the Sellers wishes
and the terms of the contract.
Failure of Shipper to Meet Terms
Cases may also occur in which the Purchaser refuse to sign the shipping
transaction, claiming that the shipper failed to meet terms. In this instance,
the Arbiter, upon deciding that the Shipper failed to meet terms, would
also not sign the shipping transaction. The Arbiter would then create the
transaction to release the Arbiter’s Action Fee, returning the Seller and
Purchaser their funds, and paying the Shipper’s portion of the fee to the
Arbiter. The Seller and Purchaser would then both sign the Arbiter’s Action
Fee transaction. At this point, the Seller has payment, The Purchaser has
the goods to keep or return per terms of contract, and the Shipper is not
paid for service, but must pay the Arbiter the Action Fee. The shipper may
also be required to cover losses for the goods.
Failure of Purchaser to Meet Terms
The final case type is one in which the Purchaser refuses to sign, and
does not provide any or satisfactory reasons for their refusal. In these
cases, the Arbiter’s actions are simple. The Arbiter signs both the Primary
and Shipping transaction, releasing payment for goods to the Seller, and
payment for services to the Shipper and Arbiter. Then the Arbiter creates
the transaction to release the Arbiter’s Action Fee, returning the Seller and
Shipper their funds, and paying the Purchaser’s portion of the fee to the
Arbiter. The Seller and Shipper would then sign this transaction. At this
point, the Seller has received payment, the Purchaser has the goods, and
the Shipper and Arbiter have both received payment for their services.
Conclusion
This idea and example contract shows that by combining multisigniture
and cryptocurrencies in an escrow system, parties in large transactions
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6. can spread the risk of non-payment without the use of credit, and in the
majority of cases, without payment to a third party. While many variations
of this example are possible, there are several items which would be present
in nearly all use-cases:
1. Defining the Shipper, Seller, Arbiter, and Organizer
2. Stating of guidelines for the Arbiter’s decisions
3. Statement of signiture requirements
By building systems based on this idea, costs could be lowered, transac-
tions could be expidited, and trade could be shielded from some the risk of
credit.
References
1. drwasho. Voting pools in openbazaar.
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