The Legal Nature and Operational Specificities of Documentary Letters of Credit: Contemporary Challenges and Ways Forward

The documentary letter of credit constitutes a cornerstone of the international payment system and remains one of the most reliable settlement instruments in international trade. The reliability of the letter of credit is determined by its legal nature and operational mechanisms, which ensure the minimization of commercial and legal risks. Despite the impact of globalization, new economic models, and technological developments, the institution of the letter of credit has not lost its relevance. This paper examines the legal nature of the documentary letter of credit and the specific features of its application. Particular emphasis is placed on the principles of autonomy and documentary compliance, which ensure legal predictability and reinforce trust among the parties involved. The paper further emphasizes contemporary challenges affecting the functioning of letters of credit, including the digitalization of trade finance, compliance risks (defined in this paper as banks’ adherence to international regulatory requirements, sanctions regimes and monitoring of financing rules), and sanctions-related restrictions. The compatibility of new economic models and regulatory frameworks with international standards governing letters of credit is also analyzed. The article concludes that the continued relevance of documentary letters of credit depends on preserving their fundamental legal principles while adapting operational processes to contemporary technological and regulatory realities. The paper proposes several approaches aimed at addressing identified challenges and enhancing the efficiency and sustainability of letter-of-credit-based settlements.