Technology will help the UK boost SMEs' overseas trade thanks to digital negotiable instruments #MLETR #DLT

By André Casterman, Chair Fintech Committee, ITFA and Member of Legal Reforms Steering Group, ICC UK

Bahrain, Singapore, Abu Dhabi, the United Kingdom, Egypt, Paraguay, ... more and more jurisdictions are reforming laws to take advantage of the United Nations Commission on International Trade Law (UNCITRAL) Model Law for Electronic Transferrable Records, also referred to as MLETR by trade finance practitioners.

The pandemic has accelerated the interest for MLETR as 2020 saw businesses around the world struggle when exchanging paper-based instruments such as bills of exchange, promissory notes and bills of lading. The reason for this is simple: negotiable instruments still rely on practices established in the 16th century when paper was the only way to record information such as an agreement and to transfer ownership of a payment obligation or goods in transit. Those bureaucracies ought to be removed to bring trade roaring into the digital age.

Abu Dhabi Global Market made the move in February 2021

On 28 February 2021, ADGM enacted its Electronic Transactions Regulations 2021 which confirmed that electronic signatures, contracts, records, and documents are as legally enforceable in ADGM as the traditional non-electronic (paper) versions. ADGM chose to rely on the MLETR for this purpose, and became the 3rd jurisdiction globally to enact a legislation that allows the use of transferable documents and instruments, such as promissory notes and cheques, in electronic form. ITFA has been delighted to engage with ADGM on this front and following this successful experience, both ITFA and ADGM defined a broader engagement leading to the signing of a partnership on digital trade transformation with the aim to maximise the benefits of the new regulation for banks and corporates established in Abu Dhabi.

MLETR gets on the G7 agenda

The importance of aligning national laws with the MLETR is being heard loud and clear at the level of the G7. To this end, the G7 has initiated a dialogue between experts to work to achieve compatible domestic reforms, and provide collective support to other international initiatives seeking to facilitate the adoption of electronic transferable records, with an aim of enabling commercial operators to adopt these digital solutions for the shipment of goods and trade finance. Domestic scoping exercises will be completed until October 2021.

"We [G7] will work to PROMOTE the adoption of legal frameworks compatible with the principles of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records 2017. This will be done with the acknowledgement that different domestic systems will require different legal solutions. Laws enabling electronic transferable records should be technology neutral, future proof and applicable to all transferable records." G7 Digital and Technology Track - Annex 4

Luca Castellani, Legal officer in the UNCITRAL Secretariat, who oversaw the preparation of MLETR, states that it is the first commercial law text explicitly enabling the use of distributed ledger technologies as well as a smart contracts. Luca highly appreciates the above mentioned policy guidance from the G7 as stated on 30 April 2021:

"In my wildest dreams, I would have never imagined to see one day the G7 endorsing the result of a project [MLETR] I worked on. But luckily sometimes reality outdoes fiction -- and that, for the better." Luca Castellani, UNCITRAL

The UK also wishes to embrace MLETR to support SMEs

In 2020, the UK also recognised the need for bringing its Bill of Exchange 1882 Act into the digital age. Work started in Q1 2020 and since then, several stakeholders including ITFA, ICC UK, DCMS and the UK Law Commission have been collaborating to prepare the move. The stated objective is to reform the English law in a way that is consistent with the MLETR. The devil is in the details which is what the UK Law Commission is focusing on.

On April 29th, ICC United Kingdom issued a call to action describing the strategic importance of digitising negotiable instruments. In that message to policy makers, ICC UK Secretary General Chris Southworth states that "Small and micro exporters will play a critical role in driving the economic recovery. At a time when the UK is charting a future as a truly independent trading nation, we have the opportunity to be the first country in the G7 to fully digitise our trading system and bring the UK in line with digitalisation initiatives in Asia. SMEs will be at the heart of any recovery and they desperately need access to short-term working capital, but an extraordinarily outdated system dating back to the 16th century stands in their way. The full digitalisation of trade documentation is a game changer and long overdue in trade. It will enable SMEs to complete trade deals in hours and days rather than weeks and months, slashing the time and cost to process all the documentation in half. It is time to bring trade roaring into the digital age of the 21st century by modernising English law and then aligning these efforts with global efforts in the G7 and Commonwealth. The government should be applauded for its efforts - it’s great to see the UK being at the vanguard of setting new global standards on trade. Transformation of the trading system is long overdue – this is a sure-fire way to help boost SME prospects at a time when they need it most.”

Following the development of an economic case, ICC UK claims that slashing unnecessary bureaucracy could also provide more than ￡220 billion of efficiency savings and reduce the carbon footprint from trade activity. The business case states that digitising transferrable documents will (1) generate ￡25 billion in new economic growth - 25% extra SME trade by 2024 and (2) reduce the number of days needed for processing documents by up to 75%.

"Digitising negotiable instruments will enable businesses to remove unnecessary bureaucracy, promote innovation, speed up transaction times and free up working capital to invest in trade" according to a recent survey commissioned by ICC UK and supported by HSBC, Barclays, Lloyds Bank, RBS, Santander and Standard Chartered Bank.

Law reform is well underway, in the UK

Another key milestone is the one of the UK Law Commission which has released its proposal for reform on April 30th. This includes a consultation on proposal to allow for legal recognition of trade documents which states:

"For electronic documents to be widely adopted for trade, they must be capable of being possessed in the eyes of the law. We propose that an electronic trade document should be “possessable” provided that (1) The document is a trade document of the kind listed in our draft legislation; (2) the electronic document is capable of exclusive control; (3) the electronic document must be fully divested on transfer."

The ITFA DNI Initiative aims to demonstrate that the technology space is ready to fulfil those requirements.

The technology to produce, manage and trace e-originals is ready

In order to help banks align with such transformational evolution of national laws around the world, ITFA set up the DNI Initiative in Q3 2019 to define the technology requirements for e-originals. Members of the DNI Initiative developed a vendor-agnostic technology framework - entitled dDOC - that caters for technical interoperability of e-originals. dDOC provides guidance to banks wishing to benefit from e-originals and describes how various technologies such as JSON, cryptography, e-signatures and public DLT enable banks to interoperate in the same way as they do with paper originals since centuries. This means there should be no need for participants to rely on a 3rd party central platform or to subscribe to a closed ecosystem or to sign up to a multilateral agreement.

dDOC aims to help banks exchange e-originals with their corporate and SME clients, as well as with correspondent banks in a fully interoperable way. As a vendor-agnostic framework, dDOC caters for bank-grade requirements in terms of data privacy which is achieved by relying on public distributed ledger technology (DLT).

"Public DLT brings notarisation of e-originals without disclosing any business data on the distributed ledger, which is in line with banking practices and regulatory data security requirements", G?ran Almgren, CEO, Enigio

dDOC is a deliverable of the DNI Initiative, and it complements MLETR with the required technology framework as outlined below:

The members of the DNI Initiative include technology vendors, advisors and financial institutions. They are working on the following technology (e.g., dDOC), legal (e.g., ePU) and commercial (e.g., use cases, testimonials, technology integration partnerships) deliverables:

e-originals digitise negotiable instruments in an interoperable way

When combining dDOC-compliant e-originals with the appropriate legal option, i.e., contractual law or common law compatible with MLETR, banks are able to process legally enforceable digital negotiable instruments with their clients, correspondent banks and other types of counter-parties (e.g., digitisation platforms).

“ITFA’s work with reformers such as the Law Commission in the UK, whose recent consultation paper references our DNI Initiative and dDOC framework, and Abu Dhabi Global Market has been important in both changing current law and accelerating the pace of reform to ensure that change can happen in the near future. These developments will secure a sound and robust legal basis for the commercialisation of digitally native negotiable instruments creating or, more accurately, recreating financial markets of great depth. Members of the DNI Initiative include suppliers, platforms and users with the technology and reach to produce and distribute these instruments either translated directly onto a blockchain or other technology, or even as tokens.”, Sean Edwards, Chair ITFA

The increased use of technology in the trade financing space not only enhances efficiency and attractiveness of traditional instruments such as bills of exchanges, promissory notes and bills of lading, but it also delivers the critical trusted data layer to build additional use cases.

"Digitising negotiable instruments will make use of public DLT, which brings the technical foundations to track the end-to-end lifecycle of those transactions. This means that parties can continuously verify their existence and validity. Public DLT is the cornerstone to combat typical fraud cases, such as double financing.", André Casterman, Chair Fintech Committee, ITFA

DLT-based document technology implements e-originals across multiple industries

e-originals are not only required for negotiable instruments but also for a variety of critical authoritative functions across various industries. The dDOC technology framework supports a variety of business standards which are - or will be - developed by sector-specific industry bodies as outlined below.

"SMEs prefer to adopt technologies brought to them by their chosen bank(s). A low-hanging fruit for SME-focused originators is to digitise bills of exchange and guarantees via their proprietary e-banking portals. Any dDOC-compliant technology provider will help achieve this in a white-label way." André Casterman

In the road transport industry, dDOC is already in use by Scanlog for CMR using Enigio's trace:original. Through the use of blockchain technology and Ricardian contracts designed by Enigio, Scanlog’s customers will be able to track their cargo along the supply chain and easily acquire evidence for insurance claims in case of damages or loss. More info here.

A number of vendors have already embraced the dDOC framework as outlined below:

What industry stakeholders say

Professor Sarah Green, Law Commissioner of England and Wales: "Smart contracts, digital assets and electronic documents promise to revolutionise the way we do business, digitising existing processes and in some cases introducing entirely new concepts. There are, however, lingering uncertainties about whether and how English law can accommodate these. We believe there is a compelling case for reviewing the law in these areas to ensure that the jurisdiction of England and Wales remains a competitive choice for those who want to use and to develop emerging technology."

David Frye, CEO, Levantor: “We are delighted to see innovative evolution in this sector as digital bills of exchange will provide huge benefits for Sales Finance. Digital negotiable instruments will facilitate faster processing and an even more seamless experience for vendors and their customers and distributors, as well as for the banks that fund these flows. We are keen to benefit from the ITFA DNI Initiative once the UK common law will recognise use of digital documents.”

John Cherkezian, President, Norex International LLC: "The practical business and financial benefits to both exporters and banks for digitalization of negotiable instruments are immense. Greater operational efficiencies and options for transaction execution become available using DNI products – particularly those which are vendor agnostic... The trade finance universe is seeking the transparency and increased security that these digital assets offer to banks, investors and insurance industry.... dDOC simply makes the exporter’s life easier and efficient in securing faster liquidity and in management of credit risk."

Atul Khekade, Founder, XinFin Network: "We welcome the digitisation of negotiable instruments as promoted by UNCITRAL model law. By tokenising digital payment obligations, the XinFin Network brings the needed institutional and retail liquidity that SMEs depend on. We will demonstrate this soon which is why we recently joined ITFA and the DNI Initiative."

Asif Ali, Managing Director, Head of Product and Partnerships at Traydstream: "Traydstream's automated document checking technology is ready to embrace e-originals as per ITFA's dDOC specifications. We recognise the need to digitise original trade documents which will further accelerate document handling by financial institutions."

André Casterman: "Banks need technologies that integrate seamlessly with existing ones such as back-office applications, front-office portals and communication channels. This is what the DLT-based dDOC technology framework brings using public blockchain applied to e-original documents."

More information on MLETR implementations

• ADGM and ITFA partner to boost the impact of #tradetech
• Singapore Parliament Passes Law to Recognise Electronic Bills of Lading
• Bahrain first country to enact MLETR
• FRAMEWORK FOR G7 COLLABORATION ON ELECTRONIC TRANSFERABLE RECORDS
• G7 on 28 April 2021 - The UK, Canada, France, Germany, Italy, Japan, the US and European Union have agreed to the G7 Digital and Technology Ministerial Declaration

More information on ITFA DNI Initiative and dDOC

• DLT in action - ITFA's dDOC specifications help digitise guarantees and negotiable instruments, in the most pragmatic way
• "SWIFT FileAct and Enigio's trace:original provide the best of both worlds to the global trade finance community"
• Detailed presentation on DNI Initiative activity streams - available on request

More information on UK reforms

• The Telegraph on 30 april: "Digital documents should have same legal powers as paper ones, says Law Commission"
• City AM on 29 April: "Exclusive: Scrapping paper documents could boost UK trade by ￡25bn"
• Chris Southworth, Secretary General, ICC UK 29 April "The economic case to reform UK law and align to the UNCITRAL MLETR"
• Sarah Green, Law Commissioner for Commercial and Common Law, UK Law Commission for England & Wales "Our proposed reforms to facilitate electronic trade documentation"