London, UK - The Electronic Trade Documents Act (ETDA) will shortly receive Royal Assent and will come into effect two months later.

The culmination of years of work by many people and industry bodies, once it takes effect the Act will allow certain documents used in trade and trade finance in electronic form to have the same legal effect as paper documents. Until the Act comes into force, such electronic documents are not considered capable of being (physically) possessed under English law to enforce rights to payment of sums of money or delivery of goods on board a vessel or in a warehouse.

The Act will have far reaching potential for businesses in the trade and trade finance industry, as nearly all documents used in international trade have until now been in paper form, other than using platforms, or similar, where contractual arrangements between the parties and fintech providers set out the terms of recognition of such electronic versions of those documents.

The Act will provide better access to, and has the potential to vastly improve the speed of exchange, as well as the security, of almost all trade and trade finance documentation globally. It is anticipated to move the industry to approved and enforceable digital documentation.

Geoffrey Wynne, head of the trade and export finance team and partner at law firm Sullivan & Worcester in London comments: “The trading and financing of commodities around the world has essentially been going on in the same way for hundreds of years. Now, by removing the physical barriers to the creation and exchange of the documents of trade and trade finance, The Electronic Trade Documents Act will bring the industry up to date, while ensuring security, addressing transferability issues and guaranteeing the legal concept of ‘possession.’ I expect this development will deliver a significant uptick in the volume of trade that is financed, globally, in the coming years by both banks and non-bank financial institutions which will see expanded opportunities in trade assets as viable business to finance.”

The ETDA will recognise the following in their electronic form, and businesses will need to use a ‘reliable system’ that affords one person exclusive control of the relevant electronic record of that trade document:

• Bills of exchange and promissory notes
• Bills of lading and ship’s delivery orders
• Warehouse receipts and mate’s receipts
• Marine insurance policies and certain insurance certificates

Key advantages of the legislation will include:

• Electronic trade documents will become capable of ‘possession.’ They will have the same legal recognition and functionality as their paper counterparts. But note that the concept of ‘possession’ in law will only apply to certain trade documents and not extend to digital assets.
• Security will be improved, anti-fraud measures enhanced and concerns around issues of transferability of ownership of documents with a reliable system will be addressed.
• The reduction in the need for trade documents to travel will reduce the amount of time needed for physical documentation exchange to minutes.
• Ensuring the UK continues to lead the charge internationally on the digitalisation of trade documents.

This significant development in trade and trade finance may take time - even once it becomes law - to be adopted by all those involved in the industry. This is owing to the need for increased awareness, the standardisation of systems, and ensuring all market participants have access to appropriate technology.

While business and processes may take some time to adapt, there have already been a number of significant steps towards the digitalisation of some aspects to trade finance, including:

• In February 2023, Mercore, the global trade focused fintech group, completed the UK’s first ‘digital Bill of Exchange’ transaction, providing finance into the UK SME sector and supporting the sugar trade with Nicaragua. This financing leveraged ITFA’s Digital Negotiable Instrument (DNI) Initiative’s digital Bill of Exchange text and dDOC specification, together with execution via trace:original. Sullivan supported Mercore in relation to the structure behind this innovative transaction.
• In August 2022, Lloyds Bank completed the UK's first transaction utilising a digital promissory note purchase. Sullivan advised Lloyds Bank on the specific template structure behind the purchase and it was the first transaction to use ITFA’s DNI issued using Enigio's solution for digital original documents.