Digital trade transactions – what next?

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[co-author: Stefan Bateson]

At the latest Trade & Export Finance webinar, Geoff Wynne, head of the Trade & Export Finance Group and Sullivan's London office, gave a whistle-stop tour of recent developments in digital options available in trade finance, including the multi-jurisdictional efforts to recognise electronic transferable records.

The case for digitisation

For some time now, digitisation has been on the agenda of global organisations and national governments alike. While the International Chamber of Commerce (ICC) has forged a working group on digitisation, organisations such as the International Trade & Forfaiting Association (ITFA) have launched a Digital Negotiable Instruments Initiative, seeking to digitise the equivalents of promissory notes (PNs) and bills of exchange (BEs).

Meanwhile, on the lending side, banks have been busy updating legacy systems and implementing new digital frameworks, with fintech businesses offering new platform-based solutions using artificial intelligence, smart contracts and digital ledger technology to trade operators. (Please see our previous blog post "It's a Digital World – Embracing Technology in Trade Finance" for a brief overview on various digital solutions, including electronic signatures, blockchain-based platforms, electronic payment undertakings and the Uniform Rules for Digital Trade Transactions (URDTT).)

While the COVID-19 pandemic has certainly increased the appetite of market players to "go digital", the call for new technology solutions—and the rules and legal framework to match—has certainly been around well before that. This is no doubt due to the fact that reliance on paper has historically resulted in payment delays and disputes arising from the mishandling of physical documents (e.g. bills of lading and shipping documents) and payment/processing delays resulting from document mismatches (it is estimated that 60-70% of documents are rejected on first presentation). As anyone in trade finance knows, letters of credit (LCs) are considered a clumsy trade instrument for time-sensitive transactions—the average time for an LC issuance is 7 to 10 days—and the reliance on paper documentation leaves the door open for potential fraud. All of these issues, which pre-dated COVID-19, have only been exacerbated by the pandemic.

Indeed, the administrative burden posed by the reliance on paper has been highlighted by the Law Commission of England and Wales, which in its recent Consultation Paper on Electronic Trade Documents estimates global container shipping generates 28.5 billion paper documents a year.[1]

Coping with the digital issues – a global effort

Despite the potential upside to digitising trade, it is important to remember that technology, unsurprisingly, moves faster than the law. Luckily, English law has proven to be robust and flexible to meet the demands of the modern world, electronic signatures being a prime example of this. However, further reform will be needed to accommodate electronic trade documents and the transfer of possession via an electronic system, which are not currently recognised by the Bills of Exchange Act 1882. To date, efforts in England have focused on developing a new definition of "possession" in respect of certain trade documents in digital form. Key to this issue is the need for "exclusive control" and independence of the underlying trade document.

As we have previously covered on this blog, the Law Commission of England and Wales have published a consultation paper on proposed legislative reforms to recognise electronic transferable records (consultation now closed), and a draft Electronic Trade Documents Bill is due to be submitted to Parliament in 2022.

Meanwhile, the use of electronic signatures is dealt with by the UK eIDAS Regulation[2], which following Brexit, retained most of the EU eIDAS Regulation.[3] Both of the eIDAS Regulations differentiate between simple, advanced (AES) and qualified electronic signatures (QES), a QES being considered the gold standard for electronic signatures for ensuring that electronic signatures are considered legal, valid, binding and enforceable in both the EU and the UK.

Other jurisdictions have channelled their energies into the United Nations Commission on International Trade Law (UNICITRAL) Model Law on Electronic Transferable Records (MLETR),[4] a supranational effort to promote the use of electronic transferable records domestically and across borders. The MLETR applies to electronic transferable records, broadly defined as "information generated, communicated, received or stored by electronic means", that are functionally equivalent to transferable documents or instruments, such as bills of lading, BEs and PNs.[5] Initial uptake was slow with Bahrain being the first jurisdiction to adopt MLETR. Abu Dhabi closely followed, with Singapore later leading the way.

Under the MLETR, any legal requirement for signatures will be met by an electronic transferable record provided that a reliable method is used to (i) identify the signatory, and (ii) indicate the signatory's intention in respect of the information contained in the electronic transferable record. This is a lower standard than that required by an AES or QES under UK and EU eIDAS. Another potential issue is that the MLETR does not address issues such as the transfer of possession of trade documents.

Other supranational efforts have focused on the standardisation and adoption of digital documents. Trade digitisation featured heavily at the most recent G7 summit, with six interventions being identified to promote the collaboration of various digital frameworks, including a proposed framework for G7 Collaboration on Electronic Transferable Records.[6] As part of this framework, the G7 proposes to engage in "scoping exercises" until October 2021 to map out and address domestic legal barriers to the use of electronic transferable records and consider further legal issues that may require international cooperation. It is worth mentioning that the MLETR is being promoted as the way to roll out an international effort to facilitate the use of electronic transferable records, which may very well accelerate its adoption across jurisdictions and align various national laws to implement a harmonised framework.

Moving forward – a note of caution

Amidst the exciting developments surrounding electronic trade documents, it is worth moving forward with caution. If G7 recommendations are followed and MLETR is adopted, by some experts' estimates, legal barriers to digital trade could be removed in as little as 12 to 18 months. However, MLETR only provides a framework for electronic records. The question remains—will countries be ready to adopt national laws to facilitate digital trade that address, amongst other issues, how to deal with possession of trade documents and exclusive control?

Standardisation of digital platforms and successful automation of contracts will also be integral to the success of the push to digitise trade to ensure that trades can be facilitated across different systems, with all documents and data accessible to the various parties to a transaction. This has its own set of risks, hacking being one. Digital payments and digital currencies also look likely to prove useful, particularly for large transactions, as they pose the potential to increase the visibility and immediacy of payments flowing across multiple jurisdictions.

Please click here for a link to a video of the webinar.

* * * * *

[1] https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2021/04/Electronic-trade-documents-CP.pdf

[2] The UK eIDAS Regulation comprises the Electronic Identification and Trust Services for Electronic Transactions (Amendment etc.) (EU Exit) Regulations 2019 and the Electronic Identification and Trust Services for Electronic Transactions Regulation 2016 (2016 No.696).

[3] Regulation (EU) 910/2014 on electronic identification and trust services for electronic transactions in the internal market. Chapter II (Electronic Identification) has not been retained on the basis that it is no longer relevant as it focuses on mutual recognition, liability, cooperation and data processing/protection within the European Union.

[4] https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mletr_ebook_e.pdf

[5] Electronic transferable records are not intended to cover securities, such as shares and bonds, or other investment instruments.

[6] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/986162/Annex_4__Framework_for_G7_collaboration_on_Electronic_Transferable_Records.pdf

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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