The author would like to thank Andre Casterman, Sean Edwards and Chris Southworth for their contributions to this article
If you blinked and put your feet up this bank holiday weekend, you probably missed out on a few important milestones for digitalizing trade.
Digitizing global trade has been a steadfast endeavour since before the outset of the COVID-19 pandemic, but pandemic-induced closures and remote work norms have vastly accelerated its need. Unlike in previous eras, it is no longer the state of technology that is holding back this cause, rather the limitations now stem from the legal and regulatory frameworks that global trade operates within.
Recent headlines, however, show that progress is being made to update legislation, a move that will drive trade digitalization efforts globally. Here is a high-level overview of these recent developments.
Singapore and Abu Dhabi Global Market adopt MLETR
In February 2021 both Singapore and Abu Dhabi Global Market (ADGM) adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR), joining the Kingdom of Bahrain as the only jurisdictions to date to do so. The move has brought the discussions surrounding the issue of global trade digitalization into the agendas of many more jurisdictions around the world.
ADGM, an international financial centre established in 2013 by the Abu Dhabi Chamber of Commerce, and Bahrain are both located in the Persian Gulf.
This creates “an excellent springboard for a deep digital trade dive in the Middle East and North Africa (MENA)”, according to Luca Castellani, UNCITRAL Secretariat.
ITFA mints a partnership with Abu Dhabi Global Market
In April, the International Trade and Forfaiting Association (ITFA) and ADGM established a partnership to promote electronic negotiable instruments on the basis of the ITFA DNI Initiative. This partnership seeks to support the evolution of trade finance through the digitization of trade instruments, support the development of alternative modes of financing trade, and support the application of FinTech in the areas of global trade financing. Further discussions are currently ongoing with large Abu Dhabi banks and corporates.
Sean Edwards, Chair, ITFA says:
“We have worked alongside ADGM to promote the support of electronic negotiable instruments by giving valuable inputs into the new Electronic Transactions Regulations 2021. We will now explore further with them the commercialization of specific instruments such as electronic bills of exchange and promissory notes.”
The partnership will benefit from both parties’ shared objective of increasing MSME financing.
The G7 endeavours to promote digital trade
On April 28th, the G7 released the G7 Digital and Technology Track – Annex 4: Framework for G7 Collaboration on Electronic Transferable Records. Within the document, they discuss how legal barriers, regulatory matters, and technical issues impede the adoption of electronic transferable records. They acknowledge that collective action to enable reform “will strengthen the resilience of our global economic system and play a crucial role in trade recovery across the G7.”
The document then goes on to discuss MLETR and the need to develop country-specific measures.
“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.”
The G7 experts will now conduct a scoping exercise to establish a comprehensive framework for collaboration in this regard. This exercise is slated to be completed by October 2021.
ICC UK develops an economic case for MLETR
On April 29th, the United Kingdom International Chamber of Commerce (ICC UK) and a collection of top UK banks released an economic case for the UK to align with MLETR. According to the report, digitizing transferable documents will generate £25 billion in new economic growth, reduce the number of days needed to process documents by 75%, free up £224 billion in efficiency savings, and generate £1 billion to tackle the trade finance gap.
Further, these benefits are set to positively impact small and medium enterprises (SME). The changes are projected to lead to a 35% improvement in business efficiency, a 13% increase in international business, and a 25% growth in SME trade by 2024.
The transition would also position the UK, which would be the first G7 nation to align with MLETR, on the vanguard of trade digitalization. As a result of this, the UK will be able to develop modern and lasting trade and economic ties with visionary economies around the globe.
UK Law Commission sets sights on Reforming English Law
On April 30th, the UK Law Commission of England and Wales announced its objective to reform English law in a way that is consistent with MLETR, ultimately establishing digital documents under English law. The Commission has launched a consultation into its initial proposals in the hope of achieving this objective in 2022.
As English law stands today, a digital negotiable instrument does not comply. This is due to the heavily criticized legal precedent that one cannot possess an intangible. This makes it impossible to deliver, which is done through the transfer of possession to another party, an inherently intangible instrument, a legal requirement under the Bill of Exchange of 1882 (BoE 1882).
Updating the outdated English law and bringing it in accordance with MLETR, is expected to have ripple effects throughout the world. This is because of the English system’s widespread influence, with nearly 40% of the world’s legal systems being based on or inspired by it.
ITFA touts the DNI Initiative as a possible technical solution
On May 3rd, The ITFA, which established the Digital Document (dDOC) specifications, has further promoted both these specifications and the digital negotiable instruments (DNI) initiative in support of MLETR. The dDOC specifications and DNI initiative make use of E-signatures, cryptography, and distributed ledger technology (DLT) to create digital documents that effectively replicate many legally necessitated properties of paper.
“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.”, said André Casterman, Chair Fintech Committee, ITFA.
By applying these specifications to digital documents that replicate negotiable instruments, such as bills of exchange or promissory notes, the ITFA hopes to create a type of DNI, referred to as an electronic payment undertaking (ePU) that can be used in an MLETR-driven trade environment.
The technology is here and now there are promising signs that the legal and regulatory frameworks that global trade operates within are finally catching up to today’s digital-first world.