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The Electronic Trade Documents Act (ETDA) is soon to be granted Royal Assent and will be implemented two months thereafter. This Act is the result of years of dedicated effort by numerous individuals and industry organisations.
Once in effect, the Act will legally recognise certain electronic trade and trade finance documents as equivalent to their paper counterparts. Until the Act is operational, such electronic documents cannot be legally possessed under English law to enforce rights to payment or delivery of goods on board a ship or in a warehouse.
The Act holds significant implications for businesses in the trade and trade finance sectors, as almost all documents used in international trade have traditionally been in paper format, except when using platforms or similar arrangements where the terms of recognition of electronic versions of these documents are contractually agreed upon between parties and fintech providers.
The Act is set to enhance access to, and potentially greatly increase the speed and security of, nearly all global trade and trade finance documentation. It is expected to facilitate the transition of the industry towards approved and legally enforceable digital documentation.
Geoffrey Wynne, head of the trade and export finance team and partner at law firm Sullivan & Worcester in London said, “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.