A year ago, most people hadn’t heard of artificial intelligence such as ChatGPT. Today, it’s rarely out of the news and is demonstrating its use cases across a wide range of business and educational scenarios. Global trade is undergoing similar radical transformation, both in terms of the digitisation of transactions and their storage on distributed ledgers. These enhancements to future-proof trading security and efficiency are being accelerated by legislative efforts from governments across the world, including in the United Kingdom, writes Dominic Broom, SVP working capital technology at Arqit.


The digital transformation of global trade was turbocharged during the Covid-19 pandemic, with businesses and financial institutions needing to find new ways to transact business whilst offices were closed, and staff were working remotely. We all remember the images at airports across the world with planes stacked up on runways and taxiways, unable to fly as nearly all air travel ceased. As well as the human impact, this prevented companies from completing paper-based transactions as it was near impossible to physically transfer documentation. Businesses quickly recognised the benefits of exchanging documents digitally to keep the wheels of commerce turning, streamline their processes and reduce costs.


Why businesses have moved digital

The paper-based processes used by current supply chain financing programmes are costly, time-consuming and at risk of fraud. Bloomberg estimates that between 2014 and 2020, the losses to banks from trade finance defaults linked to fraud totalled US$9.26bn. A McKinsey study in October 2022 revealed it currently takes up to 50 sheets of paper to document a single shipment, and it is estimated that more than 28 billion pieces of paper are exchanged annually in support of trade transactions. This results in an unwanted environmental impact from the use of couriers, cross-border processing and tracking required for these transactions.

According to PaymentsJournal, 75% of banks and credit unions have embarked on digital transformation initiatives, with a further 15% planning to implement strategies by the end of last year. Moving to exchanging documents digitally has all the obvious benefits businesses would expect. They are faster and more efficient and can be processed and settled in a fraction of the time it would take with more traditional paper-based processes, saving both time and money. They can also help businesses reduce their carbon emissions, which is vital as we look to improve ESG and sustainability policies.

Commercial confidence is also increased as customers can track the status of their transactions in real time, leading to greater transparency and control.

Used for decades as a trusted form of a monetary contract, negotiable instruments are being given a new lease of life through the form of a digital negotiable instrument (DNI). In 2020, the International Trade & Forfaiting Association (ITFA) unveiled a DNI initiative to digitise trade documents around the world. DNIs have come on in leaps and bounds since then, and the UK’s first digital bill of exchange transaction took place earlier this year.


Delivering a legislative advantage

Just over two years ago, G7 leaders gathered in Cornwall to build back better from the pandemic. It was missed by many, but one of the most important agreements promoted in the summit communique concerned digital negotiable instruments. The leaders endorsed the work of their digital ministers in agreeing a framework to enable businesses to use electronic transferable records to generate efficiency and economic savings. It was positive to see the UK take the lead, as part of their presidency of the G7 in 2021, and to be the first G7 country to introduce specific legislation for electronic trade documents, with France, Germany and the US following suit.

The coming into force of the Electronic Trade Documents Act 2023 will allow electronic documents to be used in the same way as paper counterparts. Drafted by the Law Commission and drawing on the UN’s Model Law on Electronic Transferable Records (MLETR), it stipulates reliability criteria that must be met to constitute an “electronic trade document”, including protecting the instrument from unauthorised alteration and securing it so that it’s not possible for more than one person (or business) to exercise control at any one time. Businesses need to have confidence that a digital negotiable instrument will be as safe to lend against as a paper document held in a bank safe, which this legislation facilitates. It gives the UK a competitive advantage as one of the first countries to adopt the legislation, in a world where many trade transactions are based upon English Law.


The importance of security in a quantum-safe world

As with ChatGPT, though, new digital platforms will pose new digital risks, particularly for cybersecurity. Digital trade is inherently safer than analogue trade, but all trade carries risks.

This is not new news. Electronic instruments and networks of the past have, unfortunately, been prone to fraud and security breaches, and with cybersecurity threats constantly evolving, things are only going to get worse. It’s more important than ever for businesses to ensure they’re offering their customers the best security possible.

The number of cyber-attacks on the financial sector is on the rise. Financial entities experienced 566 data breaches last year, resulting in over 254 million leaked records. These risks are further compounded by the emergence of quantum computers, which are expected to become viable during this decade and will be able to break the legacy encryption that was not designed to meet the needs of today’s hyper-connected world. Governments are waking up to the risk quantum computers pose and there is a growing coalition to ensure businesses are prepared. Last year, the White House announced plans to transition US cryptographic systems to quantum-resistant cryptography as a matter of urgency, and Congress passed a new cybersecurity act that focusses on the quantum threat.


The future of supply chain finance

Ensuring that digital negotiable instruments meet the legal requirements for an electronic trade document, and are protected from the quantum threat, will be crucial for any bank risk committee to give the green light for their use. As a leader in quantum-safe encryption, Arqit has the technology – through our unique symmetric key agreement platform – to offer a solution that gives businesses and their customers peace of mind.

Delivered in conjunction with our launch customer Traxpay, a leader in supply chain financing solutions, we have developed Arqit TradeSecure™, which uses distributed ledger technology to provide customers with digital negotiable instruments (such as digital promissory notes) that are quantum-safe and will protect the reliability of the DNI from both current and future cyber threats. By ensuring we meet all applicable legal frameworks, we’ve set a new standard for ease of management, which will help customers be at the forefront of interoperability, ready to move their assets more freely and efficiently across borders and around the world.

The benefits of digital negotiable instruments in the finance sector are clear. Whether it’s increased speed and efficiency or enhanced security, they offer significant advantages over more traditional financial instruments. Choosing a quantum-safe digital trade finance solution to mint and secure

DNIs both protects supply chains against disruption, loss and fraud, and offers opportunities to improve cash flow, while providing the reassuring security of future-proofing.

Digital transformation is essential for the future of trade finance. The International Chamber of Commerce has estimated that digitalising trade documents could generate £25bn in new economic growth by 2024, and free up £224bn in efficiency savings. For businesses and financial institutions, now is the time to embrace digital tools to stay competitive in an increasingly digital world. Not only can digital negotiable instruments reduce costs and improve customer satisfaction, but they can also contribute to a more innovative, sustainable and inclusive financial system. With the pandemic thankfully behind us, the timesaving and cost-saving benefits to businesses from digitising trade remain and will deliver growth far into the future.