Reforming legal infrastructure has proven to be a thorn in the side of trade digitisation, yet there are signs that change is afoot. GTR takes a look at the efforts being undertaken by regions around the world to bring in legislation supporting the use of digital trade documents.
When, in February, Singapore became the second country to adopt into law the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR), the move was hailed as an important one by those seeking to advance the digitisation of trade.
As banks and businesses around the world work to accelerate the use of digital trade documents, industry figures have said that a key piece of the jigsaw – alongside the harmonisation of standards – is the reform of legal infrastructure by governments.
In most jurisdictions, electronic trade documents such as promissory notes and electronic bills of lading (eBLs) lack the same legal recognition as their paper-based counterparts, creating practical difficulties for those seeking to use them.
Many trading counterparties are still required to present documents of title – or so-called “negotiable instruments” – in hard-copy format.
As a result, some statistics suggest that take-up of digital negotiable instruments has remained stubbornly low despite more than two decades of efforts. According to data from the Digital Container Shipping Association (DCSA), only 0.1% of bills of lading – just one of the many paper-based trade documents – on container ships are issued electronically.
However, Singapore parliament’s decision to amend its existing Electronic Transactions Act earlier this year ensured that the city-state would view such trade documents as functionally equivalent to their more traditional, paper versions. Now, there’s hope that other countries will follow.
Industry associations such as the International Chamber of Commerce (ICC) and the Asian Development Bank (ADB) have long touted the implementation of MLETR by governments worldwide as a vital route towards overcoming the legal infrastructure hurdle for the digitisation of trade.
Steven Beck, head of trade and supply chain at ADB, told GTR in late 2020: “Without having this legal framework in place, we are only going to be able to move so far on the digital agenda.”
Following on from the Singapore law amendment, digital and technology ministers from G7 countries pledged in April to adopt electronic transferable records in international trade transactions.
With the G7 nations representing 33% of the world’s economic output, the commitment from the group looks set to offer a long overdue route to overcoming barriers to digital trade.
Experts have told businesses to brace themselves, warning that there will be imminent and swift changes in the international legal framework for global trade.
“Industry now have 12 to 18 months to prepare, because once those legal barriers are removed, the market is going to move extremely quickly because as the business case sets out, the economic driver is enormous,” Chris Southworth, secretary general of the ICC’s UK chapter, told GTR in May.
The economic boon to individual countries is expected to be substantial, with research carried out by the ICC and Coriolis Technologies finding that digitising transferrable documents in the UK alone will generate £25bn in new economic growth, boost SME trade by 25% by 2024, and free up £224bn in efficiency savings – £171bn of this coming from bills of lading.
Amid this promising backdrop, GTR takes a closer look at the current progress of governments across the G7, the Asia Pacific region, South America, as well as the Middle East and Africa, to lend legislative support to digital trade documents.
In one watershed moment for trade digitisation efforts this year, G7 digital and technology ministers made a commitment to adopt electronic transferable records in international trade transactions.
The various representatives from Canada, France, Germany, Italy, Japan, the UK and the US outlined the pledge at a meeting in late April, where they agreed a framework that will champion the work of the UNCITRAL and promote the adoption of its Model Law on Electronic Transferable Records.
“Paper-based transactions, which still dominate international trade are a source of cost, delay, inefficiency, fraud, error and environmental impact,” the ministers said in a joint statement. “It is our shared view that by enabling businesses to use electronic transferable records we will generate efficiencies and economic savings.”
In the coming months, the G7 governments will work to map out any domestic legal barriers to the use of electronic transferable records at home, before reporting back to their fellow members in October.
At the same time, they will also establish actions to address these barriers, consider any further legal issues that may require international collaboration, review regulatory issues which may impede private sector adoption of electronic transferable records, and establish actions for co-operation.
The UK is probably the furthest advanced out of the members, Southworth says, adding that reforms supporting electronic trade documents should be passed in parliament next year.
Since Q1 2020, several stakeholders including the ICC UK, ITFA, the Department for Digital, Culture, Media and Sport, as well as the UK Law Commission, have been collaborating on updating the country’s long outdated 1882 Bills of Exchange Act.
The Law Commission of England and Wales, an independent body which recommends law reform where it is needed, is also running a consultation on provisional proposals until the end of July and will seek to publish its recommendations to the government by the end of 2021.
Sarah Green, the UK’s commercial and common law commissioner, told GTR in May that the UK isn’t able to simply transpose the UNCITRAL model law into domestic legislation, and will seek to ensure that electronic trade documents become “possessed” – in other words, treated as documents of title – provided they satisfy certain criteria.
The trade documents covered by the proposed legal reform include bills of lading, bills of exchange, promissory notes, ship’s delivery orders, warehouse receipts, marine insurance policies and cargo insurance certificates.
“I think in terms of order, Germany and the US are likely to be the next G7 countries. Japan, Italy, Canada and France still have quite a lot of groundwork to do in identifying what the barriers are. In Germany, a lot of the enabling laws are in place, but what they’re lacking is the directives to allow industry to implement those laws,” Southworth says.
Unlike the UK, where lawmakers are having to make changes to primary legislation, he notes that the focus of efforts in countries like Germany is lending confidence to businesses through a language directive.
“In some cases, you need a directive, an equivalent to guidance in English law, that instructs industry what can and can’t be done. That’s really important, as it makes sure that if a company digitises a bill of exchange, then that will stand up in court. At the moment, there’s little confidence that it will,” he says.
Economic powerhouse the US is “quite far down the road”, Southworth says, who adds that the Bankers Association for Finance and Trade (BAFT) has been working with the Office of the United States Trade Representative on its legislative approach.
“In the US, they think they’ve identified a vehicle by which to digitise trade documents. By expanding the E-Sign Act, which is already in place, and then expanding the parameters of that act to incorporate documents of title, they think that’s probably the best option. Crucially, that would be a federal solution,” he says.
Finding a way forward through federal law would allow policymakers to sidestep the potentially tricky and time-consuming process of enacting change in each and every state.
Having adopted MLETR into law in February, Singapore is “way out in front” in the efforts by G20 countries to digitise trade, says the ICC UK’s Southworth.
Singapore’s Electronic Transactions Act (ETA) has been in force since May 2010, and since then has been working to facilitate electronic transactions through the recognition of electronic signatures and records. But certain matters – including promissory notes, bills of exchange and bills of lading – had previously been excluded from the scope of the ETA.
The MLETR amendment brings these instruments within the remit of the ETA, and allows for the use of cross-border documents in a provision detailing that electronic documents will be classed as valid whether they are issued or used in Singapore or abroad.
Bryan Tan, a partner at law firm Pinsent Masons, told GTR in February that the electronic documents will, however, have to meet certain requirements.
“The technology needs to contain the same information as the offline document – like the bill of lading – and importantly, there needs to be a reliable method to identify the immutability, the integrity and the originality of the record.”
The pace of progress is varied across the Asia Pacific region, with some countries reportedly lagging in their efforts to digitise trade.
For example, despite years of lobbying from figures in the trade sector, there are accusations that Australian government efforts are foundering.
Bryan Clark, the director for trade and international affairs at the Australian Chamber of Commerce and Industry, who sits on the National Committee on Trade Facilitation, told GTR earlier this year that there are estimated to be up to 200 pieces of legislation that may need reviewing in order to accommodate trade modernisation.
As for China, Southworth says he is unsure where the country stands in the adoption of MLETR, but that it is “going to be a really important piece of the jigsaw for obvious reasons”.
“That’s a conversation we’re having with our ICC team in China, to try and figure out exactly what the Chinese are doing in this space, but they tend to be quite fast in moving around digital.”
Middle East and Africa
In the Middle East and North Africa (Mena) region, there are signs of progress among a handful of countries.
For years, Bahrain has been a global trendsetter, having given legal grounding to electronic transferable records by enacting MLETR and revising its own existing Electronic Transactions Law in November 2018.
But in recent months there have been developments elsewhere in Mena. In late February, Abu Dhabi Global Market (ADGM) – an international financial centre and free zone based in the UAE – became the third jurisdiction globally to provide legal enforceability of electronic negotiable instruments.
Following the announcement, Luca Castellani, UNCITRAL secretariat, said: “Currently, two out of the three jurisdictions that have enacted the MLETR are from the Gulf: an excellent springboard for a deep digital trade dive in the Mena region.”
According to Sean Edwards, chair of the International Trade and Forfaiting Association (ITFA), the association gave “valuable inputs” into ADGM’s new Electronic Transactions Regulations 2021.
Now, following the passing of the law change, he says that ITFA will work to explore commercialisation of specific instruments such as electronic bills of exchange and promissory notes.
Inroads are reportedly also being made into the rolling out of regulatory policies supportive of digital trade documents in North Africa.
André Casterman, chair of ITFA’s fintech committee, noted in an article in December 2020 that Egypt’s Ministry of Communication and Information Technology has amended the e-signature law, adding regulations for online signatures and time stamp fingerprints in the middle months of last year.
Rest of world
Southworth at the ICC UK says that there is a “terrible risk” that emerging markets such as Africa or Latin America may be left behind in the legislative digitisation push.
However, he notes that there is the potential for countries across the Commonwealth, Francophone and Lusophone nations to draw on the work carried out by European governments.
While the process to identify which laws needed changing took roughly two years in the UK, the progress that the country has made to date could help shorten the route for other nations with similar legal systems.
“There’s a lot of work going on in the Commonwealth, and we’re hoping that, because the UK Law Commission has identified the problem, there will be a solution for all the Commonwealth,” says Southworth. “All the groundwork is done, the tools are there, and that means we can condense the process and make it much faster for everybody, providing we are giving – particularly the developing markets – legal capacity support to help them do the job.”
In South America, UNCITRAL’s Castellani tells GTR that Paraguay has undertaken “extensive consideration” of a bill seeking to incorporate MLETR into domestic law, noting in early June that the bill “should be adopted in the coming days”.
Island states globally are also showing intent around the adoption of MLETR.
Kiribati’s parliament has introduced an electronic transactions bill with a view to enacting MLETR into the Central Pacific nation’s domestic law. Castellani says the legislation is scheduled to be adopted in a second reading in August.
Elsewhere, Castellani says that discussions have been had in Trinidad and Tobago, though these have yet to materialise into concrete legislative action.