Nine months have passed since the digital and technology ministers of the Group of Seven (G7) nations committed to adopt electronic transferable records in international trade transactions, in what was hailed as a “momentous step forward” for trade digitisation.

Germany, which has just taken over the presidency of the intergovernmental organisation, arguably stands to benefit the most from the imminent digital trade revolution. According to recent research by the ICC, if the nation were to align fully with the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Transferable Records (MLETR) – which gives electronic trade documents the same legal standing as their paper-based counterparts – it could realise €1.1tn in extra exports by 2026.

However, there remain key barriers to overcome if the European exporting powerhouse is to take full advantage of digitalising the trade ecosystem.

“In Germany’s case, there are laws in place to handle transport documentation in digital form but no clear guidance for industry to implement the laws. For this reason, electronic documents haven’t been adopted,” Chris Southworth, head of ICC UK, told GTR when the research was released.

To tackle this, industry representatives in the country, in partnership with ICC Germany, have set up a working group on electronic transport documents and trade securities. GTR speaks to Hans Huber, senior product owner of trade finance innovation research and development at Commerzbank, who set up the working group, and David Saive, research associate at the University of Oldenburg, who is currently leading the group, to learn more.

GTR: What is the current status of MLETR adoption progress in Germany?

Huber: Germany is more or less MLETR compliant and has been since 2013. German law already allows for documents such as the bill of lading, warehouse receipt and consignment notes rendered digitally as electronic records with functional equivalence to their paper counterparts.

GTR: If Germany is a MLETR-compliant jurisdiction, what is holding back digital trade in the country?

Saive: In the case of the bill of lading, for example, the law says: ‘An electronic record having the same functions as a bill of lading shall be deemed equivalent to a bill of lading, provided that the authenticity and integrity of the record are assured.’ This is also the case for consignment notes, waybills and sea waybills. However, the issue is that this concept of functional equivalence is not defined.

Essentially, the German legislator has chosen to create something of a regulatory sandbox that enables companies to figure out for themselves what technology, what type of encryption level and what protocol can recreate the functions of these paper documents in the digital world.

Industry has hereby been prompted to come up with solution proposals, and then the ministries will put the successful ones into the law. The problem is that, as we all know, there are no industry-wide solutions that are adopted all over the world, so there is nothing for the legislator to put into this delegated regulation.

Herein lies the issue: on the one hand, electronic documents are allowed under the law, but the principle of functional equivalence doesn’t give enough guidance as to what requirements those documents need to fulfil. It’s too vague, and therefore companies and solution providers don’t have the certainty they need and they bear the risk of using or developing a solution that fails to recreate the functions of a paper document as envisaged by the law.

GTR: What is the working group on electronic transport documents and trade securities doing to create more certainty?

Huber: The working group brings together a group of 22 experts to work out what needs to be written into a directive to provide this much-needed clarity. It mostly involves lawyers who specialise in transportation law, but also includes financial institutions, insurers, logistics and technology providers, all of whom are bringing their respective knowledge to the table, and we are growing – I am currently speaking to a number of companies that have a natural interest in getting this right. ICC Germany has also taken on patronage for the initiative and general secretary Oliver Wieck has been opening a lot of doors for us.

The working group aims to legally define what functional equivalence actually means, that is, what are the functions to be reproduced, what authenticity means, what integrity means, and so on. We will then skip to the technical layer and give some really specific examples of technology that can be used to meet all of the legal requirements. However, we are technology neutral. We will not be promoting any vendor or any technology in particular. We’re trying to come up with directives that give a framework for how a solution has to be built in order to fulfil requirements, which will then give solution providers clear guidelines on how to develop their systems in order to be compliant to German – or more ideally international – law.

GTR: A major focus of the legal reform in England and Wales around electronic trade documents is around the concept of “possession”. How does this differ from the German legal issue of functional equivalence?

Saive: Although civil law and common law are very different, under German law we also need the notion of possession to transfer rights and title. However, we are a couple of steps further ahead than English law because this principle of functional equivalence lets us move away from this really clear notion of physical possession and gives us the opportunity to replace that term with something similar. In the technical world, this could be for example ‘exclusive control’.

The notion of exclusive control comes from the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea – best known as the Rotterdam Rules, so it is nothing special and certainly nothing new.

Exclusive control is the main pillar of functional equivalence, but the other part is to recreate the functions of the paper document, so on a technical level, singularity is very crucial, because it should not be possible to create copies of the document.

GTR: What is the timeline for the completion of this piece of work, and what will be the next steps?

Saive: We want to use the momentum created by Germany’s presidency of the G7 to drive this initiative forward this year. Once we have completed the work and we have a finalised definition of functional equivalence for electronic trade documents, we will present it to the regulators for them to incorporate it into the legislation, thus providing legal certainty to all actors within the trade ecosystem.