by Elise Soucie, Director of Policy & Regulation, GBBC Digital Finance
Barely a week ago, the Electronic Trade Documents Act came into force in the UK. It slipped the attention of many blockchain and distributed ledger technology (DLT) enthusiasts because it doesn’t once mention blockchain, or any other technology, but what it does say is much more important.
The Act propels UK law from the typewriter era, (the original statute was put into place in 1882) into the modern age. By legally granting electronic trade documents the ability to be treated like paper if they can act like paper, the law aims to drive international trading to be more efficient, environmentally friendly, and cost effective.
So, what does it mean to ‘act’ like paper? To do so, the electronic trade document must:
- be identifiable so that it can be distinguishable from any copies
- retain its integrity (not be alterable without necessary authority)
- not allow more than one person to exercise control over it at any one time
- be capable of being uniquely linked to that person and
- be fully divested on transfer.
These criteria were carefully set out in order to capture the complexity of trade documents which legally are ‘possessive’. Another way to think about this is that they are tangible ‘things’ which you can have possession of.
Like dematerialised securities instead of stock certificates, an electronic trade document can’t just be a digital file in name alone. Even though it is not something that can be physically grasped, it legally needs to meet the same standards to be tangibly possessed and legally recognised in electronic financial bookkeeping.
Using DLT, of which blockchain is one of many forms, is a very viable way to meet these criteria. As DLT is a consensus of replicated, shared, and synchronized digital data that may be spread across multiple sites, countries, or institutions, it enables the secure validation, recording and sharing of data.
Its inherent features, if implemented responsibly, are that it is distributed, trustless, immutable, and secure. This makes DLT an ideal candidate to meet the criteria of electronic trade documents set out in the Act.
Yet the Act also leaves breathing room by not naming blockchain, or any other technology. This is welcome – especially considering the rapid evolution of new innovations.
The benefits to be gained from electronic trade documents vs. paper are ones that those who champion digitisation will be familiar with. Efficiency gains in faster transfer times improve the international trade ecosystem as a whole and can lower costs.
The International Chamber of Commerce estimated that digitalising trade documents could generate $25 billion in new economic growth by 2024, and free up $250 billion in efficiency savings. With the secure recording and immutability (identifiability and integrity in the Act’s criteria) the trade documents will be able to be traced and verified with greater ease.
Reduction of paper use also benefits the environment and can support both the UK and other jurisdictions in meeting their net zero targets.
The World Economic Forum estimated a potential for 12% reduction in carbon emissions through digitisation of trade. Yet it is only through the network effect of global changes that these benefits can be gained, and international trading can truly become faster, greener, cheaper and more efficient.
Encouragingly, these global changes are already starting to take place, and the law will not be only one of its kind. It is based on the model law on electronic transfer records (MLETR) passed in 2017 by the UN International Trade group and other countries around the world are already considering how to implement this principle.
This means that in the UK, we have a unique opportunity. While this Act may be, as Lord Holmes put it, “the most important law you have never heard of”, it isn’t going to carry itself out. The Act only allows electronic trade documents to be used, it does not force companies to make the switch. Industry now has a choice in their implementation, and the UK has the chance to be a market leader in driving these changes as the first G7 country to implement the principle set out by the UN’s MLETR.
It is now up to both the public and private sector to enact the changes that the law enables. Let’s move from paper trade documents into the digital future and lead the way globally towards a modernised international trade ecosystem.