Trade digitisation: Testing the secret sauce
Has the secret sauce to trade digitisation been discovered in MLETR and is it something that will get over a decade of industry fatigue on the subject? Will the trade industry be able to get the sauce out of the bottle, will everyone like the same sauce, will they need to?
A regulation that is not a regulation, G7 endorsement, a platform that is not a platform, another boost for electronic bills of lading in shipping with WAVE BL and MSC, the UK Law Commission putting out feelers to change English law to help support digital trade, and more. It has been another dizzying few weeks in trade digitisation, but it certainly feels like something is coming out of the bottle. The secret in the secret sauce? There is no secret, and there may be more than one sauce.
Let’s start with the regulation that’s not a regulation, the Model Law on Electronic Transferable Records (MLETR). On 28 April, G7 digital and technology ministers endorsed a framework for collaboration on electronic transferable records, which, among other things, supports the adoption of UNCITRAL’s MLETR.
UNCITRAL, the United Nations Commission on International Trade Law, may not seem the most exciting of bodies, but its conventions, model laws and explanatory texts are part of what makes us comfortable to buy stuff on the internet globally, among other things (from the 2005 UN Convention on the Use of Electronic Communications in International Contracts). UNCITRAL texts on electronic transactions have been incorporated in more than 100 states, more than half of the world, according to Luca Castellani, legal officer at UNCITRAL. That familiarity is what is underpinning hopes that the MLETR will form some of the spine of attempts to digitise international trade. And the MLETR itself is not a regulation, it is an enabling text to be used as a ‘source of inspiration’ for national legislators. Its secret sauce is that it is a source (apologies for the pun).
Castellani acknowledges the widespread ‘trade digitisation fatigue’ that has come from many false dawns. After all, digital negotiable instruments have been in the public domain for more than a decade and have had narrow uptake. What’s different now? Underpinning the MLETR are two notions, of control and singularity. “The MLETR’s fundamental issue, first of all, this is not a regulation, it is purely enabling. It is both technology-neutral and it allows underlying laws on transferable documents and instruments based on the notion of possession, and national differences to persist,” Castellani says. “It is a keystone of the new vision that implements the concept of a data pipeline in paperless trade.”
Hold onto the idea of possession. The early adopters of MLETR include Bahrain (in 2019), Singapore (2021) and Abu Dhabi Global Market (ADGM, also 2021). Is MLETR the secret sauce that is going to unlock trade digitisation? Yes, but. “The MLETR establishes control and singularity as the requirements to reproduce possession online. How those can be achieved depends largely on technical solutions,” says Castellani.
And therein lies the rub and is the challenge being faced in a variety of different ways. “Different trade platforms have different definitions of dealing with singularity and control,” says Oswald Kuyler, managing director DSI (Digital Standards Initiative) at International Chamber of Commerce (ICC). “While this fragmentation doesn’t impact less complex supply chains or the ability to execute POCs [proofs of concept], more complex landscapes like retail require a modern approach that decentralises the title ownership – and enables transfer of ownership. Frameworks like IMDA TradeTrust simplifies, standardises and decentralises definitions for singularity and control for various documentation types across multiple industries and regions. ITFA DNI Specification does the same using a slightly different approach. These are exciting times and it will be wonderful watching these frameworks come to life over the next 12-24 months,” says Kuyler.
Back to possession: The key ingredient in any secret sauce
There are many countries poised to take advantage of the MLETR framework. The recent G7 announcement had the UK as one of the champions of digitisation. And the ICC UK and Coriolis have spelt out some of the commercial benefits for MLETR adoption and digitisation of trade for the UK economy in a report published at the end of April, which argues that digitisation could boost UK trade by £25 billion.
National regulation will be key in delivering any change. A large chunk of international trade and finance is governed by common law structures (the main two being English Law and New York Law). The UK Law Commission, a government body, provides a useful summary of applicable international trade law. The Law Commission’s consultation paper was published on 30 April and the consultation period, which calls for submissions for proposals to allow for legal recognition of trade documents such as bills of lading and bills of exchange, is open until 30 July 2021. It makes for interesting reading.
For example, Appendix 4 of its draft bill proposes a bewitchingly simple addition to the current legislation. “In section 89B(2) of the Bills of Exchange Act 1882 (instruments to which section 89A applies), at the end insert “or to a bill or note that is an electronic trade document for the purposes of the Electronic Trade Documents Act 2021 (see section 1 of that Act).”
The proof of any of the ‘possession’ pudding will be in the testing in court over the next few hundred years.
Platform that is not a platform
Turning to the matter of a platform that is not a platform: TradeTrust, which was launched last January. If it’s not a platform, what is it? “We refer to TradeTrust as a framework,” says Kay Ren Yuh, senior manager, trade, sectoral transformation group at Infocomm Media Development Authority (IMDA), a statutory board in the Singapore government which helps enable TradeTrust.
As a framework, “a particular set of rules, ideas or beliefs which you use in order to deal with problems or decide what to do,” explains Kay. He went a long way to describe the recipe of TradeTrust’s ‘secret sauce’ which is not to be a secret. TradeTrust is a multilateral, open legal and technical framework, that enables inter-operability for governments and companies across different trade platforms and formats for the exchange of digital trade documents on the back of a public blockchain.
Importantly, what TradeTrust does is to show a way to help disconnect title management from document management. That means, for instance, TradeTrust enables the carrier, when it is preparing a physical bill of lading, to register the title of that document on the public blockchain as part of the same process. Carriers, banks (even including SWIFT via FileAct), governments, importers and exporters can then go ahead with their own business processes in their own way, but there’s one registered version of title.
“Our methods for solving this ‘teensy-weensy problem’ of paper trade documentation is [publicly available on Github via Architectural Design Records] and we could have just stopped there but we decided to take it one step further and bake those methods into software components that operate at the services layer that are designed to be easily integrated into platforms and systems,” Kay says. “These software components are released as open-source so are free-for-use and anyone can look at the code to assure themselves of what it does.” He adds: “The trade team at IMDA has worked very hard on this project for the past few years and we look forward to the international trade community benefiting from our efforts.”
The concept of a public blockchain (in TradeTrust’s example Ethereum), being used so one version of ‘the truth’ (ie a record of title) is one potentially good use of distributed ledger technology. “I would argue that having a trusted-reliable mechanism to verify and validate possession and control is a principal use case of distributed ledger technology. Embracing public blockchain to truly decentralise who holds title, while still enabling the PDF or data to be used in various different systems is required for simplified change management. Couple this with standards like the Digital Container Shipping Association (DCSA) electronic bill of lading standard ((eB/Ls) that helps democratise the process for preparation and issuance of bills of lading and we can see ourselves moving closer to a interoperable world,” says Kuyler at DSI, which is an advocate of TradeTrust.
Progress on digitisation of eB/Ls continues elsewhere. Most recently, MSC Mediterranean Shipping Company (a founder member of DCSA) announced that its customers can now exchange eB/Ls on the WAVE blockchain network. How close are we to scalability of the ‘rails’ supporting trade digitisation? Gadi Ruschin, CEO of Wave BL tells TXF, “Scalability is not an obstacle to digitisation today. WAVE BL’s technological infrastructure scales to every type of organisation, from the smallest importer to the biggest bank.”
WAVE BL is aligning to UN standards. “We welcome every initiative that supports digitisation – whether it’s regulatory or commercial standardisation, or a drive to increase awareness in the industry. Standardisation certainly plays an important role in making it easier for companies to adopt digitization, which is vital for sustainability in global trade today,” Ruschin says.
Another flavour to use MLETR
Meanwhile, ADGM is aligning with UN standards with its Electronic Transactions Regulations 2021 which confirm the legal enforceability of electronic negotiable instruments such as digital promissory notes and bills of exchange that are equivalent to physical paper documents. It has adopted MLETR with inputs on its electronic transactions framework from International Trade and Forfaiting Association (ITFA)’s Digital Negotiable Instruments (DNI) Initiative and Technology Experts for Regulatory Action (TERA) taskforce (which includes Enigio, a Swedish Fintech).
There is more news on its way, more standards for electronic title documentation, more to cover on the data pipeline in paperless trade, particularly as it will affect SME finance. ‘Interoperability’ is a word that many of the service providers following MLETR say is vital. How interoperable they will prove to be is untested. It will be interesting, however, to see whether users will have to choose what meal goes under their secret sauce.
This is digitisation’s moment. The pandemic has certainly been a driver for it, and it will continue to be. Says WAVE BL’s Ruschin of his solution. “In the COVID-19 pandemic, reliance on paper has become a barrier and has caused severe disruptions to trade. The pandemic has been a turning point where everyone in the trade industry now sees digitisation as essential to business sustainability. Carriers, freight forwarders, exporters and importers have reacted quickly and adopted WAVE BL’s digitised documentation solution. At the moment not all banks have caught up, which means there is an undigitised link in the chain. I’m sure this will evolve quickly, with more banks enabling buyers and sellers to use end-to-end digitised document workflows that support LCs.”
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