Documentary Credit World

The UK Electronic Trade Documents Act 2023 (ETDA) was passed on 20 July 2023 and came into effect on 20 September 2023. This Law provides recognition of an ‘electronic trade document’ as having the same effect as an equivalent paper ‘trade document’ (ETDA Section 3 (2)) and that “[a]nything done in relation to an electronic trade document has the same effect … in relation to the document as it would have in relation to an equivalent paper trade document” (ETDA Section 3 (3)).

Whilst the UK ETDA is different in form to the United Nations Commission on International Trade Law (UNCITRAL) Model Law for Electronic Transferable Records (MLETR), they are considered to be aligned and compatible.

The MLETR was published by UNCITRAL in 2017. The model laws of UNCITRAL are sets of model legislative provisions focused on trade that nation states can adopt by enacting into national law. The MLETR applies to ‘electronic transferable records’ that are the “functional equivalent” of transferable documents or instruments in paper form. Eight jurisdictions have adopted based on or influenced by the MLETR, including Bahrain (2018), Singapore (2021), Abu Dhabi Global Market (2021), and the United Kingdom (2023) by virtue of the ETDA.

An ‘electronic trade document’ in the UK ETDA corresponds to an ‘electronic transferable record’ in the MLETR.

The ICC’s Uniform Customs and Practice for Documentary Credits for Electronic Presentation (eUCP) Version 2.1 provides that a ‘document’ includes an ‘electronic record’ (eUCP sub-article e3(a)(ii)). This latest version of eUCP, published in 2023, emphasised that it was not a revision or update of the eUCP, but was solely an alignment with MLETR with respect to electronic transferable records. The key changes in this Version 2.1 from the previous Version 2.0 (published in 2019) are the inclusion of ‘electronic transferable record’ within the meaning of electronic record (sub-article e3(b)(iii)) and the addition of one new article (sub-article e3(b)(v)) which reads:

“Electronic transferable record means an electronic record that contains the information that would be required in the equivalent paper document, such as a negotiable bill of lading or an assignable insurance document.”

The definition of electronic record in eUCP is aligned with (though not identical to) the MLETR’s definition of electronic record.₁ The definition of an electronic transferable record in MLETR is an electronic record that complies with the requirements of its article 10, viz:

1. The electronic record contains the information that would be required to be contained in a transferable document or instrument; and
2. A reliable method is used:
   1. To identify that electronic record as the electronic transferable record;
   2. To render that electronic record capable of being subject to control from its creation until it ceases to have any effect or validity; and
   3. To retain the integrity of that electronic record.

In the UK ETDA (Section 2(2)), an electronic trade document is information in electronic form that, if contained in a document in paper form, would lead to the document being a paper trade document, and where such information would constitute an “electronic trade document” for the purposes of the Act if a reliable system is used to:

1. identify the document so that it can be distinguished from any copies,
2. (b) protect the document against unauthorised alteration,
3. secure that it is not possible for more than one person to exercise control of the document at any one time,
4. allow any person who is able to exercise control of the document to demonstrate that the person is able to do so, and
5. secure that a transfer of the document has effect to deprive any person who was able to exercise control of the document immediately before the transfer of the ability to do so (unless the person is able to exercise control by virtue of being a transferee).

The MLETR has provisions requiring a ‘reliable method’ to perform the actions or functions of an electronic transferable record, similar to the need for a ‘reliable system’ described in the UK ETDA.

It ought to be noted that an ‘electronic record’ in eUCP is not confined to an ‘electronic transferable record’ and is broader to include any type of document in data form that is (per sub- article e3(b)(iii)):

1. capable of being authenticated as to the apparent identity of a sender and the apparent source of the data contained in it, and as to whether it has remained complete and unaltered,
and

2. capable of being examined for compliance with the terms and conditions of the eUCP credit.

The requirement of eUCP sub-article e3(b)(iii)(a) for authentication as to whether an electronic record has remained complete and unaltered aligns with MLETR Article 10 (2) which requires, in relation to the use of a reliable method to retain the integrity of an electronic record: “The criterion for assessing integrity shall be whether information contained in the electronic transferable record, including any authorized change that arises from its creation until it ceases to have any effect or validity, has remained complete and unaltered apart from any change which arises in the normal course of communication, storage and display.” In the UK ETDA, information constituting an electronic trade document requires that a reliable system is used to protect the document against unauthorised alteration (Section 2 (2)(b)).

It needs to be understood that for an electronic record to be recognised as such under eUCP, certain criteria must be satisfied. Similarly, for an electronic transferable record to be recognized as such under MLETR or an electronic trade document to be recognized as such under the UK ETDA, they have criteria to satisfy. Therefore, the use of a PDF document in a letter of credit presentation may not necessarily constitute presentation of an electronic record under eUCP or be protected under the applicable law governing electronic transferable records, unless the requirement that the document is tamper-evident (i.e. whether it has remained complete and unaltered) and can be authenticated as to its source and sender can be satisfied.

Whilst presentations under eUCP credits need only meet the requirements of eUCP, and a complying presentation must be honoured, should the parties to the transaction wish to avail the protections of the law with regard to use of electronic transferable records or electronic trade documents, the requirements of the law need to be met.

The MLETR relates to only electronic transferable documents equivalent to paper-based transferable documents or instruments. The third term defined in MLETR Article 2 states:
‘Transferable document or instrument’ means a document or instrument issued on paper that entitles the holder to claim the performance of the obligation indicated in the document or instrument and
to transfer the right to performance of the obligation indicated in the document or instrument through the transfer of that document or instrument.”

The UK ETDA similarly relates to electronic trade documents that would otherwise be paper trade documents. Section 1(1) of ETDA states:

“A document is a “paper trade document” for the purposes of this Act if (a) it is in paper form; (b) it is a document of a type commonly used in at least one part of the United Kingdom in connection with (i) trade in or transport of goods, or (ii) financing such trade or transport; and (c) possession of the document is required as a matter of law or commercial custom, usage or practice for a person to claim performance of an obligation.”

Section 1(2) then provides examples of documents that are commonly used in UK trade, transport, or financing thereof. The examples are: a bill of exchange; a promissory note; a bill of lading; a ship’s delivery order; a warehouse receipt; a mate’s receipt; a marine insurance policy; and a cargo insurance certificate.

The bill of lading is arguably the most important electronic transferable record in use for international trade. According to ICC UK, 80% of all bills of lading operate under English law.₂ Given the weight that English law carries globally in the number of bills of lading issued under it, it is meaningful to look at the ETDA for what might constitute a ‘reliable system’, noting that a trade document recognised by the ETDA can be an electronic trade document only if a ‘reliable system’ is used.

Section 2(5) of the ETDA states:

“When determining whether a system is reliable for the purposes of subsection (2), the matters that may be taken into account include:

1. any rules of the system that apply to its operation;
2. any measures taken to secure the integrity of information held on the system;
3. any measures taken to prevent unauthorised access to and use of the system;
4. the security of the hardware and software used by the system;
5. the regularity of and extent of any audit of the system by an independent body;
6. any assessment of the reliability of the system made by a body with supervisory or regulatory functions;
7. the provisions of any voluntary scheme or industry standard that apply in relation to the system.”

The ETDA is not prescriptive on how a reliable system is to be determined, but provides guidance on matters that may be considered in the process of evaluating reliability. These matters, appearing in Section 2 (5), include the rules governing the system’s operation, measures taken to ensure the integrity of information stored within it, efforts to prevent unauthorised access and use, the security of hardware and software components, the frequency and thoroughness of independent audits, assessments conducted by regulatory bodies, and adherence to voluntary schemes or industry standards applicable to the system.

By outlining these considerations, the ETDA offers a broad framework for assessing the reliability of systems used to perform the functions stated in Section 2 (2) of the Act, which can be condensed into three key criteria:

1. Singularity – “identify the document so that it can be distinguished from any copies”.
2. Integrity – “protect the document against unauthorised alteration”.
3. Control – “secure that it is not possible for more than one person to exercise control of the document at any one time”; “allow any person who is able to exercise control of the document to demonstrate that the person is able to do so”; and, “secure that a transfer of the document has effect to deprive any person who was able to exercise control of the document immediately before the transfer of the ability to do so (unless the person is able to exercise control by virtue of being a transferee”.

The ETDA sets an adequate, but not necessarily an elevated, threshold of what constitutes a reliable system to deliver the functions of an electronic trade document. The assessment of the reliability of information technology systems is not a novel practice but is an extant normal consideration in IT systems use. For instance, since 2013, the Monetary Authority of Singapore has published Technology Risk Management Guidelines that provide principles and best practices for financial institutions to manage technology-related risks in their operations.

A number of systems for electronic bills of lading are in use today. The first such system commercially available was Bolero, launched in 1999. This was followed by the launch of essDOCS in 2005 and these two providers have been the traditional stalwarts of electronic bill of lading solutions used in eUCP credit transactions. In recent years, newer providers that leverage blockchain technology have emerged and include edoxOnline, WaveBL, CargoX, TradeGo, IQAX, and Secro.

Do each of these systems qualify as a reliable system under the UK ETDA? They can be assessed based on the reliability factors outlined by the Act. Evaluation of each of them as a reliable system may not follow a uniform ‘one size fits all’ approach or a pass/fail criterion. Rather, it is likely to be a nuanced process, carried out on a case-by-case basis, incorporating qualitative assessments relevant to the unique characteristics of each system. For example, some use a centralised database to record possession and title, and others use distributed ledgers, and hence the evaluation of reliability factors will need to consider the distinct technology and methodology employed by each system.

ICE Digital Trade (formerly known as essDOCS) has obtained a legal opinion certifying that its ICE CargoDocs is a reliable system under the ETDA.₃ This prompts the question: Should other electronic bill of lading (eBL) providers likewise pursue similar ‘certifications’?

If there is to be an ecosystem where different electronic bill of lading platforms of various providers can interoperate, there arises the question of ascertaining that all participants are reliable systems under the law. The vulnerability of any one electronic bill of lading platform could compromise the collective integrity of the entire network, validating the axiom that the chain is only as strong as its weakest link. Mutual recognition by network participants of the reliability under the law of each of their systems could bolster market confidence for greater adoption of electronic bills of lading, and this may well be a reasonable assumption required by the market.

The current use of electronic bills of lading is at a miniscule percentage of bills of lading in circulation.₄ Key reasons hindering broader use of eBLs include the need for user signups to the platforms providing eBLs and the desire for legal certainty on acceptability of eBLs.

Operating in a closed loop system where the legal ecosystem is made up of multiparty user contracts where all parties thereto agree to consider the electronic record as replicating the functions of paper bills of lading have enabled eBLs to be used prior to the passage and coming into force of laws providing statutory recognition of eBLs.

Most if not all existing eBL schemes have been built using contract law as a basis for acceptance by their users, because they were created prior to the UK ETDA and Singapore’s adoption of MLETR.₅ The adoption of MLETR into law does not preclude the existing eBL systems from continuing to rely on contract law for legal validity. However, for recognition of their respective eBLs under the applicable legislation as an electronic trade document or electronic transferable record, the criteria of singularity, integrity, and control thereof established through a reliable system or method needs to be met.

To address the issues that have inhibited mainstream adoption of electronic transferable documents, and accelerate the digitalisation of trade, the Singapore government amended its Electronic Transactions Act in 2021 to adopt the MLETR and developed a framework called TradeTrust for creation and authentication of digitally verifiable and transferable documents that would comply with the requirements for a reliable method under MLETR. The TradeTrust framework created by the statutory board Infocomm Media Development Authority (IMDA) is focused on trade documentation and is one of a number of Singapore government digital initiatives built on OpenAttestation, an open-source framework for digital verifiable documents and transferable records.₆ TradeTrust’s open-source code can be downloaded for free, for integration into the user ’s existing IT systems, to issue verifiable and transferable documents.₇

Using TradeTrust, any type of trade-related document (purchase order, invoice, certificate of origin, transport document etc.) can be created by the issuer as a verifiable document, which can be transmitted by various electronic means (email, application programming interface, WhatsApp etc.) to recipients who would be able to verify the authenticity of the received documents using TradeTrust. Electronic transferable records such as bills of lading, warehouse receipts, bills of exchange and promissory notes can be created using TradeTrust which combines the verifiable document with a non-fungible token to enable transferability on a public blockchain of the issuer ’s choice (Ethereum, Polygon or XDC as of now).

TradeTrust makes it possible to satisfy eUCP sub-article e3(b)(iii)(a) (an electronic record means data “capable of being authenticated as to the apparent identity of a sender and the apparent source of the data contained in it, and as to whether it has remained complete and unaltered”) without reliance on the use of a closed-loop platform or reliance on multiparty user agreements or an agreed rulebook, by enabling issuance, transmission and verification in a decentralised manner.

As part of its endeavour to establish TradeTrust as a reliable method/system, IMDA collaborated with the law firm Stephenson Harwood on a publication. This publication outlined legal analyses of the “TT eBL” (electronic bill of lading created using TradeTrust) under MLETR, Singapore law, UK law and US law. Each of the analyses addressed five criteria, tailored to the nuances of each law, and concluded that the TT eBL complied with all five criteria:

1. Same Information: Ensuring that the electronic record contains the required information found in a paper transferable document.
2. Singularity: Identifying the electronic transferable record as functionally equivalent to a paper transferable document.
3. Control: Ensuring the electronic record is subject to exclusive control and identifying the person in control.
4. Integrity: Guaranteeing the electronic record remains complete and unaltered, including any authorised changes.
5. Reliable Method/System: Achieving singularity, control, and integrity through the operation of TradeTrust.₈

Conclusion

The emergence of the UK ETDA and growing adoption of MLETR globally are impetuses towards establishing the reliability of systems in the digitalization of trade. As technology and methods of digital trade are expected to continue evolving, the work of establishing the reliability of systems for electronic trade documents will be a continuing process. The legislative frameworks provide essential thrust for electronic systems to prove their being fit-for-purpose, as bulwarks for the integrity, trustworthiness and safety of digital trade.

The initiatives of IMDA exemplify a proactive approach to meeting the requirements of legal interoperability for a reliable system or method. The aspects of singularity, integrity and control are essential characteristics of ETDA electronic trade documents and MLETR electronic transferable records. They are key design elements of any digital system for the transaction of such electronic records for commerce and financing. By embracing innovation, upholding reliability of electronic systems, and adopting MLETR, the potential of digital trade and the use of electronic records including electronic transferable records for eUCP credit transactions can be unlocked.

* Tat Yeen Yap is Managing Director Asia Pacific of the fintech MonetaGo. A DOCDEX Expert, CDCS Advocate and Chartered Fintech Professional, he was previously a transaction banker for 20 years at ABN AMRO, Citi and Société Générale. His involvement in digital trade includes having been a drafting group member of the ICC’s eUCP Version 2.0 and eURC Version 1.0 and of ITFA’s URTEPO Version 1.0, launching eUCP credit practice at Société Générale and being Sherpa of the Digital Trade Finance Lab at the Asia Pacific Financial Forum.

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