The Electronic Trade Documents Act ("ETDA") came into force 21 September 2023. Prior to the ETDA, you would prove ownership using a physical piece of paper which you had to hand to someone and by so doing exchanged ownership.
This change propels UK law from the typewriter era, into the modern age by enabling the legal digitisation of physical documents and aims to drive international trading to be more efficient, environmentally friendly and cost effective. This significant as English law is used in 80% of all international trade so expect to see other jurisdictions to embrace digitization of documents and unlock the promised efficiencies.
At the end of last year a panel of industry experts convened at Rosenblatt & Memery Crystal's bi-monthly thought leadership breakfast briefing to discuss the opportunities of digitisation such as the ETDA, the examples of key legal and policy changes enabling this around the world, the UK's place in those developments and how we can expect digitisation to progress quickly and look out for other asset managers to follow the lead set by Abrdn, Franklin Templeton, Blackrock, Amundi who are digitising their money market funds
Participants agreed that the benefits to be gained from electronic trade documents vs. paper are familiar for those who follow trends in new technologies. Secure recording and immutability means digital trade documents will be able to be traced and verified with greater ease. 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 digitising trade documents could generate $25 billion in new economic growth by 2024, and free up $250 billion in efficiency savings.
So far the UK is leading the way towards these savings, yet the ETDA will not be alone as it was based on the UN's model law on Electronic Transfer Records. Elise Soucie, Director of Global Policy & Regulatory Affairs at GDF explained that, "Any G7 and G20 countries which signed onto the model law will have to implement laws similar to the ETDA in years to come. While the UK has the advantage right now, other countries will likely follow quickly given the current UN mandate."
Aljosja Beije of Docklab worked closely with an EU funded organisation called 2Tokens and helped the Port of Rotterdam to tokenise/digitise some of their bills of lading, but the process has been slow. He noted that, "One of the things that is slowing the process down is that it is hard to change the single laws of one country in the EU. The Netherlands also works by consensus – everyone needs to have their view heard." Aljosja stated as well that it was surprising how quickly the equivalent act was adopted in the UK. However, this was likely spurred on by the fact that 80% of global trade contracts between ship broker and ship owner are under UK trade documents.
Yet trade documents are just one area where digitisation is occurring. Throughout the discussion it was made clear that the digitisation of assets continues to grow broadly across financial services across the derivatives market, debt, cash mutual funds, property investment, and storage of digital assets to name a few. For example, Goldman Sachs' digital bond saved 150,000 dollars using blockchain technology when it digitised its debt instrument. Debt issuance is 6 trillion a year and if businesses can save basis points, then it is almost guaranteed that rapid implementation of cost saving technology will follow.
Jonny Fry, Group Head of Digital Assets Strategy for ClearBank, who moderated the discussion, believes that the next important step for digitisation is for the asset class called cash mutual funds ("CMFs") which are currently used by mainly institutions. CMFs are funds whereby professionals undertake treasury management on your behalf, and this is professionally managed across a range of assets. These funds in some jurisdiction as refered to as Money market funds and according to a report from the US Federal Reserve, such fund have over $9 trillion in assets under management globally.
Fry explained that, "The digitisation of this asset class will make this type of funds more accessible to individuals. For example, if you digitise CMF then you get to withdraw the money immediately because it will not only trade 24/7. Digitisation of a CMF provides lower risk and more transparency for the consumer and the regulator. Once digitised, it can essentially be treated like a deposit account." It was clear that in the coming years regulation and technology innovation will drive digitisation like CMFs further and faster than we could currently imagine. Furthermore, there is a strong argument that digitisation helps to improve asset managers Consumer Duty credentials as not only are investors able to buy and sell a fund 24/7 as opposed to once a day but a digitised fund can be independently priced market makers as opposed to investors relying on the fund management firm to price the fund.
But where are we in building the infrastructure for these technology developments and when can full global digitisation be expected? Panellists seemed to agree that we are still years away. It is likely that there will be co-existence of the different payment trails for a very long time, approximately 10 + years. For example, a lot of banks still have not migrated to the cloud despite it being invented in the 60s. Digitisation will likely be similar in terms of technology transformation and implementation.
Yet despite the time needed for full implementation, the opportunity is clear. Digitisation could revitalise not only trade finance, but financial services as a whole. The UK may have a narrow window of opportunity to lead, but other jurisdictions are likely to move quickly at the opportunity to cut costs and increase efficiency.
The roundtable was hosted by Laura Clatworthy (Rosenblatt & Memery Crystal) and moderated by Jonny Fry (ClearBank). Panellists consisted of Elise Soucie (Global Digital Finance), Aljosja Beije (Docklabs & 2Tokens), Daniel Tunkel (Memery Crystal) and Richard Baker (Tokenovate). This article was co-authored by Elise Soucie and Jonny Fry.
Originally published 6 February 2024
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