More data, less paper
Published in the November edition of Gaftaworld. Link to the specific edition is here.
The Digital Transformation of Commodity Trading: Progress and Implications
International commodity trading plays a vital role in the global economy, facilitating the exchange of trillions of dollars worth of goods each year. However, the sector has long been plagued by inefficient, paper-based processes that slow down transactions, increase operational costs and present environmental, social and governance (ESG) challenges.
The Weight of Historical Paper Processes
In the history of international trade, paper documents have been deeply ingrained, dating back to medieval times. The bill of lading, one of the most critical documents in trade, has its roots in the maritime practices of the Mediterranean in the late Middle Ages, approximately in the 14th century. These documents served as evidence of the contract for the carriage of goods and as a receipt issued by the carrier. They were essential for the functioning of long-distance and international trade routes.
Documents like the bill of lading have been crucial for centuries in verifying and securely transferring goods. Over time, international laws and protocols, such as the Hague Rules (1924) and the Hamburg Rules (1978), have solidified the importance of paper-based documentation in the sector.
Laying the Legislative and Legal Framework - The Rise of Electronic Transferable Records (ETRs)
The practical relevance of electronic transferable records (ETRs) is becoming more prominent with the implementation of the UK's Electronic Trade Documents Act 2023 (ETDA) on September 20, 2023. ETRs enable secure and legally valid exchanges of trade-related data and ownership rights, eliminating many of the drawbacks associated with paper-based systems.
Regulatory Catalysts: UN MLETR and ICC URDTT
The United Nations Model Law on Electronic Transferable Records (UNCITRAL MLETR) and the International Chamber of Commerce Uniform Rules for Digital Trade Transactions (ICC URDTT) are crucial international frameworks driving the transition to digital trading practices. Adopted in 2017, the UN MLETR has played a vital role in defining the legal parameters of ETRs, from functional equivalence to control and transfer. Similarly, the ICC URDTT provides a common set of rules for digital transactions, including error management and compliance criteria. Together, these frameworks contribute to a more secure and efficient digital trade ecosystem.
The UK's Progressive Stance: ETDA 2023
The Electronic Trade Documents Act 2023 (ETDA) received Royal Assent in the UK on 20 July 2023, and took effect on 20 September, marking a significant moment for the UK in embracing digital trade. This legislation legitimises electronic versions of essential trade documents, such as bills of lading, warehouse receipts and bills of exchange, filling the legal gaps that previously existed in English law regarding digital trade documentation. The ETDA aims to enhance transaction speed while reducing costs, thereby boosting overall trade activity and broadening access to trade finance.
Prior to the ETDA, electronic documents did not have the same legal status as their paper-based counterparts under English law. This discrepancy has now been rectified, granting electronic formats of trade documents identical legal ramifications, functionalities and effects as their traditional versions.
It's worth noting that the UK is not alone in transitioning towards digitalisation. Countries like Papua New Guinea, Belize, Kiribati, Bahrain, Paraguay, the Abu Dhabi Global Markets in the United Arab Emirates and Singapore have already adopted the United Nations MLETR, further emphasising the global shift towards a modern and efficient trading ecosystem.
This legal evolution in the UK, combined with international trends, creates an environment conducive to trade innovation and makes a compelling case for the adoption of digital solutions in trade operations.
Securing Your Post-Trade Trade Network
Havona is conducting live trials with various stakeholders, including chambers of commerce, commodity traders and single trade windows. Post-Trade, our platform’s flagship product, is designed to facilitate a reliable, transparent and traceable exchange of digital trade documents. This is particularly important given the traditional requirement to physically possess or secure custody of vital, negotiable paper title ETRs such as bills of lading and warehouse receipts.
Utilising state-of-the-art technologies such as distributed ledger and cryptography, software providers like Havona can work with clients to create secure digital trade networks within the commodity services market. The platform aims to expedite the exchange of value, data and information in a way that is not only faster but also more transparent and secure.
Additionally the ability for any participant to grow a secure network is becoming a reality, whether you are a farmer, importer, exporter, trader, chamber of commerce or customs authority or surveyor: secure networks built on reliable systems have the potential to positively impact the transition to increased levels of secure electronic data being exchanged.
Furthermore, the implementation of secure, reliable systems has demonstrated significant operational advantages. Streamlining the documentation process has resulted in time savings of 12–15 days, accompanied by cost savings of up to 40%.
Many organisations within the commodities sector have commenced the integration of digital technologies across their value chains. As the last remaining challenges, specifically in the realm of post-trade processes, are being addressed, the aspiration for a wholly digital commodity trade landscape is finally becoming attainable.
