It is confirmed every day with the emergence of new usage scenarios that blockchain is not just Bitcoin and cryptocurrencies. It has long been stated that blockchain technology and tokenization have significant potential in terms of trade finance, logistics, insurance, and supply chains. The implementation of smart contracts regarding letters of credit was on the agenda.
Paperless trade involves the digitalization of the information flow needed for the cross-border exchange of goods and services; for example, it refers to the existence, transfer, and storage of bills of exchange and other negotiable instruments in the electronic environment. Creating documents used in international trade digitally instead of paper can have many advantages, such as speed, efficiency, reducing errors, and protecting the environment. For example, while it may take days to transfer a commodity bill, it is possible to complete this transaction in minutes in the electronic environment. It is also possible for trade-related data to change hands with better quality, faster, and at less cost. All these advantages are also significant for the global banking and logistics sectors.
Although the concept of paperless trade has been on the agenda for many years, current laws in many countries are not convenient for bills of exchange and other valuable documents to exist completely electronically. For this reason, although it is technically possible to switch to electronic versions of documents used in business life, legal uncertainties have prevented their widespread use.
MLETR (Model Law on Electronic Transferable Records) is an international initiative to provide a legal framework for electronic commerce documents. Already in 2017, MLETR pioneered the digitalization of trade documents by promoting the legal validity of electronic documents and providing guidelines and standards for the use of electronic records and signatures in commercial transactions. Legislation affected by or directly adopting MLETR has been enacted in Bahrain, Belize, Kiribati, Paraguay, Papua New Guinea, Singapore, Abu Dhabi Global Market, and most recently the United Kingdom.
We can say that the COVID-19 pandemic has also been a driving force in creating the legal infrastructure of digitalization: During the pandemic, the International Chamber of Commerce (ICC) invited all countries to eliminate all legal obligations regarding the use of paper trade documents and encouraged the long-term changes to their legal infrastructure to give validity to electronic documents as an emergency measure.
The law named “Electronic Trade Documents Acts” (ETDA) was adopted in England on July 20, 2023, and came into force on September 20, 2023. We can say that this law is within the scope of the research and legalization movements that have been carried out in the UK for the last five years and especially focus on blockchain technology. Simultaneously, legislative activities regarding the legal infrastructure of the digital asset category, which includes crypto assets, continue in the UK.
ETDA allows electronic commerce documents to be considered the functional equivalent of paper documents and have the same legal effect as their paper counterparts, provided they meet certain conditions. Within the scope of ETDA, documents such as policy, bill, bill of lading, ship's delivery order, warehouse receipt, captain's receipt, marine insurance policy, and cargo insurance certificate are considered as examples of electronic commerce documents.
Blockchain technology is a significant tool in creating electronic records as the equivalent of paper documents. However, the name of a specific technology is not explicitly mentioned in ETDA (tech-neutral); it is mentioned that the electronic commerce documents must be created in a secure system in order to be equivalent to their paper counterparts. To create an “electronic trade document” under the ETDA, a “reliable system” must ensure that the electronic trade document contains the same information as its paper equivalent and is distinguishable from any copy. In addition, this system must ensure the protection of a document against unauthorized alteration, the security that more than one person can't exercise control of the document at any one time, the allowance any person who can exercise control of the document to demonstrate that the person can do so, and the security 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 can exercise control by being a transferee).
In this context, it is significant to prevent unauthorized access to the system, to ensure the integrity of the information held in the system, and to have an industry standard on which the system is based. Considering all this, it is a fact that blockchain technology is perfect to ensure that an electronic document can be subject to exclusive control and that once it is transferred, the previous owner will no longer have control over the document.
With this new regulation, the tokenization of trade documents will have a legal basis. This legalization activity in English Law is also significant for other countries. Because English Law is one of the most preferred laws in international trade law. For example, it is known that many bills of lading issued in international trade transactions are prepared within the framework of English Law.
In pursuit of this development in English law, it is expected that more countries will accept MLETR and start implementing it. It is stated in many places in the explanatory notes regarding the law that MLETR is taken as a basis. We will soon see how this development in English Law will affect legalization activities in other countries.