In the ever-evolving landscape of corporate finance, the Electronic Trade Documents Act 2023, which received Royal Assent in July and will be in operation from September 20, stands as a monumental milestone, poised to reshape the way corporate treasurers manage financial transactions. The UK has become the first G7 and G20 country to enact legislation based on the UN Commission on International Trade Law’s (UNCITRAL’s) Model Law on Electronic Transferable Records (MLETR), opening the door to more innovative, accessible trade finance solutions, and supporting trade and business growth globally.

Dominic Broom
Senior Vice President, Working Capital Technology, Arqit

Chris Southworth, Secretary General, ICC United Kingdom, says: “Trade is modernising at a pace we have not seen before. There is little dispute now about whether digitalisation is happening with G20 leaders being the latest group to support the momentum with a common set of principles for digital trade and a commitment to more dialogue on common standards.

“The UK has again played a leading role, this time in helping secure the G20 principles. After September 20, there will be no more legal barriers to digitalising commercial trade documents in English law. It is a unique opportunity for all involved to shape the way trade operates in the future and ensure we deliver a cheaper, simpler, faster, and more sustainable trading system for every company.”

Heightened banking regulations, recovery from the pandemic and the conflict in Ukraine are just three examples of the stresses facing companies as they seek to navigate disruption to trade corridors and the movement of goods, as well as the complexities in obtaining all-important trade finance. Existing SCF solutions often fall short, suffering from issues such as insecurity, inefficiency, restricted accessibility, and being siloed. Smaller businesses are regularly overlooked, struggling to access working capital support. There is a digital working capital solution: digital negotiable instruments.

Using the same principle as paper-based notes, digital promissory notes remove the manual burden and can enable a superior process where sellers can be paid based on the creditworthiness of the buyer. A corporate can invite a supplier onto its SCF programme, gaining a discount on the basis that the supplier elects to receive early payment. If the digital promissory note is used as the basis of the lending rather than invoices, suppliers can receive same-day payments. This will increase access to finance and liquidity for smaller businesses, delivering discounts and extended payment terms.

Corporates can also benefit from interoperability and flexibility, as these digital solutions can be seamlessly integrated into corporate ERP systems and give control of supply chain processes and functionality back to the buyers and suppliers. Corporates can choose to switch between self and third-party funding as their liquidity needs change with their business cycles. For smaller corporates that do not use ERP systems, invoice data can be uploaded simply using CSV files.

Trading systems suffer from fragmentation with processes that are unnecessarily paper-heavy, inefficient, and costly, especially for smaller businesses. The digitisation of trade documents will enable rapid payments and approvals, enabling suppliers to receive funds efficiently, optimising cash flow and working capital.

The use of digital negotiable instruments will cut end-to-end transaction costs by up to 80% including administrative costs, which can hit SMEs particularly hard. Lower costs will benefit everyone in the transaction, removing any supplier onboarding costs for banks and minimising third-party software costs associated with operating large SCF programmes. No business can ignore sustainability and with a single shipment requiring up to 50 sheets of paper, the switch to digital trade instruments is an effective way of contributing to a business’s ESG efforts.

Compliance will be central as businesses will need to be certain that digital negotiable instruments meet the legal requirements set in the countries where the transactions will take place.

Nick Davies, Director of the Centre for Digital Trade and Innovation, (C4DTI) says: “The international trading system has been slow to take advantage of the digitalisation of processes because of the diversity of legal approaches and a lack of standardisation. This is changing fast as countries enact MLETR-type legislation, with the UK playing a leading role in enabling the international trading community to realise the benefits from adopting digital trading processes both through legislation and its [trade] Treaty network. C4DTI’s mission is to accelerate the adoption of these digital processes to make trade cheaper, simpler, faster and more sustainable – this work has never been more relevant or required.”

The global, multifaceted nature of trade means it can be particularly susceptible to financial crime. Paper-based transactions are far more prone to fraud than digital transactions, so the move to digital negotiable instruments can act as a form of risk mitigation for security. As cyber-security escalates the risk registers for businesses, we must ensure that data is secure from both current and future cyber threats. Within the next few years, quantum computing will be powerful enough to break the legacy encryption that industry currently relies upon.

My belief is that corporate treasurers want certainty before choosing to implement digital transformation, and companies cannot invest for the long term without securing against both current and future risks, including quantum attack. Arqit TradeSecure™ leverages encryption technology that has been developed to a military standard, thereby enabling companies engaged in global trade to transact and conduct business safely and securely, while standing up to the most extreme current and future cyber threats.

These are but some of the extensive reasons to adopt digital negotiable instruments. Digitalising a supply chain might seem to be a daunting task, but it can be achieved in incremental steps. It’s time for digital negotiable instrument adoption to climb up the priority ladder because the benefits are obvious and far-reaching.