Vinod E P

Vinod E P
Client Director at #dltledgers

In History, there are certain transition moments, namely the discovery of fossil fuels, the industrial revolution, electricity generation, the possibility of long-distance communication, the Invention of transistors, the widespread usage of computers, the evolution of the internet, to name a few. These are some moments that set the ball rolling and pushed humanity to the next orbit of progress.

Mechanisation is a vital aspect that has brought convenience to humanity by replacing physical labour with mechanical labour. Then Automation helped convert a series of mechanical activities into one massive mechanical activity. Today machines automate the existing mechanical process, thereby increasing capacity manifold. However, the counter-argument to this is whether automation of existing approaches is the most innovative way to do the job. Some machines redesign the working to such a large extent that we may forget how the original task was done earlier. That discussion is for another time. However, I would call these devices that work with AI and real Automation Intelligent devices. These are the iPhones among phones that ushered in the smartphone revolution, the Tesla among cars that have pushed the world to intelligent EV and the solar cells among electricity generators.

A similar revolution is happening in the Trade finance space in banking too. There are some smart transitions in banking, such as movement from physical ledgers to computers, from stand-alone computers to networked systems, ATMs, credit cards, mobile banking, swift, etc. These are some of the watershed moments in the life cycle of Banking.

The Automation of Trade is an aspect that people have tried to grapple with for a long. The concept of a letter of credit started centuries ago when merchants found that carrying huge cash during long voyages was risky. They found third parties who could assure payment or make payment for purchases or advances made by the traders or traders could raise funds for their future purchases and sales. Letters of credit attained their present form after the first world war when there was a significant increase in world trade coupled with unstable economies when merchants became insolvent overnight. The development of UCP and later the use of telex and subsequently swift helped evolve letters of credit. Even though issuance and transmission of letters of credit have been transformed, the presentation of documents under these documentary credits remains pretty much the same as years ago.

Post-Covid, an important question that troubles trade practitioners is reimagining Trade in the twenty-first century. The electronic bills of lading rely on rulebooks to define the rights and responsibilities of players involved in the negotiable instruments under the Bill of lading.

The electronic transactions act, which has been in vogue for quite some time, applies to electronic documents with functional equivalence. However, the negotiable instruments were excluded from the list. The model law of transferable electronic records of UNICTRAL has addressed the challenge posed by transferable electronic records, which have functional equivalence to negotiable instruments like the Bill of lading and Bill of exchange. Only a few geographies like Bahrain, Singapore, and Abu Dhabi have adopted the MLETR, but it is only a matter of time before most of the countries adopt MLETR

How will we reimagine Trade when we design rules for the twenty-first century? Are the digital documents being designed to be functionally equivalent of the archaic physical document? For example, the concept of endorsement, intended to transfer a title to a new titleholder, requires a functional equivalence in the digital world. There was a time when we used to see physical cheques endorsed and title transferred to third parties. More than fifteen years back, I remember a Finland company opening an account with the bank I worked for and was surprised to see a cheque book in the welcome kit. He vaguely remembered seeing his father use cheques a long time back. Can we expect the coming generation of trade practitioners to say the same about physical documents in Trade?

What is the Tesla among Trade that we are going to see? Is it going to be the old wine put into a new bottle called Automation or digitization? Are we trying to reimagine the rules? Are we trying to break the mould and create a relevant instrument for the post covid digital world?

What is the Tesla among Trade that we are going to use? Is it Automation of the existing physical Trade, or will we adopt a new way relevant to the current generation?

Blockchain could be the Tesla of Trade as it is the new technology that will help us break the old processes and transition to the new. Blockchain provides the trust, authenticity and ability to involve multiple players without losing security. It gives a new means for players to connect securely. A blockchain solution that is network agnostic while providing trust and authenticity would be the ideal solution for negotiable instruments in post covid era. However, one organization establishing authenticity for the whole world brings a lot of trust issues. Today we have the certificate of origins issued by one country verified and accepted by another country without hassles. In the case of transferable records, the records originate from independent corporates, and the transfer of title must be seamlessly recorded. A network of international and regional organizations like UN, ASEAN, SAARC, GCC, PA, providing a mechanism to register a document and vouch for the authenticity and ownership of a registered document, can help bring confidence into the system.

Covid 19 has forced us to find ways and means to address life where there is no assurance of physical movement of persons. With the multiple waves of covid, which restricts the physical movement of people, Blockchain can securely connect people and organisations. We have had enough examples and proof of concepts demonstrating the capability of this technology. Digital trade is only a fraction of global trade volumes and it is only a matter of time before large scale adoption of this technology and transformations happens in the Trade finance space. Possibly this is the solution that Trade has been eagerly waiting for a long time.