Components of the Digitalisation Journey of International Trade and Finance

Establishing a new legislative structure for the digitalisation of commercial trade documents and enabling digital identity for corporates are the most discussed trade transformation topics of 2022.

In an episode published on the Ubisecure Let’s Talk About Digital Identity podcast, the relationship between digital identity and the trade business, as well as the legal reforms regarding data driven trade, are discussed very articulately. Chris Southworth, Secretary General of ICC United Kingdom, and Oswald Kuyler, former director of the ICC Digital Standards Initiative, both leading names in this industry, clearly convey the work done in the direction of digitalisation of trade and the roadmap for removing barriers.

Significant and major legal reform steps have been taken, continuously and decisively, in the UK, Germany, France, China and further G7 countries for the digitalisation of international trade.

What needs to be understood about digitalisation is not just the conversion of paper trade documents into a digital format like PDF, but also the gathering of data from papers with AI technology.

The legal reforms such as the UK’s Electronic Trade Documents Bill allows for certain trade documents to be digital, such as bills of lading, bills of exchange, promissory notes, warehouse receipts, and insurance documents. These currently must be on paper and physically possessed. Under the Bill, digital trade documents – in other words, trade data – will be on the same legal footing as their paper-based equivalents.

Why do we need this legal reform?

The problem is pretty simple: to have possession of goods—if they are under a bill of lading, for example—you must be able to possess that document. It is much more than a contract of terms, but it is a possessive document. Possess the paper and you possess the goods. How is it possible to take this ownership into a digital and intangible, and yet in so many ways so contested, world?

With the standardisation of the trade data used by the main stakeholders of international trade, who are logistic providers, banks and insurance sectors, we will experience a kind of digital revolution similar to that of the inclusion of internet usage in the 1980s, which caused the information age and globalisation of the world. Today, for example, the ICC’s Digital Standards Initiative (DSI) and the United Nations Centre for trade Facilitation and Electronic Business (UN/CEFACT) lead these standardisation efforts in cooperation with sectors such as logistics and banking towards a new world age.

Cornerstones of Digitalisation

Enabling Wide Usage of Digital Identities

The main two cornerstones that will ensure digitalisation in trade are enabling wide usage of digital identities by corporates and transacting with electronic transferable records.

Digitalisation decisions of leading countries eventually will help to relax anti-terrorist regulations and KYC processes of bankers which tied them up in knots in terms of operational processes, with the 9/11 terrorist attack in the USA and then the 2008 financial crisis.

In addition, with digital identity, it will be easier for SMEs to access new supply chain networks but also financial resources. The trade finance space of SMEs is calculated to close the 1.5 trillion USD financing gap.

In supply chain management, it is not easy for a buyer company to onboard a reliable supplier that will provide goods to the production line. In order to ensure trust in trade transactions, these problems should be figured out, who the supplier company is in real life and whether it actually produces what it says or its trade partners or references are really their partners as claimed by the supplier, and more importantly, which staff are authorised to sign on behalf of the corporate. For this reason, cumbersome bureaucratic procedures are carried out in the processes of carrying goods, sharing information and transferring payments between the parties of the trade.

As trust and transparency cannot be provided, aside from the operational costs, the rapidly growing supply chain financing gap of SMEs can’t be tackled. Clearly, there has been great potential in the field of finance.

Additionally, if trade business can reduce operational costs, paperwork can be shifted to make our world a better place in the sense of sustainability.

Transacting with Electronic Transferable Records

Another main cornerstone of digitalisation is aligning national legal frameworks to run on electronic transferable records. Which means handling of data, instead of paper, in trade transactions.

Recently, when I asked why an SME owner doesn’t export, they said “I don’t have the time and resources to trade with a ‘red tape’”. Imagine that there are no bureaucratic processes in an export! With the widespread use of digital identity, a supplier can trade without needing bank intelligence or references. What a great potential!

In order to tackle the rapidly deteriorating climate problem of the world, complying with the international legal regulations of ESG and 0-Carbon is not a “nice to have” situation, but it has become an inevitable necessity. This means that legal authorities should reach sensitive commercial trade data of the corporates.

In order to carry out legal inspections, transparent data on trade is crucial; not the information that companies, customs, terminal operators and banks try to collect one by one from papers stuck in data silos.

In this case, the most important technological need is to provide data confidentiality, which will provide the element of trust between the trade parties. The privacy of commercial data is almost even more important than the privacy of individual data. Individuals have been sharing their personal information, private stories, and photos every day for years. After fearlessly sharing it on social media such as Facebook and Instagram, the world started to discuss and take precautions on personal data privacy.

Data Confidentiality in Digital Identities for Legal Entities

In commercial life, neither companies nor logistics providers nor banks can scatter their data as boldly as individuals, saying “it’s good to go digital”. It is very important which information will be disclosed to whom in the digital identities of legal entities.

The legal presence, name and address information of the company in the country where it is located may be public and available to all trading partners, but for example, its balance sheet, profitability, credibility in banks, trading partners or signatories with which it does business cannot be public.

Similarly, the data on the bill of lading, which includes, for example, the buyer of the exported goods, must be confidential. This data, which cannot be processed because it is stuck in papers at the moment, provides a kind of “confidentiality” indeed. However, to make world trade of this size sustainable, we must change all paper-based processes.

Moreover, with the decreasing trust in central structures as a result of financial crises, the only technological solution that can pave the way for central structures that are insufficient to manage the world trade exceeding 22 trillion USD, seems to be Blockchain and DLT today.

Tackling digitalisation

Will the efforts of the country’s customs to facilitate trade solve the problem of digitalisation and transparent data? I think it will be insufficient. Because the main data owner parties that carry out international trade are corporates, and it seems like the only way to focus on companies’ needs is to evolve digitalisation.

The Impact of ICC Regulation

The latest regulation of the ICC, such as the URDTT (Uniform Rules for Digital Trade Transactions), is one of the most concrete steps taken on this path. For the first time in its history, the ICC Banking Commission has published a set of rules that focuses on corporates, not Banks. Even the word “Bank” is not mentioned in the URDTT, and financial service providers are included as a secondary source for risk mitigation or financing.

UNCTAD- #MLETR (Model Law on Electronic Records) is also the best example of this as a draft model law. This Model Law has succeeded in drafting a legal text that stipulates providing commercial data privacy as the top priority of transacting with electronic trade data. Now there is a need for neutral entities such as the Global Legal Entity Identifier Foundation (GLEIF).

The trade industry is struggling to form neutral and interoperable entities of digitalisation which are valid internationally and in cooperation with local (legal) structures. I think this is the right form of governance of digitalisation.

Benefits of the Digitalisation

With the digitalisation journey, not only will the problems in the management and financing of supply chains will be resolved. But also, the smuggling, fraud, corruption and VAT losses that countries face will be mostly controlled. The fraudsters, who know the commercial documents and banking process, are now living a good life thanks to the run-down structure based on paper.

Not to mention the VAT losses; in the UK alone, the VAT deficit is estimated at £9 billion. If we make a rough calculation considering the VAT leakage amount in the total imports of goods and services (£609 billion) of the UK in 2020, we can say that the VAT loss of all countries in world trade is about 2.3 trillion USD. Such a huge amount!

It is time to start global cooperation in the field of digitalisation and international digital identity. It would be beneficial to roll up our sleeves for cooperation in the field of digitalisation and international digital identity. By controlling this kind of fraud, we can use revealed sources for SME’s finance and complying with ESG (environmental, social, and corporate governance) rules or tackling the climate crisis.

Global Digitalisation Growth

There are 53 countries in the UK’s commonwealth and the most prominent countries which meet the same basis with English Law are India, Canada, Australia, and New Zealand. With the adoption of the electronic trade document law, which is currently in the “fast track” stage in the UK legislative process, great impact on the commonwealth area will be seen. Moreover, the adoption of English law in international trade agreements and letters of credit is a centuries-old tradition in the world.

Germany, France and the USA have made significant progress in the adoption of the electronic trade document law. China, on the other hand, is taking firm steps forward in this area. These countries have a large area of influence and the potential for the acceleration of data-driven digital electronic trade is quite high in the coming years.

Therefore, digital supply chain documents and finance operating platforms such as the Bolero International (WiseTech Global Group), Contour, Marco Polo Network, TradeLens, which have managed Rulebooks, will find themselves a great commercial opportunity with digital data-based trade that has become law. Although technology provider platforms based on blockchain technology experienced “winter conditions” in 2022, they will be able to scale rapidly from 2023 with the availability of legal infrastructures.

How should organisations prepare for digitalisation?

So, what should companies and banks do for the upcoming digitalisation era?

Is it wise to wait for these developments to mature?

Especially small companies and local banks seem far from creating a vision to prepare for the effects of the big change coming. Some large companies think that they can adapt to digitalisation by relying on their size, but if they do not prepare their workforce, which is their most valuable resource in their medium-term business plans, they will not only be more vulnerable to negative impacts like COVID, but also may lose their competitive advantage in their own sector. In the view of that what should companies do? Watch out for upcoming articles.