By: Kalyan Basu, MD & CEO, Vayana TradeXchange & Dominic Broom, SVP Working Capital Technology, Arqit.
“As more countries and businesses adopt digital trade practices, we stand at the dawn of a global trade revolution that promises to redefine the dynamics of international commerce”
It’s perfectly possible that you may have missed recent developments in trade document digitalisation. The relative newness and general unfamiliarity around the tangible benefits of digital negotiable instruments (DNIs) and whether they outweigh the perceived burden of adoption and change to current processes are perhaps to be expected in the face of game-changing technologies. And that’s a pity, because trade finance instruments exist to bridge the trust gap between the supplier and the buyer. The most significant factors in the longevity of paper trade documents are that they have universal interoperability and are valid in court.
That’s why the ETDA (Electronic Trade Document Act) is so important. As Chris Southworth, Secretary General, ICC United Kingdom, explained: “The ETDA effectively recognises documents of title in digital form.”
The Act opens the door to a raft of new possibilities, not least in 3 of corporate finance’s critical focus areas: liquidity, risk, and profitability. The good news is that digital negotiable instruments offer a solution to all those priorities.
The passing of the ETDA (and similar legislation in other leading economies) provides a perfect opportunity for businesses and financial institutions to use DNIs more widely to improve working capital and earnings by delivering financing flexibility to existing supply chain finance frameworks. DNIs enable better access to liquidity for SMEs, enhanced data security, and the opportunity to tap into and attract additional liquidity by accessing a broader range of financing partners. The reasons for adoption are many and inevitable, only a few are stated below. It is never a question of if, it is a question of when.
- DNIs have the potential to make deep tier financing of supply chains a reality.
- DNIs are a perfect solution for funding open account transactions (which now account for more than 40% of global trade transactions) in a cross-border trade.
- DNIs and e BL put together can become a perfect digital financial instrument (replacing paper) which are completely digital, interoperable, transferable, traceable and identifiable, enabling banks, NBFIs, credit insurers and the entire ecosystem to better assess credit risk.
- DNIs can offer a seamless solution for investors in the secondary market to invest in trade assets without going through the painful and cumbersome securitisation process and the legal framework around it.
- DNI adoption supports the cause of reducing carbon emissions and ESG, which each one of us should be concerned about.
- Ultimately DLT can look forward to a real use case scenario for mass adoption after two decades of its existence.
Early adopters are beginning to benefit and are seeing a comparative advantage over their industry peers. If the silk road was paved with paper, the new road is paved with silicon.
The global shift towards the digitalisation of trade documentation is propelled by the realisation that the future of commerce lies in leveraging technology to eliminate barriers, reduce transaction times, and ensure the integrity of trade transactions. At the heart of this transformation is the principle that DNIs are not just about adopting new technology and transitioning away from paper; they are about reimagining the flow of capital and goods in a way that benefits all stakeholders in the supply chain.
So how do DNIs add value?
- They provide the Holder (Financier in case of Financing against a DNI) with a binding and irrefutable promise to pay, without uncertainty over legal enforceability.
- DNIs can be financed at 100% of their face value thanks to the instruments’ unconditional and independent nature, separating the performance risk from the financing transaction.
- DNIs enable businesses to tap new pools of liquidity and release trapped working capital, a huge advantage to frequently hard-pressed suppliers.
- DNIs enhance efficiency as they are digital and can be exchanged in real time, thus reducing financing and operating cost.
- DNIs are far more secure than paper documents so long as the records of the instruments are kept on a highly secure digital ledger.
- Interoperability – DNI-related solutions can be seamlessly integrated with other systems and networks.
- DNIs are easily scalable, provide end to end data transparency and are fully auditable, as they are traceable from minting to cancellation.
What does the future hold for adoption and further innovation?
The initial adoption phase is underway with transactions initiated by corporates from a range of countries across Asia, Europe and the Americas, using SCF platforms such as Vayana TradeXchange and DNI providers such as Arqit TradeSecure™. DNIs are now underpinning supply chains worth tens of millions of dollars, with large and mid-cap corporates being the first to move. As more countries adopt similar legislation and more banks and NBFIs integrate the technology into their existing business models the adoption rate of DNIs will increase exponentially.
Although introducing digital solutions to supply chains may seem daunting, treasurers can achieve it in incremental steps that don’t disrupt existing processes. It’s time for DNI adoption to climb up the priority ladder because the benefits to all stakeholders are obvious and far reaching. DNIs are becoming an integral part of the forward-thinking corporate treasury toolkit, combining the flexibility of supply chain finance with the certainty of payment afforded by a globally recognised financial instrument.
As more countries and businesses adopt digital trade practices, we stand at the dawn of a global trade revolution that promises to redefine the dynamics of international commerce.
