The ITFA Digital Negotiable Instruments (DNI) Initiative is a project that aims to promote the digitization of negotiable instruments in trade finance. The International Trade and Forfaiting Association (ITFA) launched the initiative in 2019 in partnership with technology firms, banks, and industry associations.
Negotiable instruments, such as bills of exchange, promissory notes, and letters of credit, have long been used in international trade to facilitate payments and financing. However, these instruments are often paper-based, which can be time-consuming, costly, and prone to errors.
The ITFA DNI Initiative seeks to address these challenges by promoting the adoption of digital negotiable instruments. Digital negotiable instruments can be created, transferred, and endorsed electronically, which can reduce costs, increase efficiency, and improve transparency in trade finance.
The ITFA DNI Initiative has developed a set of technical standards and legal frameworks to support the adoption of digital negotiable instruments. The initiative is also working with regulators and industry associations to promote the acceptance of digital negotiable instruments in international trade.
In order to fully digitalise paper promissory notes and bills of exchange it is necessary to achieve agreement on standards for advanced document technology. Industry bodies, banking groups and most importantly governments can set up regulatory frameworks to this end. This has been successfully done in the case of e-invoices which is now subject to EU standards.
The race has started for fintech companies to be on the ground floor when it comes to be the preferred provider of tech that can dematerialise promissory notes etc. Digitial document-compliant technology (dDOC-compliant tech) has already been developed by Enigio. China Systems and Finastra have also thrown their hat in the ring wanting to benefit by locking in early adopters to their tech. The list will grow quickly as a tempting list of government bodies, corporates and regulators have expressed considerable interest in digitalising negotiable instruments. These include UK Export Finance, HMRC, Nokia, Emirates NBD, Lloyds Bank, SMBC, Mitigram, CargoX, Automaxis and Norex International.
Once the bills, notes and letters have been uniformly digitalised the next challenge is to guarantee immutability and transparency. In other words, the digital assets have to be secure from the threat of tampering. And they have to be accessible by all interested parties. The obvious solution is distributed ledger technology, or as it is frequently called blockchain technology. Cryptography that cannot be hacked guarantees immutability. The decentralised ledger ensures transparency as the digital documents do not reside on any single computer or server hidden from sight, and oversight.
The ITFA are currently proposing using the XDC Network as their preferred blockchain. It is an open-source, layer one blockchain that has enforceable smart contract capabilities. It is hoped that other blockchains with smart contract capabilities are onboarded into this venture in order to fully capitalise on the wealth of talent available in the blockchain developer space.
The key bit of legislation in this regard is UNCITRAL Model Law on Electronic Transferable Records (MLETR) adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 2017. Under the MLETR each dematerialised document does not need to be managed in a separate information system. Rather the same system could manage multiple documents. This allows companies to merge logistics and supply chain, or even commercial and regulatory documents, in a single electronic transferable record. As this is an UN initiative it doesn’t carry the weight of law – it is down to governments and trading blocks to negotiate and implement the details.
The issue with implementing a MLETR law in the UK is the English Bills of Exchange Act 1882. The ITFA are looking to pool together bills of exchange, promissory notes and letters of credit into the category of ePUs or electronic payment undertakings. This will bring the documents within the realm of contract law. The challenge is still to make ePUs recognised in common law. This requires political capital in the House of Commons. As the UK is just a year out from a general election, the Conservatives seem to have little bandwidth for dealing with this matter or for any matter other than ‘small boats’ and ‘culture wars’.
Overall, the ITFA DNI Initiative represents a significant step forward in the digitization of trade finance, which has the potential to transform the way that international trade is conducted. There is a strong need for leadership to drive this change. The prestigious body, the ITFA, has taken this role. However, there is a need for inclusion to deal with issues of interoperability with different blockchains and different fintech solutions to digitising documents. Technological advance should bring opportunities to the market on a level playing field not the creation of behemoths such as Microsoft and Google.