MLETR is the acronym given to an attempt to establish a global standard for digitising trade documents. It has been proposed by UNCITRAL (United Nations Commission on International Trade Law).
The Model Law on Electronic Transferable Records aims to produce a frictionless exchange of original digital documents through existing operating systems. MLETR is designed for interoperability so that once an original digital document is created it can be easily shared with the other relevant parties in a transaction.
An Example of How MLETR Works
A logistics company takes possession of a commercial shipment. It can create and share a digital Bill of Lading with its client using email. The supplier then takes the Bill of Lading and adds its invoice for the customer along with any other relevant documents and sends the bundle of digital documents to their bank using internet banking. The supplier’s bank then relays these documents to the buyer’s bank via the SWIFT system. At this point the buyer’s bank can electronically share all the documents generated by this transaction to their client using their own internet banking platform. And finally, when the shipment arrives the buyer can submit its confirmation of the accuracy of the Bill of Lading to the shipping company using email.
Features of MLETR
There are two main features to the proposed system for transferring records electronically. The first is that the documents can be ‘owned’. Namely, only one party at a time is in control of the documents. Thus, in the above example possession of the documents moves from supplier to bank to buyer to the shipping company. This is to recreate the unique nature of paper documents. The digital documents are originals and cannot be replicated. They can be possessed and passed on to another party.
The second feature of MLETR is that it is not confined to any one system. In the above example the bill of lading and invoice are shared by email, internet banking systems and using the SWIFT system. Interoperability is built into the MLETR standard. There are no mandated technologies that are required. This is a great benefit for global trade – it is designed to work with any system that can transfer digital information. The only requirement is to act within the legal framework of the jurisdiction(s) you are trading in.
Early Adopters
So far MLETR has passed into law in Bahrain, Belize, Kiribati, Paraguay, Papua New Guinea, Singapore, and in the Abu Dhabi Global Market (ADGM), an International Financial Centre located in Abu Dhabi, United Arab Emirates.
None of the G7 have passed MLETR laws yet. However, the UK is set to pass the Electronic Trade Documents Bill into law in 2023. This is notable as English common law is used as the basis for 30% of the world’s legal systems. Adoption by the UK (despite its role being diminished by Brexit) of MLETR will no doubt nudge other large trading nations to get onboard with the new standards.
Other Financial Instruments
MLETR has the potential to incorporate negotiable financial instruments such as Bills of Exchange, Promissory Notes and e-cheques into its system. These once paper-based methods of payment can be digitized and used within the MLETR framework as the system recognises ‘possession’ of documents. Thus, as with paper bills and notes, there can only be one original document – copies cannot be used.
Digital Identities
One of the crucial elements that underpin MLETR is the need for certainty that documents are sent to the correct parties in a transaction. Fraud has moved online in the past few years and now makes up the largest percentage of overall crime in the UK. Buyers, suppliers and shippers all require verified digital identities so that the potential for fraud is reduced.
The current solution is KYC or know-your-customer checks that are performed by banks and other institutions to verify identity, nationality and address. Banks have by far the largest repositories of stored digital identity check information. One proposal by advocates of MLETR is to create an open network where companies can submit their digital identities. These digital identities are then verified by the banks using their KYC databases.
Once a digital identity has been established it is a simple step to assign a digital wallet to that identity where documents can be stored. Attached to the wallet could be an eSignature facility to allow digital authorisation between trading partners.
Neutral Technology vs The Need for Certainty
MLETR is based on the principle of neutral technology. Any digital technology can create original documents and send those documents. However, the problem of fraud remains. It is the right-click problem. An email can be intercepted, especially by government backed hackers. A digital file can be copied using a computer. PDFs can be converted to changeable files like a Word Doc, altered and then converted back to a PDF. The email is then sent on surreptitiously to the intended party. How is this fraud prevented? Some way of attaching a digital stamp to a document that can be included in the document and then checked easily needs to be introduced.
The Japanese academic Koji Takahashi has studied the Bahrain Electronic Transferable Records Law. He points out that since the legislation adheres to the principle of technology neutrality it means “blockchain technology is not excluded from the Model Law’s scope of application. It is in fact a technology well suited for creating and managing electronic records which purport to replicate transferable documents because it is capable of guaranteeing that there is a single true version of electronic records”. The Bahrain law (passed in February 2019) requires a government accredited ‘operator’ to handle an information system for managing electronic transferrable records. Takahashi has studied the wording of the law and has concluded:
In view of the definition of an “operator” (Article 1(l)), it seems unlikely that any accreditation will be issued with respect to public blockchains. But the administrator of a private blockchain may fall within that definition.
Koji Takahashi – Bahraini legislation based on the UNCITRAL MLETR
Bahrain as an early adopter of electronic trade documents is undergoing a debate that all countries wishing to adopt this standard may face. While the United Nation’s model law clearly wants to embed the principle of technology neutrality in electronic trade documents law, trade experts and fintech experts are pointing out that blockchain technology that uses a distributed ledger is clearly more robust. Cryptography prevents hacking and a distributed ledger prevents any one server holding the data and thus being vulnerable to attack and manipulation.
In Summary
The Model Law on Electronic Transferable Records or MLETR has already been passed into law in several countries. It is an ‘open’ system that prevents any one fintech gaining a monopoly. It seeks to digitize global trade to allow buyers, suppliers, logistics companies and banks to send ‘original’ documents to each other using a variety of digital methods. Transactions are secured by digital identity checks built on the current KYC requirements used by banks. The process is faster than the current system that still requires the transport of paper documents. Once governments worldwide legislate for this improvement global trade will be enhanced, made more secure and error will be reduced. The issues that remain with MLETR are connected to how best to prove the genuine nature of a digital document and how to verify the current possessor of the document.
