Negotiable Instruments have played an enduring and pivotal role in the financial landscape. Operating on the principle of irrevocable and unconditional promise to pay along with characteristics of transferability by endorsement and delivery. The recognition of these instruments and acceptability cutting across nations makes them an integral part of almost every financial transaction across the globe, particularly in cross-border trade on account of the Bill of Lading, Bills of Exchange, Promissory Notes, etc.        

Despite transformational technological advancements in international trade, transferable trade documents like Bills of Exchange, Bills of Lading, etc remain paper-based as it was difficult for an electronic transferable trade document to have the same legal outcome as in the case of transferable paper documents.

Acknowledging the potential for improved certainty and commercial predictability in electronic commerce, the United Nations Commission on International Trade Law (UNCITRAL) supports harmonising rules for legally recognizing electronic transferable records. The new legal framework under MLETR brings Digital Negotiable Instruments (DNIs) into reality, removing legal impediments and allowing electronic documents to be legally recognized. DNIs, utilising advanced Distributed Ledger Technology (DLT), offer heightened security, enforceability, verifiability, and traceability. Their interoperability enables seamless integration with existing ERP and supply chain systems.

Why is the Adoption of DNIs Important?

Global Supply Chain disruptions have widened the trade finance gap, standing at USD 2.5 trillion, as per ADB’s report. Inflation, high-interest rates, compliance costs, and financial crimes worsen the situation. The introduction of DNIs and their accompanying regulations heralds a transformative era in financing, risk management, and working capital optimization for all Supply Chain stakeholders.

1. It provides the Holder (Financier in case of Financing against a DNI) with bidding and an irrefutable promise to pay without uncertainty over legal enforceability.
2. DNIs are expected to be far more secure than paper documents as the records of the instruments are kept on a distributed ledger.
3. Interoperability – DNI-related solutions can be seamlessly integrated with other systems and networks.
4. DNIs enhance efficiency as they are digital, thus reducing cost. They are easily scalable and more compliant as they are traceable from minting to cancellation.    

How MLETR will Empower SMEs/MSMEs (Micro, Small, and Medium Enterprises) and Drive Financial Inclusivity?

The pervasive presence of SMEs/MSMEs, especially in Asia, comprising over 95% of businesses, underscores their profound impact on employment, GDP, and exports. Their growth is crucial, yet limited access to bank credit remains a major hurdle, leaving a USD 2.5 trillion financing gap.

It is also true that most of the MSMEs are not credit-ready in terms of the requirements for a bank to assess and provide financial support, moreover, most of the banks do not have the infrastructure to reach out to millions of MSMEs.

So, is there any way to make risk assessment easier for the financing entities so that MSMEs can have access to finance their working capital needs? Can the financing process get rid of the paper-based manually intensive, time-consuming, error-prone, inefficient system to a process that is end-to-end digital? Can the banks and other financial institutions have a better risk mitigant than asking for movable and immovable collaterals?

This is possible with the adoption of MLETR thereby making DNI – e Promissory Note or e Bill of Exchange, a reality. DNIs act as irrefutable promise to pay on a certain date by the Buyer to the MSME supplier, which creates a trade financing instrument that is unique from a risk perspective. For the banks and other financial institutions the DNI will act as a risk mitigant, as with this instrument in place, lending will be purely based on the credit standing of the Buyer and not the MSME Supplier.

Enablers for MLETR Adoption for Different Countries

The push for digitization in global trade documents, particularly key transferable ones like the Bill of Lading, Bill of Exchange, and Promissory Note, has been a long-standing desire.

The UN’s Model Law on Electronic Transferable Records (MLETR) is now adopted by the G20 countries and beyond, with ongoing efforts to establish a legal framework. MLETR aims to facilitate the legal use of electronic transferable trade documents for domestic and cross-border trade. Countries like the UK, Singapore, Abu Dhabi, and Bahrain have enacted laws recognizing digital mobile trade documents, while others, including France, Germany, Italy, UAE, and Qatar, are at advanced stages of adoption. MLETR’s adoption addresses legal concerns and paves the way for the tokenization of trade assets, creating a new asset class for investors and financial institutions.

Moreover, multilateral institutions like the ADB (Asian Development Bank) play a pivotal role in driving the global adoption of MLETR. By collaborating with the ICC Digital Standards Initiative (DSI), ADB has made substantial strides in advancing MLETR. A similar initiative has been launched by the EBRD (European Bank for Reconstruction and Development), highlighting the growing impact of digitalization. These institutions’ participation underscores the comprehensive effect of digitization, extending beyond trade efficiency into realms such as compliance, governance, and environmental considerations.

Why Must India Adopt MLETR?

While India has made substantial progress in various aspects over the last decade, financing small businesses remains challenging. Despite successful initiatives like TReDS, there is still significant ground to cover. The recent initiative by IFSCA, introducing ITFS Platform guidelines and licensing for operation from GIFT City, marks an important step.

Adopting MLETR and establishing a legal framework for DNIs will ensure uniformity of law related to these instruments across the globe and thus make cross-border trade finance more seamless, secure, effective, and efficient in terms of reduction in time and cost, etc. It will also enhance the effectiveness of platforms like TReDS and ITFS, thus a big enablement for MSMEs to avail working capital finance more easily. This move would provide financiers on these platforms with an instrument that has better legal enforceability, ensuring seamless financing.

This advancement, backed by legally enforceable instruments (DNIs), mirrors the centuries-old tradition of dealing with Paper Nis (Negotiable Instruments), eliminating adoption challenges while increasing the much-needed liquidity.

To Culminate

Despite considerable endeavours to optimise international trade, an influential trade finance gap endures, surging to an astounding

$2.5 trillion in 2023, demanding immediate attention. While physical supply chains have evolved, the documentation and funding processes still need to be mired in the outdated paper-based methods, causing inefficiencies and financial risks. We believe that with the adoption of MLETR the last frontier in Trade Digitization would be overcome. It has the potential to enable 100% invoice value payment on the same day, reducing transaction costs by 80%, and opening the door of seamless end-to-end digital financing for millions of MSMEs in domestic trade and cross-border trade.

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• Source: https://www.finextra.com/blogposting/25377/mletr–a-pioneering-reform-and-its-potential-to-transform-global-trade-and-finance?utm_medium=rssfinextra&utm_source=finextrablogs