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Treasury

Trade finance: Questions over legal validity hinder digital letters of credit

Wider adoption of digital letters of credit is being held back by limited standardization and lack of interoperability.

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Photo: iStock

Progress towards digital letters of credit has been so slow.

Partly this is due to the requirement for writing and endorsement of bills of lading and bills of exchange found in 19th-century legislation that remains in place despite requests for a legal framework for electronic transactions.

An electronic bill of lading in this context has a binding nature and recognition for all parties signing a contract in a ‘club’ system such as Bolero or essDocs, explains Didier Maeter, senior trade expert, documentary trade products, at BNP Paribas.

There is simply no infrastructure that connects the digital and physical worlds of trade
Carl Wegner, Contour
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“However, if a party steps out from this system, it can be problematic as there is uncertainty as to whether an electronic bill of lading in a DLT [distributed ledger]-based transaction will have the equivalent characteristics and legal validity of an original document in traditional paper form,” he says.

The eUCP (uniform customs and practices for electronic presentation under letters of credit) was first published in 2002.

However, only a small percentage of letters of credit use these rules, largely due to constraints regarding digital transfer of title documents and the multitude of trade players required to facilitate a single transaction.

That


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