Legal problems holding back blockchain-based trade finance: research

Source: R3

R3, Shearman & Sterling, and BAFT (Bankers Association for Finance and Trade), have released a technical paper, ‘Code Is Not Law: The Legal Background for Trade Finance Using Blockchain’, which examines the paths to securing legal recognition for “electronic negotiable instruments.”

Despite general recognition that blockchain technology promises to be the basis for major improvements in the efficiency of trade financing, the absence of U.S. regulations and laws applicable to “electronic negotiable instruments” is an obstacle to the deployment of blockchain technology in trade financing.

Most notably, while it has become technologically possible to execute transactions using negotiable instruments registered via blockchain technology, existing U.S. law recognizes negotiable instruments only if they are on paper and signed, and so hindering the advancement of blockchain-based trade finance.

The paper outlines three paths to overcoming this challenge, including:

Revise UCC Article 3 by amending its definitions so that Article 3 would cover electronic promissory notes and bills of exchange.

Extend and amend the Uniform Electronic Transactions Act (UETA) to cover and provide for electronic promissory notes, as well as electronic bills of exchange.

Create a rulebook that would be subscribed to by users of electronic negotiable instruments and that would fill in gaps in existing law. The rulebook would require electronic promissory notes and bills of exchange to be registered on a permissioned blockchain not accessible by the general public, where each transacting party would agree as a condition of the use of the blockchain to be bound by the rulebook.

While the ideal, long-term, solution would be to amend UCC Article 3, such amendment could take years to be prepared and enacted. In the interim, a viable solution is the creation of the rulebook to apply existing law to electronic instruments.

Shearman & Sterling is a member of R3’s Legal Center of Excellence, which was developed to collaborate with, and gather feedback from the legal sector on blockchain technology. R3 is a member of BAFT, the global transaction banking industry association, and an active participant on the BAFT Innovation Council. 

Comments: (0)

Find out more