Lloyds Bank and Swedish fintech Enigio have completed the UK’s first digital promissory note transaction, in a pilot hailed as “significant” for the wider use of the product, including for trade finance purposes.
On August 17, Lloyds Bank conducted a pilot enabling the sale and purchase of land worth £48mn between several UK businesses, with the promissory note issued using Enigio’s digital trade finance documentation product, trace:original.
Lloyds Bank says the solution dramatically accelerated payment speed, with the pilot being initiated and finalised within 24 hours. In paper format, promissory notes can take over a week to be transferred between banks and notaries.
The transaction was completed under ITFA’s Digital Negotiable Instruments initiative, which was set up in 2019 to fully digitise bills of exchange and promissory notes, and which counts Lloyds Bank and Enigio as members.
Digital versions of negotiable instruments, such as promissory notes and bills of exchange, are still not valid under English law, although the UK government has recently adopted draft legislation which will give these and other electronic trade documents the same legal standing as their paper-based counterparts. It is hoped that the UK’s new Electronic Trade Documents Bill will be enacted by early 2023.
ITFA and the association’s legal partner Sullivan had previously worked on coming up with a temporary workaround to legislative barriers, creating digital equivalents of these instruments that operate under the current English Bills of Exchange Act.
Those efforts have now borne fruit, with Sullivan and Lloyds Bank partnering to create an original promissory note template that works within contract law and utilises dDOC specifications provided by ITFA.
“The development of this, the first digital equivalent promissory note issued in this way, will be closely watched by the market as a whole,” says Geoffrey Wynne, partner and head of the trade and export finance group at Sullivan.
“It has the potential to be a real game changer in terms of the speed of creation and transfer of the payment obligation that it offers,” he adds.
While the pilot highlights that digital promissory notes can be issued on a contractual basis, there is an acceptance that widespread adoption of these debt instruments can only take place once legislative hurdles are removed.
Legislative change is also underway in other countries with the adoption of UNCITRAL’s Model Law on Electronic Transferable Records (MLETR).
The model law has already been implemented in a number of jurisdictions, including Singapore, Bahrain and Abu Dhabi Global Market. Singapore completed a MLETR-enabled pilot transaction with Abu Dhabi in late 2021.
The Lloyds Bank transaction shows that anyone can digitise negotiable instruments “without having to wait for any particular law to come into force”, an Enigio spokesperson tells GTR.
“These laws are, however, extremely important and useful and will have a huge impact on the use of electronic trade documents going forward as [they will no longer] need to rely on any contractual arrangements.”
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