The coronavirus pandemic has driven digitalisation. This also applies to global trade. Negociable instruments are thus brought back to life.
During the coronavirus pandemic, companies and financial institutions have had to find new ways of doing business. This has accelerated the digitalisation of global trade. Companies quickly recognised the benefits of digital document exchange to keep business moving, streamline processes and reduce costs.
Digital financing instruments offer sustainable advantages, especially when it comes to securing liquidity. The sale of receivables in particular can release the liquidity tied up in the receivables and eliminate the associated payment risk. Reverse factoring in supplier financing is also based on the sale of receivables. Issuing an irrevocable promise to pay also eliminates the so-called verity risk, where the debtor asserts defences derived from the supply contract or where disruptions arise due to multiple assignments or fraud.
Transferable and non-transferable receivables
A distinction is made between two types of receivables: those that are transferable – i.e. negotiable instruments such as bills of exchange – and those that are not. These include invoices, for example. Transferable instruments create an independent payment obligation that cannot be cancelled due to a dispute between the parties to the transaction. Transferable instruments are transferred by endorsement, whereas non-negotiable instruments are transferred by assignment. To this end, the parties must conclude a corresponding assignment agreement.
The bill of exchange represents the perfect synthesis of payment and financing instruments and intrinsically contains the concept of a smart contract, as rights and obligations are derived from the bill of exchange law. This is particularly important in connection with the aforementioned irrevocable promise to pay in the case of reverse factoring agreements. This is because it can be replaced by a promissory or promissory note. A different structure and an additional assignment agreement are no longer required.
Cybersecurity and digital negotiable instruments
In contrast to their paper predecessors, digital bills of exchange offer the advantage of including additional information such as invoice data. This ensures and proves that bills of exchange are based on actual commercial transactions. Digital negotiable instruments provide the long-awaited link between the physical and financial value chain.
However, new digital risks are emerging, particularly in terms of cyber security. Quantum technology provides the necessary security technology to protect against the misuse of quantum computing. Future-proof supply chain finance solutions based on digital negotiable instruments build on this new quantum cyber security technology.
Outlook for paperless retail
The transformation to digital negotiable instruments (DNI) revitalises the advantages of special legal certainty and simple transfer of negotiable instruments. The International Chamber of Commerce assumes that paperless trade in the G7 countries could generate additional exports totalling USD 267 billion by 2026 compared to the baseline forecasts.
In 2023, the United Kingdom will be the first G7 country to introduce specific legislation for electronic commercial documents. France, Germany and the USA want to follow this example.n to use a bill of exchange, answered no at the end of the workshop, ready to use the digital bill of exchange. An impressive and motivating result!
by Markus Wohlgeschaffen 30 August 2023
Markus Wohlgeschaffen wrote the original article for Finance Magazine.
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