Blockchain use in trade finance faces legal uncertainty, EBA says
Blockchain is beginning to prove itself a revolutionary development in the sphere of global trade finance, but a new report from the European Union banking regulator has questioned the legality of its use.
Trade finance has traditionally been a document-heavy process, with the interests of many disparate parties needing to be reconciled before payments can be transferred.
We.trade joint venture
Earlier this week, however, a consortium of European banks – under a trade finance joint venture called we.trade – announced the completion of the first live cross-border trades using a blockchain distributed ledger to replace the complex trail of paperwork usually needed for such supply-chain transactions.
The trade finance distributed ledger uses so-called smart contracts – pieces of computer code which are executed automatically on multiple nodes upon fulfilment of pre-defined conditions agreed between counterparties in a transaction.
In a report published this week, however, the European Banking Authority (EBA) underlined a number risks associated with smart contracts.
Potential legal and compliance risks could arise, the EBA said: “Such as uncertainties around the applicable law, the unclear and uncertain legal value of smart contracts and the lack of a clear applicable jurisdiction.”
The question of jurisdiction is important, the EBA said, as cross-border trades may need to facilitate the needs of counterparties in different global locations and a digitally signed contract may not be enforceable in all the jurisdictions.
The EBA added that potential compliance issues could arise with the relevant regulatory bodies: “For example on personal data protection if sensitive personal information is revealed; on competition laws, especially when joining consortia; or on anti money laundering/combatting the financing of terrorism.”
Meanwhile, governance of the distributed ledger could become a problem, the EBA said – particularly if one member loses its private key or becomes expelled for non-compliance with regulatory obligations.
While it outlined other potential risks, the EBA also acknowledged the opportunities blockchain technology could bring to trade finance, including efficiency gains, cost reduction, and lowering the risk of duplicate financing and the loss or manipulation of documents.
“The overall automation could make the process less prone to errors by significantly reducing the possibility of human mistakes,” it concluded.