Guest Post by Irene Ng
Irene Ng is a Fellow at the Stanford-Vienna Transatlantic Technology Law Forum and a Ph.D. Candidate at the University of Vienna. On March 17, 2018, Irene shared about how UNCITRAL e-commerce texts can interact with blockchain and smart contracts at the Computational Law & Blockchain Festival, Singapore Node. The following post is a summary of her presentation and answer to some queries that were asked.
1. What is UNCITRAL?
UNCITRAL stands for the United Nations Commission for International Trade Law. It is the main body of the United Nations that aims to promote trade amongst states through modernizing and harmonizing rules for international commerce. UNCITRAL has undertaken work in a wide range of commercial law issues, such as micro, small and medium enterprises (MSMEs), arbitration and conciliation, investor-state dispute settlement reform, electronic commerce, insolvency law, security interests and international sale of goods.
2. What are UNCITRAL E-Commerce Texts and how are they related to Singapore’s e-commerce laws?
In the field of e-commerce, UNCITRAL has released four texts in the last two decades or so. The first legislative text was the Model Law on Electronic Commerce (1996). Subsequently, UNCITRAL released the Model Law on Electronic Signatures (2001), the Electronic Communications Convention (2005), and, more recently, the Model Law on Electronic Transferable Records (2017). These texts intend to facilitate e-commerce transactions by establishing rules to allow the electronic equivalent of paper-based documents to be legally recognised, thereby removing obstacles encountered by the use of electronic means.
Historically, Singapore has been an active participant in the drafting of the model e-commerce laws and has contributed much to the discussion on UNCITRAL e-commerce laws. Singapore’s very own Electronic Transactions Act, which came into force in 1998, is closely based on the UNCITRAL Model Law on Electronic Commerce. The subsequent reform of Singapore’s Electronic Transactions Act was to take into account the Electronic Communications Convention.[1] More recently, Singapore has sought a public consultation on whether it should adopted the Model Law on Electronic Transferable Records. Publicly available responses have indicated that Singapore should adopt this latest model text by UNCITRAL. You can read more about the Singapore Government’s public consultation and the responses here.
3. Technology changes rapidly. How do we know that what we’ve legislated now will not be outdated for the future?
The UNCITRAL texts are drafted with three key principles in mind: non-discrimination, functional equivalence and technological neutrality. Non-discrimination ensures that “a document would not be denied legal effect, validity or enforceability solely on the grounds that it is in electronic form”.[2] Functional equivalence sets down the criteria “under which electronic communications may be considered equivalent to paper-based documents”.[3] Finally, technology neutrality intends to “provide for the coverage of all factual situations (…) irrespective of the technology or the medium used”.[4]
With these three principles in mind, the UNCITRAL e-commerce texts intend to accommodate new kinds of technologies so long as such electronic medium or form satisfies the criteria laid down in the specific legislative text in question. The UNCITRAL texts accommodate these technologies by not specifying or listing certain technologies that would be acceptable. Rather, it takes an ex post reliability assessment approach – this is seen in the Model Law on Electronic Transferable Records, where as long as the technology meets a general reliability standard, an electronic transferable record that is made using such technology will be accepted. [5]
While UNCITRAL texts aim to accommodate new technologies, such as the use of blockchain and smart contracts, the practical implementations remain to be seen. This is even more pertinent considering that the most recent Model Law on Electronic Transferable Records makes references to “distributed ledgers” and does not make explicit reference to “blockchain” and “smart contracts” – perhaps as an attempt to stay true to its technology neutral principle.
4. You’ve previously mentioned that The Model Law on Electronic Transferable Records, which Singapore has sought public consultation on, has yet to be adopted. Could you tell us more about it?
The Model Law on Electronic Transferable Records intends to generally plug the gap that was missing in e-commerce laws. The Electronic Communications Convention aims to assure “that contracts concluded and other communications exchanged electronically are as valid and enforceable as their paper-based equivalents”.[6] However, the Electronic Communications Convention excluded transferable records such as promissory notes, bills of exchange, bills of lading, warehouse receipts or any other transferable document or instrument under its coverage.[7]
The Model Law on Electronic Transferable Records fills this lacuna by providing the rules on when an electronic transferable record should be deemed to be legally valid and enforceable, similar to a paper-based transferable record. The Model Law on Electronic Transferable Record does this by laying down the relevant rules on functional equivalence. These can be found in Chapter II of the Model Law on Electronic Transferable Records, which provides a functional equivalent for the traits of a paper-based transferable record. Thus, an electronic transferable record would be deemed valid and enforceable if such electronic transferable record fulfils the criteria as listed in Chapter II of the Model Law on Electronic Transferable Records. The Model Law on Electronic Transferable Records also provides for other rules concerning the use of electronic transferable records in Chapter III and for the cross-border recognition of electronic transferable records in Chapter IV.
5. How can electronic transferable records be smart contracts?
A smart contract can be described as a contract that automatically executes once certain conditions are met. For instance, let’s take the example of a promissory note. A promissory note, in the form of a transferable record, allows the holder to demand payment from the issuer at a fixed or determinable future date. Now, such a promissory note could be coded as a smart contract – when the computer’s timestamp reaches the specified date, the smart contract would automatically execute and payment would be automatically made by the issuer to the holder.
A smart contract that is executed over the blockchain network will also benefit from the functions that the blockchain provides – that is, the record of the execution of the smart contract will be stored on a distributed ledger that is irreversible, immutable and tamper resistant (or at least this is so on a public blockchain network that allows smart contracts, such as Ethereum). A promissory note in the form of a smart contract that is executed over the blockchain network would therefore be afforded these same qualities.
6. One of the elements of a transferable record is that of “singularity”. Yet, an electronic transferable record in the form of a smart contract executed over a blockchain network cannot be “singular”. How does this then work under the Model Law of Electronic Transferable Records?
Indeed, one key aspect of a paper-based transferable record is that of “uniqueness”, i.e. the uniqueness of a transferable record prevents “the circulation of multiple documents or instruments relating to the same performance and thus to avoid the existence of multiple claims for performance of the same obligation”.[8] This is difficult to achieve in the electronic world due to the relative ease of replicating an electronic record. It is not to say, though, that the paper-based cousin is non-replicable – a piece of paper is unique in itself, but it can be replicated. However, the risks associated with a paper-based replica is known to commercial operators and they know and are able to insure from such risks. Unfortunately, this is not the case for electronic transferable records and replicas of such, or at least not yet so.
The Model Law on Electronic Transferable Records tries to tackle this issue of providing a functional equivalence to “uniqueness” by introducing two approaches, that of “singularity” and “control”. The former “requires reliable identification of the electronic transferable record that entitles its holder to request performance of the obligation indicated in it, so that multiple claims of the same obligation would be avoided”[9] and the latter “focuses on the use of a reliable method to identify the person in control of the electronic transferable record”.[10]
Whether these approaches really do solve the problem of “uniqueness” belongs to a separate discussion. What, though, would be of interest in this discussion is whether an electronic transferable record in the form of a smart contract and executed on a blockchain would satisfy the requirements of “singularity” and “control”. Some have expressed[11] that as everyone in the network has an original copy of the ledger or record, then by extension, the notion of “singularity” and “control” under the Model Law on Electronic Transferable Records would be difficult to achieve.
Using the Bitcoin as an analogy may help in explaining how an electronic transferable record in the form of a smart contract and executed on a blockchain may satisfy the requirements of “singularity” and “control”. Bitcoin is a popular cryptocurrency that is powered by blockchain technology. At any given moment, it is possible to identify a specific Bitcoin (or part thereof) and the owner of said Bitcoin, even if a record of the transaction is collected and stored in every participating computer in the Bitcoin network. In the case of an electronic transferable record in the form of a smart contract on a blockchain network, the similar principles can apply.
First, Article 2 of the Model Law on Electronic Transferable Records provides that an “electronic record” includes “all information logically associated with or otherwise linked together so as to become part of the record, whether generated contemporaneously or not”. Thus, even if multiple copies – of one record – were to be stored in the participating computers in the blockchain network, this would not prevent it from being recognised as an “electronic record” under the Model Law on Electronic Transferable Records.
The similar principles present in the Bitcoin blockchain network (i.e. reliable identification of the specific Bitcoin and its owner) then applies – even if there are multiple copies of one electronic transferable record on each participating computer in the blockchain network, at any given point in time, the specific electronic transferable record and its owner can be identified and such information verified. This could thus be a solution to the issue of “singularity” and “control”.
7. What are some of the more fascinating provisions present in the Model Law of Electronic Transferable Records that might be of interest to someone trying to create an electronic transferable record in the form of a smart contract?
There are two provisions that would be of interest. The first one is Article 6, which provides that nothing “precludes the inclusion of information in an electronic transferable record in addition to that contained in a transferable document or instrument”.[12] The corresponding guidance note reveals that this article is an enabler of metadata. Smart contracts that intend to utilise metadata in its code is definitely not restricted so, or at least, they will not be denied validity simply because they do use metadata or additional information.
Article 18, which allows for the replacement of an electronic transferable record with a transferable document or instrument, is indirectly or maybe tangentially related to Article 6. An electronic transferable record in the form of a smart contract that is to be replaced by a paper-based transferable document or instrument will not be denied validity if a “reliable method for the change of medium is used.”[13] The explanatory note to the Model Law on Electronic Transferable Records does clarify that not all information (such as metadata) contained in an electronic transferable record needs to be contained in the replacing transferable document.[14] Thus, if parties decide that they want a paper-based transferable record after all that smart contract business, this article enables them to do so.
8. Aren’t there already electronic transferable records in existence? Do we still need the Model Law on Electronic Transferable Records, and how would this be commercially useful for parties intending to use electronic transferable records?
The Model Law on Electronic Transferable Records intends to provide the same regime for paper-based transferable records and electronic transferable records. With electronic transferable records, however, not all species of electronic transferable records have achieved equal treatment in the digital sphere. Some countries, such as Japan, have created national registries for certain electronic transferable records, e.g. promissory notes.[15] There are also companies that have created platforms to allow for the use of electronic transferable records, such as electronic Bill of Ladings,[16] but the rules are governed by contractual arrangements rather than a legislative framework.
Such national registries are usually built for domestic use and not for international commerce, while companies issuing such electronic transferable records have limited recognition as the documents are contractually recognized only by participants of their platform. This is where the Model Law on Electronic Transferable Records steps in – by providing a framework for the international use of electronic transferable records. With an adequate legal framework, these national registries can be scaled for international use with other electronic transferable records such as electronic Bill of Ladings, thus consolidating and merging logistics and finance documents in one system that would sit well on a blockchain network.
In the long run, this would be a more cost-effective and efficient solution, as compared to having fragmented platforms dealing with different electronic transferable records. Considering that there are already developments of bills of lading in the form of smart contracts,[17] the time may be ripe to develop a common platform for electronic transferable records to integrate logistics and finance documents, and adopt a legal framework to ensure the recognition of such electronic transferable records.
This view has been echoed by Deutsche Bank Asia (DB Asia) Ltd’s response to Singapore’s public consultation on the Model Law on Electronic Transferable Records, where it recognised that “it has been legally challenging to recognise electronic mimics of paper-based equivalent transferable records (…) [and the] Model Law represents an innovation and a start to address these challenges.”[18]
9. I’d like to learn more about UNCITRAL E-Commerce texts. Where should I start?
For a start, you can check out these audio clips recorded by a Senior Legal Officer of UNCITRAL, Mr. José Angelo Estrella-Faria, on Electronic Commerce and International Trade. These audio clips should give you a basic understanding on electronic commerce in international trade. You can find the first audio clip here and the following audio clip here.
Those with a more formal legal background may want to dive straight into the various UNCITRAL texts, which are made available at the UNCITRAL website (http://www.uncitral.org). Each text comes with an accompanying explanatory note that provides greater insight on the articles in the model texts or conventions. For those who are interested, more information can also be found in the travaux preparatoires (French for “preparatory work”).
10. When do you think Singapore would adopt the Model Law on Electronic Transferable Records?
There is no indication when it would be adopted but it is heartwarming to know that Singapore is paying close attention to international developments in international electronic commerce laws and continuously strives to be the e-commerce hub by adopting international standards on e-commerce laws. Although there has been a recent public consultation on the Model Law on Electronic Transferable Records held by the Singapore Government, it still remains to be seen whether and when the Model Law on Electronic Transferable Records will be adopted and what provisions from the model law would be incorporated in (presumably) the Singapore Electronic Transactions Act.
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The author would also like to extend her gratitude and thanks to UNCITRAL for its generosity and kindness in the use of its resources.
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[1] See Differences Between ETA 1998 and ETA 2010, Infocomm Media Development Authority (Singapore Government), https://www.imda.gov.sg/regulations-licensing-and-consultations/acts-and-regulations/electronic-transactions-act-and-regulations/differences-between-eta-1998-and-eta-2010.
[2] UNCITRAL Model Law on Electronic Commerce (1996), http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/1996Model.html.
[3] Ibid.
[4] Electronic Communications Convention at para. 47, http://www.uncitral.org/pdf/english/texts/electcom/06-57452_Ebook.pdf.
[5] Model Law on Electronic Transferable Records at para. 124, http://www.uncitral.org/pdf/english/texts/electcom/MLETR_ebook.pdf.
[6] United Nations Convention on the Use of Electronic Communications in International Contracts (New York, 2005), http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention.html.
[7] See Electronic Communications Convention, supra note 4 at Article 2(2).
[8] Model Law on Electronic Transferable Records, supra note 5 at paras. 81-82.
[9] Ibid. at para. 84.
[10] Ibid.
[11] See Case Study 3: Chain of Shipping, Chain of Things, https://www.chainofthings.com/cs3chainofshipping/. Someone (whose name I unfortunately did not note) raised this question as well.
[12] Model Law on Electronic Transferable Records, supra note 5 at Article 6.
[13] Ibid. at Article 18.
[14] Ibid. at para. 179.
[15] See also Electronically Recorded Monetary Claims, https://www.fsa.go.jp/ordinary/densi02-en.pdf.
[16] See also Bolero, where the use of the Bolero electronic bills of lading platform requires participants to adhere to the Bolero Rulebook, Electronic Bills of Lading (eBL), Bolero, http://www.bolero.net/home/electronic-bills-lading/.
[17] There are however some companies that are developing blockchain bill of ladings, such as CargoX. See CargoX, http://www.cargox.io.
[18] Response by Deutsche Bank Asia (DB Asia) Ltd to Public Consultation on the Draft UNCITRAL Model Law on Electronic Transferable Records, https://www.imda.gov.sg/-/media/imda/files/inner/pcdg/consultations/consultation-paper/public-consultation-on-the-draft-uncitral-model-law-on-electronic-transferable-records/deutsche-bank-public-consultation-on-review-of-draft.pdf?la=en.