electronic bills of exchange

Electronic bills of exchange and promissory notes on blockchain

Text under development.

'Bills of Exchange Factory' dApp ver. 1.0 works on cryptonomica.net/bills-of-exchange

Short description of the idea:

Introduction

Cryptonomica is working on a full-fledged digitization of the market of negotiable instruments and debts, which should be implemented on the basis of distributed ledger (blockchain) technology, use of the services previously developed and implemented by Cryptonomica, including on-line identity verification, smart contracts based arbitration clause, on-line arbitration and arbitral awards enforcement.

Challenges and goals

The market for negotiable instruments in different countries usually governed by national regulations and, partially, by international law, being an object of regulation of various government regulatory agencies. To simplify and speed up the development process, Cryptonomica has taken the digitization of bills of exchange and promissory notes market based on following assumptions:

The theory of promissory notes and Bills of exchange is generally similar in continental law and in common law;
Regulation of the market of bills of exchange and promissory notes (issue, form, turnover) is generally similar in many countries and often meets the requirements of international conventions;
The legislation of most countries does not require obtaining any special licenses or meeting special requirements for issuing, accepting and transfer of bills of exchange and promissory notes (with some exceptions)

Often, bill of exchange and promissory note market is more hampered by increased demands on the form, the difficulty of confirming the legality and conditions of transfer (for bills of exchange), special requirements and the difficulty of protesting with the subsequent implementation of the decisions adopted by the courts.

Solution

All enlisted problems can be solved using Cryptonomica service.

We provide the next services:

On-line verification of the digital keys of all participants of the bill of exchange and promissory note turnover;
Convenient custom interface to fulfill the formal requirements for the content of the bill of exchange and promissory note;
Ability of customization, taking into account the preliminary selection of ruled legislation in which the bill of exchange and promissory note is created;
Bill of exchange is an ERC20 token on the Ethereum blockchain, that ensures recording its creation, transfers and other actions;
Creating a smart contracts with the possibility back up a a bill of exchange and promissory note with cryptocurrencies;
Inclusion of arbitration clause in the smart contract with a link to our international arbitration court online;

We can create a smart contract in witch will be implemented all the requirements of an 'instrument' as defined in Geneva Convention or of an 'order in writing' as defined in U.K. Bills of Exchange Act 1882, together with the Cryptonomica arbitration clause

This smart contract can define:

The name of the person who is to pay (drawee). We need a function 'accept', that provides a (digital) signature of the drawee.
The person who issues the bill (drawer). And with blockchain we have a (digital signature) of this person.
The name of the person to whom or to whose order payment is to be made. (These persons can be presented by address on the blockchain and identified via Cryptonomica.net It should be also stated if he/she is just a physical person, or acts in behalf of a legal person)
Sum to pay, which can be expressed in 1) fiat money, 2) cryptocurrency (ETH), or 3) cryptocurrency at the rate at the exchange rate for fiat currency at the time of payment. If a payment has to be made in cryptocurrency, the person to whom payment is to be made can be represented just by ETH address (payment is public and self-evident)

We also may provide a function for an endorsement. Technically it can be the same as 'transfer' in ERC20 token standard. It probably better to make endorsements "without recourse", so we can unify bills/notes and make them more convenient for circulation. In a smart contract we can make other forms of endorsements technically impossible.

We are going to put this in smart contact (Solidity):

string public description = "Every token (ERC20) in this smart contract is a bill of exchange in blank - payable to bearer (bearer is the owner of the Ethereum address witch holds the tokens, or the person he/she represents), but not to order - that means no endorsement possible and the token holder can only transfer the token (bill of exchange in blank) itself.";

string public order = "Pay to bearer (tokenholder), but not to order, the sum defined for every token in currency defined in 'currency' (according to ISO 4217 standard; or XAU for for one troy ounce of gold, XBT or BTC for Bitcoin, ETH for Ether, DASH for Dash, ZEC for Zcash, XRP for Ripple, XMR for Monero, xEUR for xEuro)";

string public disputeResolutionAgreement = "Any dispute, controversy or claim arising out of or relating to this bill(s) of exchange, including invalidity thereof and payments based on this bill(s), shall be settled by arbitration in accordance with the Cryptonomica Arbitration Rules (https://github.com/Cryptonomica/arbitration-rules) in the version in effect at the time of the filing of the claim. In the case of the Ethereum blockchain fork, the blockchain that has the highest hashrate is considered valid, and all others are not considered a valid registry; bill payment settles bill even if valid blockchain (hashrate) changes after the payment. All Ethereum test networks are not valid registries.";

See also:

Description of the idea for the Global Legal Hackathon 2019 (Israel)

Cryptonomica presentation of the electronic bills of exchange on blockchain idea on the Global Legal Hackathon 2019 (Israel)

https://www.facebook.com/viktor.ageyev/posts/10219075225535322 (very interesting discussion in Ukrainian and partly in Russian)

Legal part

International Law

Legal issues relating to the use of electronic transferable records (UNCITRAL, 9-13 December 2013) : https://documents-dds-ny.un.org/doc/UNDOC/LTD/V13/868/26/PDF/V1386826.pdf

Convention providing a Uniform Law for Bills of Exchange and Promissory Notes (Geneva, 7 June 1930)

status:

https://treaties.un.org/pages/LONViewDetails.aspx?src=LON&id=552&chapter=30&clang=_en

https://treaties.un.org/doc/Publication/MTDSG/Volume%20II/LON/PARTII-10.en.pdf

official publication:

https://treaties.un.org/doc/Publication/UNTS/LON/Volume%20143/v143.pdf

text:

https://www.jus.uio.no/lm/bills.of.exchange.and.promissory.notes.convention.1930/doc.html

"A bill of exchange contains: 1. The term 'bill of exchange' inserted in the body of the instrument and expressed in the language employed in drawing up the instrument;"

Convention for the Settlement of Certain Conflicts of Laws in Connection with Bills of Exchange and Promissory Notes

text: https://www.jus.uio.no/english/services/library/treaties/09/9-03/exchange-notes.xml

status: https://treaties.un.org/Pages/LONViewDetails.aspx?src=LON&id=550&chapter=30&clang=_en

The United Nations Convention on the Use of Electronic Communications in International Contracts (the "Electronic Communications Convention", or ECC)

information:

https://en.wikipedia.org/wiki/Electronic_Communications_Convention

http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention.html

status:

https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=X-18&chapter=10&lang=en

http://www.uncitral.org/uncitral/en/uncitral_texts/electronic_commerce/2005Convention_status.html

U.K.

Bills of Exchange Act 1882

"A bill of exchange is an unconditional order in writing"

Electronic Commerce: Formal Requirements in Commercial Transactions, advice from The Law Commission

Commercial Law: Text, Cases, and Materials, see also https://global.oup.com/academic/product/commercial-law-9780199692088?cc=il&lang=en& , on electronic bill of exchange see p. 663

'The negotiable cow': https://en.wikipedia.org/wiki/Board_of_Inland_Revenue_v_Haddock

Germany

Eckpunkte für die regulatorische Behandlung von elektronischen Wertpapieren und Krypto-Token: https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Internationales_Finanzmarkt/2019-03-08-eckpunkte-elektronische-wertpapiere.html

https://de.wikipedia.org/wiki/Wechsel_(Urkunde)

Wechselgesetz (Bills of Exchange Act) 1933, text : https://www.gesetze-im-internet.de/wg/

U.S.

Uniform Commercial Code › U.C.C. - ARTICLE 3 - NEGOTIABLE INSTRUMENTS (2002) › PART 1. GENERAL PROVISIONS AND DEFINITIONS › § 3-104. NEGOTIABLE INSTRUMENT

§ 3-104. NEGOTIABLE INSTRUMENT.

(a) Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

(b) "Instrument" means a negotiable instrument.

(c) An order that meets all of the requirements of subsection (a), except paragraph (1), and otherwise falls within the definition of "check" in subsection (f) is a negotiable instrument and a check.

(d) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this Article.

(e) An instrument is a "note" if it is a promise and is a "draft" if it is an order. If an instrument falls within the definition of both "note" and "draft," a person entitled to enforce the instrument may treat it as either.

(f) "Check" means (i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check. An instrument may be a check even though it is described on its face by another term, such as "money order."

U.S. Code Title 15. COMMERCE AND TRADE Chapter 96. ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE Subchapter II. TRANSFERABLE RECORDS Section 7021. Transferable records

(a) Definitions

For purposes of this section:

(1) Transferable record

The term “transferable record” means an electronic record that—

(A) would be a note under Article 3 of the Uniform Commercial Code if the electronic record were in writing;

(B) the issuer of the electronic record expressly has agreed is a transferable record; and

(C) relates to a loan secured by real property.

A transferable record may be executed using an electronic signature.

(2) Other definitions

The terms “electronic record”, “electronic signature”, and “person” have the same meanings provided in section 7006 of this title.

(b) Control

A person has control of a transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred.

(c) Conditions

A system satisfies subsection (b), and a person is deemed to have control of a transferable record, if the transferable record is created, stored, and assigned in such a manner that—

(1) a single authoritative copy of the transferable record exists which is unique, identifiable, and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable;

(2) the authoritative copy identifies the person asserting control as—

(A) the person to which the transferable record was issued; or

(B) if the authoritative copy indicates that the transferable record has been transferred, the person to which the transferable record was most recently transferred;

(3) the authoritative copy is communicated to and maintained by the person asserting control or its designated custodian;

(4) copies or revisions that add or change an identified assignee of the authoritative copy can be made only with the consent of the person asserting control;

(5) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; and

(6) any revision of the authoritative copy is readily identifiable as authorized or unauthorized.

(d) Status as holder

Except as otherwise agreed, a person having control of a transferable record is the holder, as defined in section 1–201(20) of the Uniform Commercial Code, of the transferable record and has the same rights and defenses as a holder of an equivalent record or writing under the Uniform Commercial Code, including, if the applicable statutory requirements under section 3–302(a), 9–308, or revised section 9–330 of the Uniform Commercial Code are satisfied, the rights and defenses of a holder in due course or a purchaser, respectively. Delivery, possession, and endorsement are not required to obtain or exercise any of the rights under this subsection.

(e) Obligor rights

Except as otherwise agreed, an obligor under a transferable record has the same rights and defenses as an equivalent obligor under equivalent records or writings under the Uniform Commercial Code.

(f) Proof of control

If requested by a person against which enforcement is sought, the person seeking to enforce the transferable record shall provide reasonable proof that the person is in control of the transferable record. Proof may include access to the authoritative copy of the transferable record and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record.

(g) UCC references

For purposes of this subsection, all references to the Uniform Commercial Code are to the Uniform Commercial Code as in effect in the jurisdiction the law of which governs the transferable record.

Singapore

Law: https://sso.agc.gov.sg/Act/ETA2010 - art 4(1)

"4.—(1) The provisions of this Act specified in the first column of the First Schedule shall not apply to any rule of law requiring writing or signatures in any of the matters specified in the second column of that Schedule."

First schedule, p 2:

"Part II" : "Negotiable instruments, documents of title, bills of exchange, promissory notes, consignment notes, bills of lading, warehouse receipts or any transferable document or instrument that entitles the bearer or beneficiary to claim the delivery of goods or the payment of a sum of money"

In short: electronic bills of exchange are not allowed in Singapore

Australia

Gamertsfelder, Leif "Electronic Bills of Exchange: Will the Current Law Recognize Them?", 1998, UNSWLawJl 50; (1998) 21(2) UNSW Law Journal 566 http://www.austlii.edu.au/au/journals/UNSWLJ/1998/50.html

China

ICBC (China Bank) Moves Aggressively on Electronic Bill of Exchange Business : http://www.icbc.com.cn/ICBC/ICBC%20NEWS/icbc%20moves%20aggressively%20on%20electronic%20bill%20of%20exchange%20business.htm

South Korea

An electronic note or electronic bill (전자어음/電子期票) is a promissory note (약속어음/期票) issued and used in an electronic manner since January 1, 2005.

In March 2004, the Issuance and Distribution of Electronic Bills Act (the "Electronic Note Act", 전자어음의 발행 및 유통에 관한 법률) was enacted to facilitate electronic payment of B2B e-Commerce and to avoid some problems related with paper-based promissory notes.

See: Electronic note on KoreanLII: Korean Law via the Internet