Instrumental Change

In the first of the MEA Finance Leadership Series video interviews, we talked with Frank Wendt Co-Founder and Chairman of the Board at FQX AG, the first market-ready solution for eNotes™ built on a banking-grade Blockchain (Swiss Trust Chain). Here in a directly transcribed summary of the video, he discusses eNotes™ and the role they will play in world trade, business and finance

What key factors distinguish eNotes™ from other digital payment or promissory options?

First of all, I think it makes sense to define what is actually an eNotes™. An eNotes™ is an electronic equivalent to a paper based promissory note. Now, a promissory note is an instrument that is a security and has many functions. One is the function as a payment instrument, being a buyer and a supplier, but also as a debt or credit instrument, which means a borrower and the lender, and thirdly, you can even add that it’s a collateral instrument or it can function like guarantee. The beauty is it is fully standardized globally, based on common law, but also the Geneva Convention (of) 1930. And it is today fully understood, it is a very uncomplicated security which is negotiable transfer.

What are their performance advantages over other methods?

Now, if you look at what are the other methods, so, it could be that you look at factoring, reverse factoring which is very often used in trade finance, open account trading. The beauty is that you can at source, securitize payables, but also purchase orders pre-shipment and post-shipment and transfer them to the holder of, the best holder, be it the fund, be it the bank. So, it’s becoming negotiable and that means it is transferable and this means for many investors, that they can actively manage their portfolios and the balance sheets. The other benefit is that everybody knows about it already and that it’s fully electronic. That means you don’t need to use paper anymore in any way or form. And that is a big advantage if you look at global scalability.

Why do you think that FQX was the first market-ready solution for eNotes™?

I think life is sometimes a bit funny because I used to work for an SCF, a Supply Chain Finance house and then I had discussions with some bankers and then I said, you know, all the solutions I see have always one or the

Frank Wendt Founder and Chairman, FQX

other disadvantage, which seemed to undermine the overall business case. And then they said, you know, Frank, you know, what you’re looking for is actually the bills of exchange or promissory note. But you know, nobody wants to see paper, and then basically started three and a half years with some self-funded legal analysis and so forth; is it possible? So then, I realized that in particular, the United Nations Commission on International Trade Law (UNCITRAL) model, on electronically transferable records was already in place. And then the kingdom of Bahrain started (using) and then it was a coincidence. Parallel thinking, in a sense.

How do you feel about being one of the few asked to join ADGM’s Digital Lab?

It’s a privilege. We have been acknowledged also in Switzerland, but to come to this region and ADGM obviously has enacted the electronic transaction regulation, which is a legal basis for electronic promissory notes, and also the usual instruments. It’s, for us is great recognition and we are fully dedicated to ADGM in particular and the ETR because that is a legal basis which we can use, not only in the UAE and in the GCC but also Mena. And from that perspective, it’s perfect match.

The UNCITRAL Model Law on Electronic Transferable Records was adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 2017. How important was this for the expansion and acceptance of fully digitised transactions?

Right, the first instance, it’s a model Law, it’s not a convention. The model law I think has, through the work of many NGOs; UNCITRAL, ICC, WTO and many others, got attention by governments. And you can see that Singapore has now enacted the Electronic Transaction Act, the Kingdom of Bahrain, the first one, ADGM (also), and we see now traction in particular with the consultation period in the United Kingdom or England and Wales to be precise, and the German government is looking at this. Plus (the) G7 has made a commitment with regards to the model law itself to enact it.

What is the answer to your question? It is the fundament. If we all create tokens, and these tokens have no legal basis, the trust of investors and our counterparties is not very high, and the adoption will not be that high. There are thousands of proofs of concepts around the world but they’re all basically half the problem; the legal framework is not there. So, this is fundamental.

How will eNotes™ and fully digitised transactions change the world of trade, business and finance?

I think what we see at the moment is that the overall movement of the trade finance

or trade in general actually, industry is driven very heavily by either big players like Maersk, IBM, but also the NGOs like the ICC. So, the ICC, DSI, Digitalization Standardization Initiative is very important. Why? Because although you have no legal basis, you also need to make sure that you have interoperability, because you have otherwise, silos. So, we have one standard here, on standard there. So, I think we can say that the ebill, the electronic bill of lading is a negotiable instrument, or the electronic bills of exchange or what we do, the electronic promissory note will probably have fundamental implications on how we trade in terms of efficiency, global reach and more importantly, the complexity. If you look at the letters of credit, I think we will see that they are in the future, not as used in the same volume as today, much lower.

What other benefits do you foresee coming from these landmark developments?

Digitalization has always been very similar to wireless, right? One is automation. One is disintermediation. I think we will see that a lot of players might not be needed anymore to put the stamp on something or to simply sign something. It’s going to be electronic and maybe they are not even needed in this value chain. So, the value chain will change. The other factor, I believe is that with digitalization, you get global reach. Today you have a fragmented picture based on legislation, but also on electronic solutions. And I

think this is going to change and I think we are moving into another phase of globalization, which is different to what we have been experiencing in the past. And standardization is key here, in my view. And maybe I always, I liked one comparison, if I might just put this in, if you remember, after the Second World War, we had something called the containerization. Right. And what happened is that a lot of the bulk cargo was basically turned into container shipments and that led to a complete overhaul of the entire value chain from rail to air to ship, and the efficiencies and the cost of transport dropped to a fraction of what it used to be. I think what’s going to happen here too.

I THINK WE WILL SEE THAT A LOT OF PLAYERS MIGHT NOT BE NEEDED ANYMORE TO PUT THE STAMP ON SOMETHING OR TO SIMPLY SIGN SOMETHING