Author: Dr Mark van Rijmenam
Every year, the 2Tokens Foundation collaborates with stakeholders, experts, and other interested parties to develop three token use cases. These use cases are then turned into actual businesses, and a round table discussion is held to take a deep dive into some of the challenges.
November 23rd, 2Tokens organized its 8th round table session to discuss topics related to invoice tokenization and digital notaries. The session was attended by 90+ people and took place at the Koninklijke Industrieele Groote Club in Amsterdam.
Recently, there has been a growing interest in using blockchain technology for contracts and finance. A digital notary uses blockchain technology to provide a secure and verifiable record of transactions, such as the transfer of assets or the execution of contracts, automatically and efficiently.
Fractionalized tokenized invoicing is a method of representing the value of an invoice using tokens, which can be traded and settled more efficiently and transparently than traditional invoicing methods. Both of these technologies can improve the efficiency and transparency of the trade finance industry and support the growth and innovation of businesses.
This article will explore the potential benefits and challenges of the digital notary and fractionalized tokenized invoicing, as discussed during the roundtable session. For more information, you can also listen to the panel discussion that was recorded during this session.
The Digital Notary
The Digital Notary use case aims to create a fully digital process for incorporating limited liability businesses and trading their shares. This will be made possible by creating a fully digitized shareholders register that allows for the trading of shares without the need for a notary. This use case aims to make the process of incorporating and trading private limited companies more efficient, affordable, and faster. This does not mean that the role of the notary will be removed, but rather that their role will be redefined.
During the round table, the digital notary group discussed three topics related to the use of tokenization in the financial system. The first topic focused on tokenization to create proof of ownership and increase liquidity. The second topic discussed the potential for Ricardian contracts to replace legal relations. The third topic explored the idea of using tokenization to make notaries redundant in trading shares.
Tokenized Proof of Ownership
Tokenized proof of ownership is a digital representation of ownership of an asset, such as property, art, or other physical or digital items. It uses blockchain technology to create a unique, verifiable token that represents the ownership of the asset. This token can be easily transferred and tracked, providing
transparency and security in the ownership of the asset. It can also make it easier to transfer ownership of the asset, as the token can be easily traded on a blockchain platform, and transparency, accessibility, and trust in assets can be achieved.
Of course, there are a wide variety of assets, but the discussion focused on the ownership of shares in a limited liability company and whether using a digital notary could simplify processes, save time, and improve accessibility. After all, the current systems for shareholding and ultimate beneficial ownership (UBO) are complex, and the notary sector could benefit from innovation in this field.
Ina tokenized ecosystem, the notary's role will shift to an advisory role as a tokenized proof of ownership can make processes more transparent and efficient for stakeholders. Moreover, tokenized shares can incorporate more information than traditional shares, as tokens are programmable, adding significant benefits and enabling companies to reward shareholders based on new variables such as
how long someone holds a token.
However, there are risks associated with sharing data, such as the potential for it to be misused. It is essential to have measures in place to protect the privacy and ensure a healthy balance between transparency and privacy. As such, a new legal framework may be required based on good governance and regulation.
Ricardian Contracts
Smart contracts are pre-defined by a piece of code and linked to a database, and when deployed on a blockchain, they become immutable and can be accessed indefinitely. They offer opportunities for organizations to improve efficiency and collaboration, but they are not legally binding. Ricardian contracts combine human-readable and machine-readable text and use cryptographic signatures, are legally binding and can be hashed and stored on a blockchain.
The roundtable discussion focused on the potential benefits of using Ricardian contracts to simplify contract signing. Ricardian contracts can make the process faster and more transparent and provide accessibility to international deals. It can also prevent conflicts in law and allow for the signing of multiple contracts simultaneously.
When processes are digitalized and simplified, there is an impact on the intermediaries, in this case, the notaries. The use of Ricardian contracts may change the role of notaries by allowing them to focus on other aspects of their work and providing more opportunities for collaboration and innovation; from signing contracts to an advisory role.
However, there is still a lot of work to be done before Ricardian contracts will become commonplace. Stakeholders, such as the government and technology providers, need to support the implementation of Ricardian contracts and ensure their legal validity. This will require standardizing procedures, identity systems, and wallets, for example, using the IRMA system.
IRMA, or I Reveal My Attributes, is a self-sovereign identity tool that allows individuals to control and manage their personal data. It uses a decentralized system that enables users to store and share their personal data in a secure and private way. IRMA uses cryptographic signatures to verify the identity of
users and ensure the authenticity of the data they share. It also allows users to selectively share only the personal data necessary for a specific purpose, such as verifying their identity or providing proof of qualifications. This means that IRMA could be used in conjunction with Ricardian contracts to provide a secure and legally binding way to verify the identity of the parties involved in a contract and ensure the authenticity of the data included in the contract, further changing the role of notaries.
How Will Notaries Change?
The notary's role will change in a digital world with Ricardian contracts and tokenized shares. Instead of being gatekeepers, they will act as guides and advisors. The tokenization of shares and property will increase efficiency and reduce errors. However, tokenizing identities and KYC may be necessary to ensure security. The notary can serve as a trust anchor in this process. The notary's role should be tokenized, not the notary themselves, but for this to happen, the public's trust in blockchain technology should improve, which can be done using open experiments.
The notary's role will remain relevant, but rather their functionwill be digitalized. For example, although the use of a blockchain can make Anti-Money Laundering efforts more efficient, there are concerns about the tokenization of wills. Notaries will be required to ensure that won’t be multiple copies stored on the blockchain.
The notary's role will remain relevant, but rather their function will be digitalized. For example, although the use of a blockchain can make Anti-Money Laundering efforts more efficient, there are concerns about the tokenization of wills. Notaries will be required to ensure that won’t be multiple copies stored on the blockchain. ular situation, requiring the intervention of a notary to resolve the issue.
The consensus was that using tokenization and the blockchain as a tool for the notary is positive and will not make the notary redundant altogether. It would provide numerous benefits, including increased efficiency and security, without completely eliminating the need for human intervention in
certain cases.
The Invoice Token
Decentralized Finance (DeFi) is a movement that aims to create an ecosystem of financial applications using blockchain technology. This ecosystem offers a global and open alternative to existing financial services. The use of blockchain technology in invoicing is expected to grow significantly in the coming years, with electronic invoices expected to experience a 400% growth. By 2030, it is anticipated that e-invoicing will replace paper invoices as the dominant form of invoicing.
The invoice market is a financial market where invoices are traded as financial instruments. Factoring companies, banks, and fintech companies, known as originators, can sell invoices to institutional investors, who profit from them. This process allows the originators to free up capital by distributing
their balance sheet risk.
By creating a non-fungible token (NFT) to represent invoices and program their functions into it on a distributed ledger platform, the invoice market aims to become more efficient and overcome issues such as a lack of standard invoice format and verification difficulties. This also allows invoices to be widely available to investors as a new asset class.
Invoice Token Standards
The discussion focused on the need for invoice token standards to prevent fraud and facilitate funding by third parties. These include standards around communication protocols, content protocols, ownership protocols, identity tokens, and what should and should not be part of an invoice. In addition, standards are required around data storage to ensure compliance with GDPR.
Standardization is essential to avoid wasting time and money on reinventing the wheel and instead accelerate the invoice market. The more players and actors participating in the market, the more critical these standards will become. Overall, the group believed that a well-designed token standard for invoices has the potential to create societal value, improve efficiency and reduce the dependency of small and medium-sized enterprises (SMEs) on traditional trade finance providers.
Fractionalized Invoices
Onepotential benefit of tokenized invoices is the possibility of fractionalizing invoices, making it easier for SMEs to access trade finance.
One potential benefit of tokenized invoices is the possibility of fractionalizing invoices, making it easier for SMEs to access trade finance be done using blockchain technology, which allows for creating tokens representing the ownership of the fractionalized invoice. By fractionalizing invoices, companies can access trade finance more easily. Investors can buy and sell fractions of invoices to manage risk and earn a return on investment.
The discussion revolved around the potential benefits of using blockchain to enable the fractionalization of invoices. The group highlighted several key advantages, including increased efficiency, reduced risks, and improved transparency.
One of the main benefits mentioned was the ability to increase efficiency by storing invoices on the blockchain and using a scoring system to evaluate customers' payment history. This would make it easier for companies to predict their income, access trade finance, and reduce the number of unpaid invoices.
Another benefit mentioned was the potential to reduce risks by using the blockchain to verify the identity of customers and ensure that they are creditworthy. By storing invoices and payment history on the blockchain, companies and their stakeholders can see how funds are used and ensure they are not used to support unwanted parties. This increased transparency could help to build trust between
companies and their stakeholders and could also help to prevent fraud and other types of financial misconduct.
However, transparency can be a double-edged sword, as companies may not want to reveal certain information that could give their competitors an advantage. Zero-knowledge proofs and other privacy-enhancing technologies could help balance the need for transparency with the need for confidentiality.
Apart from transparency challenges, fractionalizing invoices comes with multiple other challenges and problems. One of the main challenges mentioned was the need for standardized data and KYC processes to ensure the system works effectively as, without them, it could be difficult to evaluate customers' creditworthiness and prevent fraud.
Anotherproblem discussed was the potential for wallets to be used to send invoices to each other and gather a high score, which could undermine the integrity of the scoring system. One potential solution to this problem could be to apply KYC to every wallet to verify the identity of users.
Another problem discussed was the potential for wallets to be used to send invoices to each other and gather a high score, which could undermine the integrity of the scoring system. One potential solution to this problem could be to apply KYC to every wallet to verify the identity of users.d realize the potential benefits of invoice fractionalization.
Community Settlements
Invoices are a natural part of any business. Companies receive and send out invoices regularly. If more money flows in than out, these companies are fine, but if the other way around, a cashflow issue could jeopardize the company.
This can cause a gridlock of payment delays as invoices cannot be processed in the order they are received. The group discussed addressing this problem using the multilateral settlement of invoices, or community settlements, where invoices can be cleared simultaneously within payment cycles. This approach would improve the match between accounts receivable and accounts payable while reducing transactional risks and providing an alternative to traditional finance and insurance
products governed by smart contracts.
Multilateralsettlement of invoices involves remitting all issued invoices to a (decentralized) clearing house, where only non-contested invoices are included in a pool. Debits are then automatically cleared with credits from other entities in the pool, using an AI/ML algorithm to calculate the most optimal match.
If invoices are cleared in full, the involved entities automatically sign a cession of credit transferring the invoice ownership. If invoices are not cleared and reach their maturity date, they must be paid in cash by the debtor.
If the debtor cannot pay, a liquidity pool formed by financial institutions may provide the needed funds. In case of a dispute, the clearance is rolled back, and intervening parties must come to a solution using an opt-in court system, avoiding legal procedures.
A multilateral settlement of invoices would improve the efficiency and transparency of trade finance. It could help to prevent the gridlock of payment delays that can lead to bankruptcies while simultaneously boosting the health of the SME ecosystem.
Conclusion
The digital notary and the invoice token have the potential to revolutionize the trade finance industry. Digital notary technology can provide a secure and verifiable record of transactions, which can help to prevent fraud and improve the efficiency of the trade finance process. It will significantly change the
role of notaries.
Fractionalized and tokenized invoicing can be traded and settled more efficiently and transparently than traditional invoicing methods, improving the trade finance industry's efficiency and transparency and supporting SMEs' growth and innovation.
The use of blockchain technology to enable the digital notary and the invoice token are promising developments that can improve the trade finance industry but require further research and collaboration to overcome the challenges and realize their full potential.
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