Why Electronic Negotiable Instruments are Technically Possible
There is a way to avoid falsification, forgery and duplication of electronic promissory notes and bills of exchange online
For most countries that inherited the UK/US legal tradition on negotiable instruments, there is technically nothing that prohibits or restricts the circulation of electronic negotiable instruments.
The negotiable instruments law, as supplemented by the law recognizing electronic contracts and electronic signatures, will suffice to create a legally valid and enforceable electronic promissory note and electronic bill of exchange, with the full legal protection on the rights of holders in due course.
The difficulty here is operational and practical in nature: how does one deliver an electronic negotiable instrument? “Delivery” is a crucial operative act in the issuance, negotiation, indorsement, and presentment of the instrument. The first delivery of the instrument by the maker or drawer determines whether an instrument is operative. The subsequent delivery of the instrument by the payee to an indorsee or subsequent holder determines whether an instrument has been validly negotiated or indorsed.
Assuming that the transmission of the electronic file from issuer to payee, or payee (as indorser) to indorsee, constitutes delivery, then the electronic negotiable instrument is subject to the “double-spend problem”. The double-spend problem is a potential flaw in any electronic payment scheme in which the same unit of an electronic medium of exchange can be spent more than once, through the duplication, falsification, and forgery of that unit in digital form.
The double-spend problem does not affect the legal validity and enforceability of the electronic negotiable instrument; however, it exposes issuers, holders and acceptors to serious operational risks, since the integrity and delivery of negotiable instrument in digital form would always be in doubt.
There is a technical solution to this operational problem: the electronic negotiable instrument should be in the form of a non-fungible token (NFT).
The technical design of an NFT as a digital asset is precisely meant to address the double-spend problem through cryptography, distributed ledger technology, and the blockchain protocol.
When an electronic negotiable instrument in NFT form is issued and negotiated, that instrument retains a distinct existence capable of being delivered from one party to another, and capable of being distinguished from a mass of other electronic financial instruments.
Moreover, even if two or more of these instruments are created and have exactly the same material particulars (i.e., the same issuers, dates, amounts, or even exactly the same chain of indorsers and holders), the NFT form retains the integrity and distinct identity of each instrument.
Furthermore, an additional advantage of an electronic negotiable instrument in NFT form is that there is an immutable record of the entire chain of negotiations or indorsements in the blockchain network.
Thus, an electronic negotiable instrument in NFT form can even be better than a physical negotiable instrument in preventing duplication, forgery, and falsification, which are problems that have clogged court decks since time immemorial.