What is an electronic signature and how does it differ from a digital signature? Is an electronic signature legal? And what makes it legal? Even despite the growing adoption of electronic signatures, these questions are still a mystery to many.
The COVID-19 pandemic and the widespread adoption of electronic signature software tools, such as DocuSign and Adobe Sign, resulted in digital signing solutions being used more than ever before.
According to the research conducted by MarketsandMarkets, the global digital signature market is expected to grow from $4 billion in 2021 to $16.8 billion by 2026.
In this article, we’ve collected answers to the most popular questions related to electronic and digital signatures, their legal aspects, key benefits, use cases, and limitations.
What is an electronic signature?
An electronic signature, or esignature, is a legal way, which allows you to get approval on electronic documents. The United States Electronic Signatures in Global and National Commerce (ESIGN) Act defines it as an electronic symbol, sound, or process, which is logically associated with a record and is executed by a person to sign the record.
Being accepted in almost all countries across the world, electronic signatures can be used instead of handwritten signatures in any personal or business transactions, including contracts, application forms, change authorizations, vendor onboarding documents, and many more.
What is a digital signature?
A digital signature is a mathematical scheme which enables users to verify the authenticity of digital documents. It works like an electronic fingerprint that is unique to a person or entity, and provides the highest level of assurance of a signer’s identity.
Digital signatures allow users to confirm that the information originated from the signer and that it was not changed or modified. Digital signatures help prevent tampering, and are often used for software distribution, financial transactions, and similar situations.
How does a digital signature work?
Digital signature solution providers use a specific protocol called public key infrastructure (PKI). The protocol consists of standards, policies, and systems that support the distribution of public keys. PKI requires digital signature providers to use a mathematical algorithm. This algorithm generates two long numbers known as a public and a private key.
PKI often requires the services of a trustworthy Certificate Authority (CA) to protect the integrity of the signature. A CA is a reliable third-party provider that validates a signer’s identity and issues a digital certificate that is digitally signed by the CA.
The digital signature is created through the private key, which is kept secure by the signer. The mathematical algorithm acts like a chipper, creating a piece of data that is derived from the signed document. This data is known as a hash – a fixed-length string of numbers and letters. The hash is unique to the document so if you try to make changes to any part of the document, it will completely change the hash. The created data is then encrypted, forming a digital signature. This signature is also marked with the time it was created.
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When the digital document is sent to the recipient, the recipient then generates their own hash of the document and decrypts the sender’s hash through the sender’s public key. The recipient then compares the generated hash against the sender’s decrypted hash. If they match, it means the digital document hasn’t been modified.
What is the difference between a digital signature and an electronic signature?
Both digital and electronic signatures are used to sign documents and authenticate the signer. However, they differ in their technical implementation.
Electronic signature software solutions apply electronic authentication methods to verify the identity of a signer. These could include an email address, a corporate ID, or a phone PIN.
Digital signature software, on the other hand, presupposes the use of certificate-based digital IDs. The main difference between electronic and digital signatures is that the latter comes with encryption standards. A digital signature demonstrates proof of signing by binding each signature to the document with cryptography. The digital signature algorithm encrypts a document with invisible digital codes, which helps prevent tampering and duplication.
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Should your business use electronic and digital signatures?
Yes, there are many reasons to start using electronic and digital signatures in your business. For example, many industries and geographical regions have accepted electronic and digital signature standards for business documents. Moreover, due to enhanced security, these signatures can be used for higher-risk transactions.
Electronic signature and digital signature benefits
Electronic and digital signatures alike bring multiple benefits, including security, compliance, cost efficiency, non-repudiation, authentication, integrity, and time management.
By signing a document on paper, the signer gets a tangible sense of security. However, a handwritten signature can be forged. Moreover, the signed document itself can be tampered with or misplaced.
Digital signatures prevent any of these circumstances with certificates from a trust service provider (TSP). When a signer uses a digital signature their identity is re-validated, and their signature cryptographically bound to the document. Backed by a unique digital identity, digital signatures eliminate the risks of forgery and provide the highest level of security, ensuring the document hasn’t been changed in any way.
One of the most common questions related to the use of a digital signature is whether they are legally valid. Having been developed with compliance at their core, digital signature standards follow all international regulations and laws. Digital IDs come from accredited TSPs which helps you confidently comply with security regulations around the world.
Electronic and digital signatures allow you to significantly reduce spending on paper, ink, printers, and maintenance, which usually come with handwritten document signing. Along with these obvious money-saving benefits, eSignatures and digital signatures reduce other costs associated with document management and storage, such as physical space and document distribution.
Non-repudiation is the process of associating actions or changes with a specific individual. Imagine that you signed a job contract outlining your job responsibilities. In this case, your signature acts as a non-repudiation device. You cannot later disagree with the terms of the contract and say that you never signed it.
Digital signature encryption provides non-repudiation when it comes to online transactions and ensures that a party cannot deny the authenticity of their signature. The digital signature non-repudiation is enabled through the use of a private key. Only the private key holder can access it and create this signature, which proves that a document was electronically signed by this person.
Similar to non-repudiation, digital signatures and their encryption mechanisms can be leveraged to authenticate the identity of the source messages. This is particularly important in the financial context when it’s necessary to make sure that a message or document was sent from an authorized source.
Digital signatures ensure that content isn’t tampered with or modified. As soon as a document is digitally signed any further changes in it will invalidate the signature. Moreover, the digital signature algorithm doesn’t allow you to produce a new document with a valid signature, as this is computationally impossible.
Better time management
They say time is money. By using an electronic signature or a digital signature app you can save many hours that can be spent waiting for someone to courier or scan the signed documents to you. Needless to say, it’s frustrating to spend hours trying to find a physical document that has undergone a lengthy manual signing and storing process, and has been stored among many other similar documents.
By enabling recipients to e-sign documents you can significantly streamline administrative and legal processes, saving hours and in some cases even days, thus closing deals in a matter of minutes. You and your employees can focus on core activities and priorities rather than downloading, printing, and other time-consuming tasks.
What are the limitations of electronic signatures?
As with many electronic products, the use of a digital signature or electronic signature has some limitations. These are technology related issues, digital signature certificate, and compatibility.
To start using digital signatures and digital certificates, it is necessary to purchase a digital signature app, which involves additional costs. Also, digital signatures naturally rely heavily on technology. And in the era of fast technology advancements, many technology products have a short shelf life.
Digital signature certificate
To start using a certified digital signature, you will have to purchase a digital certificate from trusted certification authorities, which can be a costly step.
The various eSignature and digital signature standards can be incompatible with each other, thus complicating the process of sharing digitally signed documents.
What are the use cases of electronic signatures?
Thanks to electronic signature technology, you can quickly obtain signature authorization remotely, which opens up a wide array of use cases. These include executing sales contracts and purchase orders, signing supplier/vendor and non-disclosure agreements, handling employee onboarding, dealing with intellectual property licensing, and many more.
Look through the infographic below to find the most common eSignature use cases sorted by industry.
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How do different governments regulate electronic signatures?
If you consider using eSignatures for your business, you are likely to ask: Is an electronic signature legal? And the answer will be yes.
eSignatures are legally enforceable. In 1999, the EU passed the Directive for Electronic Signatures. In 2000, the Electronic Signatures in Global and National Commerce Act or the ESIGN Act was published in the US. These acts made electronically signed documents legally binding. Following the EU and US, most countries have adopted legislation and regulations governing electronic signatures.
Let’s take a look at how different countries regulate digital and electronic signatures.
In the US, along with the ESIGN Act, which is active in all 50 states, there is a Uniform Electronic Transaction Act (UETA), accepted in 47 states. The 3 outlier states are Illinois, New York, and Washington.
Both acts govern electronic signatures, but UETA adds a few provisions, which include how records should be attributed, how mistakes in contract documents should be handled, and similar issues.
There are also several electronic signature laws by state, which include the Electronic Commerce Security Act in Illinois, the Electronic Signatures and Records Act in New York, and the Washington Electronic Authentication Act in Washington.
The European Union
Established in 2014, eIDAS is a uniform law that applies to all EU governments and covers aspects around electronic identification, digital certificates, and the legality of eSignatures.
The GDPR was established in 2016 with the goal of harmonizing data privacy laws across Europe. It isn’t specifically aimed at digital and electronic signatures but adds additional rules, such as data security, encryption, consent, and processing, all of which should be taken into account by the companies that implement electronic signature solutions.
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The United Kingdom
Regardless of Brexit, the UK continues to follow eIDAS regulations. In 2018, the European Union (Withdrawal) Act was passed in order to provide legal certainty through continuity of EU laws and regulations within UK law. Therefore, the status of electronic signatures remained the same under the Withdrawal Act as it did under eIDAS.
Another electronic signature law that functions in the UK is the Electronic Communications Act 2000 (the ECA 2000). Section 7 of the Act has regulations on the admissibility of electronic signatures in the UK.
An electronic signature law in China – the Electronic Signature Law of the People’s Republic of China (PRC) – was established in 2004, with significant revisions in 2016 and 2019. It provides a legal framework to govern the legitimacy of eSignatures in the country and states that eSignatures can be used to sign general business documents and contracts.
In Canada (Alberta, British Columbia, Ontario, and Quebec), legal aspects of electronic signatures are governed by the Personal Information Protection and Electronic Documents Act (PIPEDA). According to this, electronic signatures are equivalent to physical ones, which means that any business operating in Canada can freely use both digital and paper documents with equal validity.
Alberta, Ontario, and British Columbia have also adopted provincial-specific legislation governing electronic transactions. These are the Electronic Transaction Act in Alberta, the Electronic Commerce Act in Ontario, and the Electronic Transactions Act in British Columbia.
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Electronic and digital signatures have proved to be more efficient and secure compared to handwritten signatures, and they also save time by replacing paper-based processes.
Electronic signatures are widely accepted in countries around the world with billions of people now comfortable with signing documents electronically. Signing documents quickly and securely while focusing on our core tasks, while at the same time boosting efficiency and reducing costs ‒ isn’t that what we all want? ESignatures already provide us with all this functionality.
If you have made up your mind to develop an electronic signature app or an entire document management software system, just email PixelPlex team, and together we will come up with the best possible solution that will cover all your business needs and requirements.