English law can ‘easily’ accommodate digital securities, says UKJT in new legal statement

Three years after publication of an initial legal statement on cryptoassets and smart contracts, the UK Jurisdiction Taskforce (UKJT) has published a second legal statement (Statement) on the issuance and transfer of equity or debt securities using blockchain or other distributed ledger technology (DLT) under English law.

The Statement concludes that there is 'no difficulty in principle in Digital Securities (whether debt, proprietary or equity securities) being issued, by UK or foreign companies, and governed by English law, using a blockchain or DLT-based system', nor in a contractual security being stapled to a digital token, nor in using a blockchain as a register of Digital Securities (with the possible exception – subject to system architectures – of a register of members).

The Statement is intended as a persuasive, though not comprehensive, explanation of how English law applies to these issues and how the inherent flexibility of common law can adapt to new technologies. The UKJT hopes that the Statement will be referred to and relied on by relevant stakeholders (including regulators and the courts) in addressing the application of English law in this context.  However, the Statement does not amend the law and it has no strict precedential value, so it remains to be seen how regulators and the English courts will ultimately address these questions and whether any legal reform is proposed to clarify these issues through legislation.

In the meantime, the Statement reflects a welcome attempt by the UKJT to create greater legal certainty as digital securities continue to gain traction in the financial markets.

Scope

The Statement seeks to answer the questions asked in the public consultation launched in August 2022. For purposes of the Statement, the UKJT considered three types of digital securities:

• Digital bonds (debt securities);
• Digital proprietary securities (entitlement to an underlying asset); and
• Digital equity securities (in the form of shares in a UK company).

Digital Bonds

Blockchain and DLT are fundamentally types of electronic databases. The Statement concludes that digital bonds using these technologies could therefore be treated under English law in the same way as any other registered bonds employing electronic databases to record and conduct bond issuance and transfers. The Statement notes that English commercial law has historically adjusted to accommodate a variety of investment structures and, in principle, would have no difficulty adjusting to a new type of record-keeping using DLT.

However, the Statement acknowledges that the distributed, pseudonymous, and disintermediated nature of blockchain and DLT may create challenges for certain types of digital bonds that require further consideration.

Digital Proprietary Securities

The digital securitisation of proprietary interests in an underlying asset can (as exemplified in the Statement) be achieved by putting an asset into trust for the benefit of controllers of blockchain tokens which have been offered at a sale price.

The Statements concludes that these types of digital proprietary securities would give rise to few novel legal issues and no specific difficulties under English law.

Digital Equity Securities

Due to the necessity to adhere to the requirements of the Companies Act 2006 (CA) for share transfer and registration, the Statement concludes that digital equity securities of UK companies present more difficulties than digital bonds and digital proprietary securities.

The Statements concludes that it may not be practical (or consistent with the current requirements of English law) to utilise blockchain or DLT as a register of members. This is because any company (under the CA as it stands now) would likely not have enough control over the register to fulfil its statutory maintenance duties.