Digital securities: Reducing legal doubt
The most common types of digital securities can “easily be accommodated” within existing English law, an expert panel has concluded.
This made English law “well placed to become a global standard in internationally mobile digitised markets”.
In its second legal statement, the UK jurisdiction taskforce of the LawTech Delivery Panel dealt with what its chair, Master of the Rolls Sir Geoffrey Vos, described as the “critical question of whether equity, debt or other securities can be validly issued and transferred under English law using blockchain systems”.
The first statement, back in 2019, declared that digital assets should be treated in principal as property.
The latest one aims to reduce legal doubt that has hindered the adoption of distributed ledger technology (DLT) by international traders and help make Britain a global centre for digital disputes.
It said: “English law (like other common law systems) does not necessarily require statutory intervention in order to support new asset classes or financial structures…
“As we have seen recently with cryptoassets, and as has been demonstrated over past decades and centuries with numerous once-novel asset classes, the common law has inherent flexibility that allows it to adapt to accommodate commercial need.”
The “most common use cases for digital securities could indeed easily be accommodated within existing English legal frameworks”.
The statement considered in detail other “aspects of digital securities that are potentially novel and distinctive” and the extent to which general legal principles applied.
In his foreword, Sir Geoffrey said: “As proved to be the case with the now well-established first legal statement, it is likely that some of the matters covered will, in the future, be the subject of judicial decision.
“I hope that, in the meantime, this document will provide much-needed market and legal confidence for the benefit of the global financial services industry.
“This legal statement concludes that English law can accommodate digital bonds circulated on a public blockchain without custodians, and the on-chain transfer of digital equity securities, even if a fully decentralised blockchain cannot currently be used as a register of members.
“I am sure that this legal statement will reinforce the reality that the common law in general and English law in particular can respond in a flexible and consistent manner to new commercial situations.”
The statement was drafted by Richard Hay, UK head of fintech at Linklaters, KCs Lawrence Akka and David Quest, based at Twenty Essex chambers and 3 Verulam Buildings respectively, and fellow barristers Matthew Lavy from 4 Pump Court and Sam Goodman, also from Twenty Essex.
Along with the statement, which followed a public consultation, LawTech UK commissioned research from finance and economics consultancy Oxera on the capacity of the English law to facilitate the commercial use of blockchain and DLT in capital markets.
It said: “If English law is recognised as supportive of digital securities, it is well placed to become a global standard in internationally mobile digitised markets. If not, another legal system is likely to take on that role.
“For domestic securities markets (that cannot choose an alternative legal system), a supportive English law would enable UK firms to implement the use of DLT more widely than would otherwise be the case.
“For internationally mobile securities markets, a supportive English law will generate additional activity in the legal and professional services ecosystem that is based in the UK (and therefore familiar with English law).”
Alexandra Lennox, director of LawtechUK, commented: “As market activity becomes increasingly digital, it is important that English law continues to provide market participants with the certainty they need to grow and innovate.
“The economic opportunity stemming from English law becoming a global standard in digital markets cannot be understated.”
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