In our last post, we discussed the United Kingdom Jurisdictional Task Force's (UKJT) consultation on the issuance and transfer of digital securities, set up with a view to positioning English law as the law of choice for digital securities governance, in advance of the publication of their legal statement. Now that the legal statement has been published, here are the key takeaways and issues addressed by the UKJT.
- The statement provides clear legal certainty: English law can support digital securities. Crucially, the statement does not make this contingent on any new statutory instruments or legislation. This approach differs considerably from civil law jurisdictions.
- The incremental approach of English law is considered a better way of addressing digital securities rather than statute. The intention is to accommodate the novelty and freedom of individual contractual arrangements between parties in order to provide an environment for innovation. Given the range and complexity of blockchain-based digital securities, it will be interesting to see how English case law evolves to deal with highly technical arrangements with limited statutory guidance.
- Statutory formalities will still need to be satisfied (for example, the requirements for transfers to be made by way of “proper instrument of transfer” under the Companies Act 2006). The statement concludes that there is no reason in principle why a blockchain based system couldn’t be designed to accommodate at least some of these formalities in the future, although these formalities will need to be carefully considered when structuring arrangements and are likely to impose restrictions in practice. For more thoughts on this, see Dominic Sedghi’s piece examining the legal statement’s position on the viability of digital company shares.
- It is not currently possible under English law to tokenise physical assets such as land. It could be possible in principle to create a blockchain-based system to provide each token holder with equitable interests in underlying physical assets, though this is still untested. Conflict of laws issues could arise, for example, where those assets are located outside of England and Wales (though the legal statement does specifically exclude conflict of laws as outside its intended scope).
The expectation is that the UKJT’s approach will catalyse the market in the development and use of digital securities, in the same way that English law has historically been a preferred governing law for debt and other contractual based securities. Now that this certainty has been provided, we may begin to see how this market and legal environment develops over time.