UK Jurisdiction Taskforce issues legal statement on digital securities

The UK Jurisdiction Taskforce, which is part of LawtechUK, has issued a new legal statement on the issuance and transfer of equity or debt securities using a system deploying blockchain or distributed ledger technology (DLT) under English law.

The new 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.

The Taskforce believes that ensuring that English law is recognised as supportive of digital securities will benefit the wider UK marketplace by: (1) increasing the value of English law itself, through the continuous building of precedent and legal expertise in digital securities, and (2) supporting the widespread use of English law, making the UK a more attractive trading and financial cluster for the international economy.

The legal statement follows the issuance of a public consultation on the matter published in August 2022, which sought to get stakeholder views on the questions that the proposed legal statement should most usefully answer. The newly published legal statement focuses on the parts of digital securities that are novel and distinctive, and discusses how well the general legal principles might apply.

The UK Jurisdiction Taskforce surmises following the consultation, interviews with relevant experts and research commissioned by LawtechUK to Oxera on the value to the UK of English law to facilitate the commercial use of blockchain and DLT in capital markets, that there is widespread consensus among stakeholders that a firm legal foundation is a critical requirement for the adoption of digital securities under English law.

Despite digital securities activity in the UK still being small compared to the potential market size, the Taskforce explains that as commercial applications of DLT-based platforms begin to scale up and attract more users, the achievement of a critical mass will result in “network effects”, which will mean that the market can quickly move towards adoption of the new technology.

The legal statement expresses the view that given the prominence of English law in capital markets it is in a good position to become the global standard in digital securities markets. However, this position depends on English law providing market participants with sufficient clarity about how digital securities will be treated, before another competing jurisdiction gets there first.