The UK Jurisdiction Taskforce (UKJT) was set up to help develop and transform the UK legal sector through technology. It has previously issued statements on the Status of Cryptoassets and Smart Contracts and the Digital Dispute Resolution Tools. Its latest consultation is on the issuance and transfer of digital securities under English private law (Consultation). The Consultation is open until 23 September 2022, with a legal statement expected to be published in December 2022 (Legal Statement).
Aside from the stated aims of the UKJT, a motivation behind the Consultation is to address some perceptions in the market that English law is comparatively less supportive of digital securities due to its lack of a statutory regime which specifically accommodates digital securities.
Scope of the Legal Statement
The focus of the Consultation is on equity or debt securities which are constituted or evidenced by reference to a blockchain or distributed ledger technology (DLT). The overarching question that the UKJT is seeking to address through its Legal Statement is whether English private law supports the issuance and transfer of equity or debt securities using a system deploying blockchain or DLT. The focus is not on conventional securities whose performance is linked to, or which are collateralised by, digital assets.
The aim of the Legal Statement is to provide clarity to the market on:
- the availability of English law as an option for constituting digital securities; and
- the types of digital security models which English law will support.
The Consultation asks stakeholders to consider what issues need to be addressed in addition to those set out in the Annex to the Consultation.
At present English law does not easily provide for the issuance and transfer of securities in entirely digital form.
Using private company shares as an example, the default is that a company must issue a share certificate following the issuance of, or transfer of, shares. There are certain exceptions but none which will apply in ordinary circumstances. A transfer of a share must be affected by way of a form of written instrument, typically a ‘stock transfer form’. For legal title in the transferred share to properly vest in the transferee, the relevant company’s register of members must be updated, and in order to do that the instrument of transfer must be duly stamped by HM Revenue & Customs, certifying that any and all stamp duty (a transfer tax) has either been paid or is not payable.
Of course the process is far more straightforward for securities held and transferred via CREST, an electronic settlement system. CREST will deal with the issues mentioned above, including deducting the necessary amount of stamp duty. However, for a security to be capable of being admitted to CREST it must be uncertificated, and for a security to be uncertificated it must (among other matters) be, in effect, held by an ‘operator’ (which CREST is). In simple terms, an operator must be recognised and authorised by the UK Financial Conduct Authority or by the European Securities and Markets Authority. This presents an unattractive, impractical and possibly ethical hurdle for operators of a blockchain. Of course, all of this comes at a cost to the issuing private company.
These are just some of the issues facing would-be issuers of digital securities.
Even without the advent of crypto assets, change is overdue. There is not a company lawyer in the land who has not encountered incomplete or erroneous registers of shareholders, or missing certificates. To enable digitization of private company shares, and to provide for an effective, automated process of transfer and updating of corporate records would be a welcome step forward by both practitioners and those responsible for administering companies.