This year will mark four years since the UK Jurisdictional Taskforce (UKJT) published its legal statement on crypto assets and smart contracts. This statement was subsequently cited with approval by the English courts holding that cryptoassets can constitute property and can therefore be the subject of proprietary legal remedies and was referred to in the seminal case of AA v Persons Unknown & Ors, Re Bitcoin  EWHC 3556 (Comm) (13 December 2019).
The UKJT has recently produced a new legal statement (the ‘Statement’) turning its attention to whether the issuance and transfer of securities on Distributed Ledger Technology ('DLT') systems, like digital securities, can be achieved within the confines of the existing English Law framework.
The Statement concluded that “the most common use cases for Digital Securities can indeed easily be accommodated within existing English law frameworks”. Though other jurisdictions such as Germany, Lichtenstein, Switzerland and France have recently introduced legislation directly intended to support digital securities in an attempt to provide legal certainty to markets, the UKJT’s view was that English common law’s inherent flexibility should accommodate digital securities without the need for statutory intervention. This flexibility can be readily observed in, for instance, Osbourne v Persons Unknown Category A  EWHC 39 (KB) (13 January 2023), where the Court held that proceedings could be served exclusively by way of non-fungible token in circumstances where no other viable method of service was available.
The Statement does not comment on how the law should develop and simply tries to present the current legal position in relation to digital securities. To that extent, English courts are free to address the question of whether the existing English law framework can and does support digital securities in whatever manner they see fit when the issue requires judicial intervention. However, just as the UKJT’s first legal statement was positively received, it is likely that the new Statement will be welcomed by various stakeholders seeking certainty in the legal position concerning Digital Securities.
The Statement focusses on three different types of securities and how they may be issued and transferred digitally, namely:
- digital debt and related contractual securities (i.e., bonds);
- digital proprietary securities; and
- digital equity securities (i.e., shares in a UK company).
Debt and related contractual securities
The Statement distinguished between (1) digital bonds involving permissioned, centrally managed DLT-based systems and (2) digital bonds capable of circulation on a public blockchain without custodians or any other form of intermediation. The UKJT submitted that (1) are unproblematic and unlikely to give rise to novel legal issues meaning they can be comfortably accommodated by English law and (2) creates legal issues which will need to be addressed however these legal issues are not insurmountable and can be dealt with by reference to pre-existing tools in the English legal system’s armoury.
The Statement noted that whilst there is some technological novelty in cryptographic authentication and DLT generally, an analogy can be drawn between digital bonds deployed on DLT and conventional bonds making use of electronic databases – in the UKJT’s view, therefore, the introduction of DLT and blockchain technologies for the purposes of recording and effecting bond transfers, in many cases, gives rise to no particularly novel legal issues. Tokenised digital bond structures where the holder of the security is intended to obtain property rights in the token itself, however, did pose issues requiring closer consideration but these issues could be dealt with within the confines of the English legal system.
In relation to digital proprietary securities, the Statement provides that digital securitisation can be achieved by putting the asset in question in trust for the benefit of the controllers of the token. The trust could then provide for the circumstances in which the trustee can liquidate the asset and distribute the proceeds to the beneficiaries (i.e. the bondholders) – these circumstances being linked to the terms of the bond.
The digital transfer and issuance of equity securities (i.e., shares in a UK company) pose greater difficulties as various statutory formalities are imposed under the Companies Act 2006. The UKJT identified three issues arising in this area including the statutory requirements imposed in relation to registration, certification and transfer of shares.
The UKJT was unconvinced that blockchain / DLT could be utilised as a Register of Members as the immutable nature of blockchain / DLT means that a company would be unable to maintain the Register of Members – the blockchain would simply act as a store for the register.
Plenty has understandably been written about the potential applicability of blockchain and DLT-based systems in the world of finance and there is clearly a growing desire for commercial parties to take advantage and utilise these technologies. The UKJT’s conclusion that digital securities, issued and stored on these technologies, can be easily accommodated within the framework of English law will therefore provide a degree of welcome certainty to these stakeholders. English law has so far been willing to accommodate the novelty of cryptoassets and this flexibility will seemingly continue if the UKJT’s Statement is anything to go by!
It is anticipated that the Law Commission will produce a report on digital assets later this year with the intention being “to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish” and it will certainly be worth a careful read when this report is published.