Earlier this month, the UK Jurisdiction Taskforce published a consultation report on digital securities.
Questions are outlined in the consultation paper to inform the legal statement, including whether digital securities can be issued appropriately using blockchain or distributed ledger technology, the form in which they might be given, and the method by which they could be transferred.
Also addressed in the consultation are questions about rights to digital securities and corporate requirements companies must comply with when issuing and transferring digital assets.
Speaking to Hash Legal about the consultation, they state, “The UK Jurisdiction Taskforce (UKJT) report is asking the right questions regarding digital securities. Analysis of debt securities in the context of Distributed Ledger Technology (DLT) and recommendations by the Taskforce is likely to ensure widespread acceptance of digital assets by legacy financial institutions.”
They also point out that “the common law needs to rethink private and property law on a first principle basis to reevaluate its relationship with digital assets. It would also be prudent if the Taskforce considered the strides being taken by UNIDROITs’ Digital Asset Working Group, American Law Institute, Uniform Law Commissions’ Report, etc. while coming out with the final Report. Finally, unless there is a statutory backing and modification of the law to the extent necessary, as well-intentioned as the Report may be, it would fall short of real change.”
Background of consultation
Institutions operating in the financial markets have made digital transformation their top priority.
There is much recognition that blockchain, DLT, and associated technologies are potentially beneficial, with many use cases emerging.
According to LawtechUK, “The UK, including the UK legal services sector, would benefit considerably if English law were to be a leading choice of law for such arrangements.” Several jurisdictions have adopted legislation to facilitate commercial blockchain and DLT use.
American regulatory environment
Speaking to Nick Rishwain, a US-based legal tech expert, he comments, “From my point of view, in the US, it’s nice to see UK government agencies working to be openly supportive of this technology. In the US, government involvement has not provided clarity for development nor a welcoming regulatory environment. It’d be nice to see our federal government, California or New York, take a page out of the UK’s regulatory book.”
Then he also emphasizes the potential challenges. “They will likely experience most challenges from financial regulators and entrenched financial interests. However, the UKJT’s interest in promoting English law as the choice for new digital asset technologies is the right frame of mind for regulators in this space. It is a positive pro-development goal. Hopefully, it will help build a cleaner regulatory environment for startups and businesses using this technology successfully.”
History of the regulation
As of November 2018, the UK Jurisdiction Taskforce published its Legal Statement on Cryptoassets and Smart Contracts, which outlines its legal jurisdiction and policy framework. Cryptocurrency assets were deemed property under English law, and smart contracts were regarded as contracts. The Legal Statement has been welcomed.
As part of the publication of on-chain digital relationships and smart contracts, the UK Jurisdiction Taskforce published its Digital Dispute Resolution Rules on April 22, 2021. It allows for concise arbitration or expert dispute resolution within short periods, enables arbitrators to implement their decisions directly on-chain using a private key, and allows parties to maintain their anonymity.
With the advent of blockchains and distributed ledger systems, the UK Jurisdiction Taskforce has turned its attention to how English law can be utilized to issue and transfer equity and debt securities.
Responses to the consultation can be submitted up until September 23, 2022. Then a public event will receive in-person feedback on the consultation. It is intended that a sub-committee of the UKJT (Lawrence Akka QC, David Quest QC, Richard Hay, Matthew Lavy, Sam Goodman, and Anne Rose) will prepare the Legal Statement for publication after the results of the consultation.