Shearman & Sterling LLP | FinReg | UK Legal Statement on the Issuance and Transfer of Digital Securities under English Law
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  • UK Legal Statement on the Issuance and Transfer of Digital Securities under English Law

    Following its consultation in 2022, on February 9, 2023 the U.K. Jurisdiction Taskforce published a Legal Statement on the issuance and transfer of digital securities under English private law.

    Digital securities are shares, bonds and other debt securities which are constituted by reference to a blockchain or distributed ledger. English law is commonly used as the governing law of choice for conventional debt securities in international markets. Seeking to provide legal certainty on the use of digital securities, the Legal Statement concludes that English law can support the issuance and transfer of digital bonds on a public blockchain without custodians, and the on-chain transfer of digital equity securities.

    According to the Legal Statement, the issue and transfer of digital bonds based on a permissioned centralized blockchain where all the participants are contractually obliged to follow a common rulebook does not raise any legal issues. However, two issues arise when digital bonds are circulated on a public blockchain without custodians or other intermediaries. First, a bondholder must have rights against the issuer and payment by the issuer to the bondholder must result in discharge of the issuer's debt or other obligation. The Legal Statement confirms that under English law the use of an electronic deed poll addresses the first issue since the formalities required for executing a deed can be met on a digital system. A deed poll is a promise by the maker that can be enforced by a person without being a party to the deed, provided the person is named or sufficiently identified as the person for whose benefit the promise is made. Secondly, there must be negotiability, which means that they can be transferred by delivery without the need for a separate document of transfer and a bondholder is protected from claims of superior title by a former bondholder. The Legal Statement states that transferable cryptoasset tokens representing digital bonds can be treated as negotiable, as bearer bonds are, or the practical effects of negotiability can be provided for in the bond's terms.

    The issuance of digital equity securities by U.K. companies would need to comply with the requirements of the Companies Act 2006 for share transfer and registration. The requirements for registers of members could be met using a permissioned blockchain as a register, provided that the required information is captured and the information could be produced in hard copy form. However, the registration requirements cannot, at this stage, be satisfied on a decentralized blockchain because a company would lack the necessary control over the register. Furthermore, for the transfer of a digital equity security, the system would need to produce a "proper instrument of transfer" that could be submitted to HM Revenue and Customs for payment of stamp duty.

    The Legal Statement does not cover traditional securities whose performance is linked to or collateralized by a digital asset. In addition, the Legal Statement does not provide any indication of how the law should develop going forward.

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