UKJT legal statement on digital securities

The UK Jurisdiction taskforce’s legal statement on the status of crypto-assets and smart contracts in 2023 concluded that English law can accommodate enforceability of digital bonds on a public blockchain without custodians, and the on-chain transfer of digital equity securities. This helps the argument that despite the lack of a specific law akin to Germany’s Law on Electronic Securities, English common  law has inherent flexibility to adapt to emerging commercial realities and can accommodate digital assets.

Notably, the taskforce explained that crypto-assets are not disqualified from being treated as legal forms of property despite being possibly comprised of ‘information’ with intangible characteristics, cryptographic, subject to a decentralised network of ledgers, and potentially subject to rule by consensus.  Moreover, despite smart contracts’ automation and self-execution in computer languages, those arrangements still fit within the English Law’s classifications and courts may look to evidence beyond any coding to understand the nature of any relevant obligations.

The various systems of legal rules and the various remedies that are available under the law should also apply also to crypto-assets.  If an owner becomes insolvent or passes away, insolvency rules or estate rules may apply to those crypto-assets.

If those crypto-assets are somehow acquired without the consent of the owner, then rules about theft may apply as may rules to do with breaches of various duties. If a smart contract does not execute or executes incorrectly, then the code behind the smart contract may be applied potentially with reference to other material by the courts.  If for example if a transaction of a crypto-asset were illegal, including some money-laundering arrangements, then the courts would treat that transfer as unenforceable under the law.

The statement suggests that because a bond is a contractual arrangement between issuer and holders, and legal effects of negotiability can be conferred by appropriate drafting and structuring, such as for example, on terms that they are intended to be treated as negotiable and that no controller of a token could assert a superior legal title against any subsequent controller of said token.

The issue of transfer of property rights in digital bonds is also addressed. A potential solution to allow holders of the bonds who do not have privity with initial purchaser of the bond/token is suggested as a deed poll, which is an established mechanism under English law that allows for a satisfactory solution for the “privity” issue.

The statement has also considered the trust model for securitisation of proprietary interests in an asset.

The legal statement concludes that typical shares and bonds may be transacted by blockchain, albeit the law and regulations continue to apply, including tax reporting, money laundering, registration requirements, and terms and conditions, along with any blockchain coding.

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