Requirements under the Companies Act are not necessarily a barrier to company shares being held and traded on a blockchain of encrypted digital code, according to a government-backed panel of experts. In its latest statement of the law relating to innovations in the crypto economy, the UK Jurisdiction Taskforce concludes that English law is well equipped to deal with digital securities such as bonds and shares. 

The statement is the second to emerge from the taskforce, set up under the LawtechUK initiative, following its 2019 statement on cryptoassets and smart contracts. Taskforce chair Sir Geoffrey Vos, the master of the rolls, says the aim is 'to provide market confidence and legal certainty', to help maintain England and Wales as the jurisdiction of choice for new crypto-based markets. 

The latest statement covers three types of securities: bonds, proprietary securitisations of assets and equity securities; ie shares. 

According to the statement, the first two categories of security pose few difficulties for English law. It notes that, despite the technological novelty of some cryptographic techniques, 'a blockchain is ultimately just a type of electronic database'. English commercial law has accommodated numerous novel business and investment structures over the years, 'and one would not expect any difficulty in principle in adapting to a new kind of record-keeping for bonds'.

Equity securities are more challenging, however, because of statutory requirements for registration, certification and transfer. A major issue encountered in consultation on the statement is the need for a share certificate and a ‘proper instrument of transfer’ for the sale of securities held outside the CREST settlement system. 

However the statement concludes that, as the Companies Act does not prescribe any particular form for a share certificate, 'there is therefore no objection in principle to an electronic share certificate'. Certification could be carried out on the blockchain but 'it would probably be necessary for the system to be configured so as to generate and issue a specific electronic but human-readable document that can be treated as the certificate'. 

Although not a definitive legal opinion, the statement will provide ammunition for the City of London in its argument that English and Welsh common law provides a better basis for innovation than do the purported certainties of statute. It notes that, while France, Germany, Lichtenstein, Luxembourg and Switzerland are among the jurisdictions to have passed specific legislation on electronic securities, 'English law (like other common law systems) does not necessarily require statutory intervention in order to support new asset classes or financial structures.' 

In his foreword, the master of the rolls says the statement 'will reinforce the reality that the common law in general and English law in particular can respond in a flexible and consistent manner to new commercial situations.'