Electronic registration and transactions

In the commercial field, the development of the law and practice of market participants has always gone hand in hand. Legal structure has often envolved as a result of market practice, thus solving some of the issues that commercial lawyers have. However, this relationship cannot fix everything, and then we must turn to technology.

An early example of technology being the answer to a commerical legal conundrum is the development of bills of exchange. These were a solution based on the use of paper to the problem of having to carry large amounts of gold in sacks in order to pay merchants. In the late 20th century, solutions tended to depend on electronic technology. In the 21^st century, the challenges revolve around how to use the latest developments in technology to solve legal problems arising from the use of 20^th century technology. Three projects with which the Commercial Law Centre at Harris Manchester College is involved address this general issue.     

The first is a project considering what are the ‘Best Practices in the field of Electronic Registry Design and Operation’. The use and development of electronic forms of registration has revolutionised the ability of those involved in business transactions to obtain immediate accurate information and to protect their own interests by making information available to be searched by others. The security of the register and the information contained within it is, however, paramount if the registration is to achieve its purpose of certainty. This project, which is a joint undertaking between the Commercial Law Centre and the UNIDROIT Foundation, considers how to develop standards of best practice in relation to electronic registration in the business context. In many contexts, of which the Cape Town Convention on International Interests in Mobile Equipment is an example, the liability of registrars depends on whether they have followed ‘best practice’, and yet there are no agreed standard to assess or determine what best practice means in this context. The project is inter-disciplinary, involving technology specialists, commercial lawyers and those working the field of registration. There are many industry standards applicable to various aspects of electronic registration, but no established means of determining, in relation to any given registry, which standards apply to which functions, and how those standards should be customised.      

A workshop was held as part of this project on 30 and 31 March 2016, and the discussion focused on developing a matrix to determine these matters. It emerged from the discussion that two very important elements of the framework were the functions to be performed by the registry, and the evaluation of the risks in relation to each function. A second workshop will be held on 27 and 28 March 2017 to refine and elaborate this functional risk-based approach in order to test it in relation different types of commercial electronic registries. These registries could be registries of secured transactions and registries of companies, for example.

The second project, entitled ‘Intermediation and Beyond’, concerns the holding of securities through intermediaries: an extremely widespread method for holding securities worth trillions of pounds around the world, which developed because of the inefficiencies of holding securities in paper form and settling transactions involving paper securities. Concerns have been raised in relation to the impact of the intermediated method of holding securities on the rights of investors, and particularly on the enforcement of these rights against issuers and intermediaries. There is further considerable complexity added by the fact that chains of holding often include cross-border elements at different stages of intermediation. Part of the project’s focus is whether the role of blockchain technology in future patterns of the holding of securities will help to alleviate these problems, or, conceivably, add to them or even create new problems. Four workshops are planned, culminating in the production of an edited volume of essays. The participants in the project include academics from the University of Oxford, the London School of Economics, the University of Pennsylvania, Yamagata University and Radboud University, as well as solicitors, barristers and representatives from Euroclear UK and Ireland.     

In the course of the first workshop, the technology behind blockchain and its operation was outlined, including key techniques such as cryptology, hashing and consensus algorithms. The potential advantages which blockchain might offer were discussed, including security of transfers and removing the need for a centralised system, although it was noted that a completely distributed ledger system would probably be inappropriate for the settlement and holding of securities. It is likely that attempts to apply blockchain in this context would face a variety of legal, regulatory and practical obstacles. In particular, the necessity of a permission-based system and a ‘golden node’ controlling this system were discussed; in particular, whether these if required would significantly reduce any advantages offered by blockchain. Potential conflict of law issues were also identified, and these will be the subject of a future workshop.

The third project, the Secured Transactions Law Reform Project, is a much wider one looking at the need for and shape of secured transaction law reform in England and Wales. As part of this project, it is necessary to consider the opportunity for a modern registration system for security interests. Such a system should be wholly electronic, and should use technology so as to overcome some of the problems that have arisen from reformed systems around the world, which have been developed at various stages of technological development. A discussion paper on registration covering the consideration of these matters has been produced and discussions are ongoing.