Securities, Intermediation and the Blockchain ― An Inevitable Choice between Liquidity and Legal Certainty?

Abstract

The latest version of this paper is available at http://ssrn.com/abstract=2697718.

Since markets have elevated intermediation to become the organising principle of securities transactions, legal certainty regarding the enforceability of rights in securities has been exchanged for considerably increased levels of liquidity. This happened incrementally on the basis of three major developments that were only poorly accommodated by the law. As a result, securities holders and takers of securities collateral have to rely on the solvency and regulatory compliance of their intermediaries, instead of enjoying a right that is good against everybody. In this context, the potential of the ‘blockchain’ is discussed intensely since very recently and is by most expected to revolutionise the practice of securities settlement. However, the relationship between blockchain technology and enforceability of rights in securities is still entirely unclear. This article traces how the tandem of practice and law of securities settlement has developed over the past 200 years. On this basis, it outlines the conditions under which the introduction of blockchain technology in securities settlement will be beneficial, in terms of both liquidity and legal certainty.

Keywords: Securities, Settlement, Intermediation, Blockchain, Liquidity, Choice of Law, Insolvency

JEL Classification: K11; K12; K22; K33