Stripping
securities of their traditional paper medium has come to be called
“dematerialisation”—in a general sense, as in Poland this concept mainly
functions in a narrower legal meaning referring to situations where securities
are dematerialised using a central depository. In this sense, dematerialisation
does not necessarily mean digitalisation of the security instruments as such.
In a certain classic sense, a form of dematerialisation could be replacement of
a documentary security with a book entry, which could function in a digital
record but also as a notation in a traditional ledger. In this context we
should mention “immobilisation,” which in certain jurisdictions serves as the
basis for shifting securities and trading into the digital world without eliminating
the strict legal connection between the security instrument and its paper
medium, but enables trading in rights to securities in such a manner that in
practice the paper medium becomes a mere formality.

New regulations on dematerialisation

Recently we have
observed in Poland an onslaught of regulations directly or at least indirectly connected
with the broad issue of dematerialisation of securities. These include:

• Now-mandatory regulations on dematerialisation of
  bonds
• Regulations on dematerialisation of stock in
  non-public companies
• Regulations governing the simple stock company.

On top of these
we should add the regime of dematerialisation functioning for years under the
Trading in Financial Instruments Act, primarily governing securities that are
the subject of organised trading (i.e. on the regulated market or in an
alternative trading system).

It seems that the
trend toward dematerialisation of securities in this or some other form is an irreversible
element of ceaseless technological development. Thus the prospect of a future
in which securities are universally held in dematerialised form appears likely.
But to take full advantage of the benefits of dematerialisation requires
adoption of rules forming a coherent system, able to handle further
technological changes no doubt awaiting us.

What sort of dematerialisation do we want?

Logic would
dictate that all regimes for dematerialisation of securities in Poland should
remain mutually consistent. Although there are sometimes far-reaching
differences between certain types of securities, securities represent a fairly
consistent legal institution which should be governed as far as possible by a
comprehensive set of standards. This should not prevent differentiation between
securities (stocks, bonds etc), while securities as such constitute a separate
and recognised legal institution with certain fixed, characteristic features. Thus
it would appear optimal to refer to a universal system of
dematerialisation shared as a rule by all securities.

It must also be
borne in mind that dematerialisation is a product of trends in technological
change. But technology will continue to evolve. For this reason, any efforts to
create a framework for dematerialisation of securities should place a serious
emphasis on ensuring technological neutrality. We wouldn’t want to find
ourselves in a situation where after conducting a complicated process of dematerialisation,
we would shortly have to conduct another “de-” process to bring our already dematerialised
securities into compliance with another form and state acceptable under some
new technological reality. In other words, dematerialisation should be a
universal process, allowing securities to function in a digital reality
regardless of the specific technology currently being used—much as traditional
paper securities existed and served commerce well for hundreds of years even as
radical changes occurred in the underlying economic realities.

Do we now have the sort of dematerialisation that we want?

Until recently,
dematerialisation primarily involved securities subject to organised trading
(on the regulated market or in an alternative trading system). The Trading in
Financial Instruments Act defines dematerialisation as the absence of document
form of a security from the time it is registered pursuant to a contract on
registration of securities in the securities depository. Dematerialisation defined
in this way (which we may refer to as dematerialisation in the strict sense)
thus involves exclusively securities that do not have a documentary form and
are subject to registration in the securities depository. Eliminating the form
of a document from securities in some manner other than registration in the
securities depository may thus be defined as dematerialisation in the broader
sense.

By the way, we
should also note the broad definition of “document” in the Civil Code (“a
carrier of information enabling knowledge of its contents”), which in the context
of the regulations on offering and trading of securities sometimes sows
confusion, particularly among non-lawyers. It should be acknowledged that the references
to the term “document” in the regulations governing securities often do not carry
the Civil Code meaning, but simply refer to “paper” form.

The earlier,
relatively narrow dematerialisation regime in Poland seemed logical, as
dematerialisation is particularly useful in the case of public trading in
securities. But in recent years it was decided to take steps toward
dematerialisation of types of securities that are not the subject of organised
trading. This refers to “private” bonds, stock in non-public companies, and
shares in simple stock companies.

The chart below depicts the existing (or soon to be introduced) regimes for dematerialisation of these types of securities:

As is apparent,
there are significant differences between the specific regimes for
dematerialisation of securities. But they are partially compatible with one
another, particularly in the case of non-public companies and simple stock
companies, where the terminology and wording of the provisions were unified
during the legislative process. It seems that the system for dematerialisation of
securities in Poland could benefit from further convergence in these systems. At
the same time, legitimate differences could be taken into account, e.g. between
securities that are or are not subject to organised trading.

The greatest
challenge remains how to frame the system for dematerialisation of securities
so that it can successfully rise to the challenges presented by further growth
in new technologies. This is particularly relevant in connection with the
“tokenisation” of assets and the use of blockchain technology. These methods raise
particular questions concerning the methodology of dematerialisation based on book
entries, requiring the involvement of an entity maintaining the ledger. Some
crypto-assets display more of the features of bearer assets, which are not in the nature of abstract rights
but rather suggest things covered by absolute subjective rights.

The need for a discussion of reform of Polish securities law (civil and regulatory) is becoming increasingly pressing, in order to meet the requirements of contemporary commerce. But what is surely not called for is more incremental, discrete changes in the legal system, which would further complicate the already highly complex legal framework for dematerialisation.

Jacek Czarnecki