Across all fields of life we witness groundbreaking changes brought by new technologies. Progressive digitalisation is not sparing the financial markets, which are indeed perceived as an area that will be shifted almost entirely into the digital world. The goods traded on financial markets rarely take material form, but are typically some type of abstract right.
The basic and most obvious challenge for digitalisation of financial markets is to eliminate paper where entries in IT systems prove to work better. Traditionally and historically, securities have taken paper form, but that clearly does not meet the requirements of contemporary trading on financial markets studded with state-of-the-art technologies.
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.