Securitisation on Blockchain: Implementation and Legal Challenges

Abstract

Blockchain has disrupted the architecture of financial transactions more than any other innovation in the last decade. The tokenisation of real-life assets is explored in many corners of the capital markets, including the securitisation market. Howbeit, European Law, may not be sufficiently equipped to shelter the particularities of Distributed Ledger Technology (DLT). This paper constitutes a qualitative legal analysis of securitisation on blockchain in the Capital Markets Union. The primary question assesses European law's proclivity to accommodate securitisation on a blockchain. The focus lies herein firmly on disclosure requirements and continuous data reporting because DLT may streamline conventional channels. Potential implementations of blockchain precede the legal discussion as they lead to contrasting observations. Benefits and challenges for issuers, investors and regulators are displayed in an attempt to underline the utility of implementing blockchain. In summary, the paper studies the implementation, the impact, and the level of harmonisation with the existing law of securitisation on a blockchain. The amalgam of securitisation and DLT is relatively new, resulting in the scarcity of legal documents to consult. Hence, most observations are derived through deductive reasoning by juxtaposing existing law and the singularities of blockchain. The Securitisation Regulation, Markets in Financial Instruments Directive, Prospectus Regulation, Anti-Money Laundering Directive, Central Security Depository Regulation and DLT Pilot Regime constitute the foundation of this analysis. In terms of implementation, the paper recognises permissioned blockchains and tokens as most suitable to comply with legal provisions. Furthermore, the paper observes that European securitisation law does not obstruct the use of blockchain as a data reporting tool for private securitisation, whereas some legal barriers are identified for public offerings. Other legal issues emanate from general questions relating to the issuance, trading, and settlement of tokenised securities. Enhanced risk monitoring and standardisation are expected advantages of implementing DLT as a data layer for securitisation. Apart from legal issues, the nascency of DLT and interoperability with traditional software are considered significant challenges for large-scale adoption. Thus, the most vital catalyst may be trusting the integrity of the technology.