The United Kingdom is on a trajectory towards the dematerialisation of securities, aiming to change the landscape of securities ownership and trading. Sam Tyfield, partner at UK law firm Shoosmiths, discusses the implications and significance of this transition in an article on Digital Bytes.

Dematerialisation involves converting physical securities like share certificates into electronic formats, streamlining transactions and enhancing market efficiency. The UK government aims to complete the dematerialisation of its securities by 2025, as part of broader efforts to modernise the financial infrastructure and to align with global standards. This transition, according to Tyfield, addresses fraud risks, simplifies transactions, and boosts market transparency.

Challenges and opportunities

Tyfield highlights the multifaceted challenges accompanying this transition. Collaboration among stakeholders is crucial, along with the adoption of technologies such as distributed ledger technology (DLT) or blockchain. Additionally, legal and regulatory frameworks must harmonise, potentially reshaping shareholder structures.

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However, “It creates new opportunities for innovation and competition in the securities market, such as the emergence of new types of securities, platforms and services and the potential for cross-border integration and interoperability”, Tyfield noted.

Dematerialisation models

A 2023 interim report by Sir Douglas Flint outlines various dematerialisation models for the transition. One proposed model involves establishing a digital registry mirroring the current system, while another favours mandating all certified shares to be held by a single nominee in a securities depository.

Industry advocacy group TheCityUK, along with various industry bodies, has responded to the report by proposing reforms for the UK’s securities dematerialisation. Their suggestions involve enhancing the share registry to foster competition and tapping into Open Banking expertise. They advocate for simplified digitisation to uphold benefits and ensure accessibility. Recommendations encompass market-entry criteria, a public campaign to facilitate retail transition, and the collection of data on system costs.

Tyfield argues that despite differing opinions on the preferred dematerialisation model, there is consensus on the necessity of a gradual transition, considering the complexities and uncertainties involved.