May 03, 2019
I am extremely honored to be listed as a co-author of the legal article Aktien-Token (share tokens) along with H.C. von der Crone and Martin Monsch. The article was published in the latest issue of GesKR, the most renowned Swiss journal for corporate and capital market law. Professor von der Crone is well-known for his authorship of Wertpapierrecht (securities law), the reference publication for Swiss securities law.
In the article, we describe a legal path to tokenize equity under the current Swiss law. There is a pending proposal to adjust the law in order to provide additional legal certainty, but it might take a while until this proposal passes through parliament (if it does). In the meantime, it is important to have ways to tokenize equity under the current laws - out of which the one described in our article seems to most promising to us.
Traditionally, shares have been printed on paper and transferred by handing over that paper. However, the handling of the paper moved more and more into the background as computers started to be used to organize stock markets in the 80ies. To simplify things, some clever lawyers came up with creative ways to avoid printing the certificate, most notably the concept of the postponed certificate-printing (aufgeschobener Titeldruck). Under that method, instead of handing out a paper certificate, firms would give the shareholders the right to demand the printing of the certificate while at the same time already granting them all their shareholder rights. Under that regime, it became possible to transfer the share without transferring a paper, simply by assigning the right to get a printed certificate to someone else. In a later twist, lawyers even went one step further and invented the “abrogated certificate-printing” (aufgehobener Titeldruck), a practice under which the shareholders get all their shareholder rights except the right to demand the delivery of a physical certificate. That legal hack made it possible to detach being a shareholder from owning share certificates. It remained a hack for decades, until it was finally provided with a sound legal basis in 2009 with the introduction of article 973c in the code of obligations.
Unfortunately, Swiss law requires the assignment of claims (and therefore also the assignment of uncertified securities to a new shareholder) to be done in writing. This already posed a problem in the 80ies, under the regimne of postponed certificate-printing. Traders do not want to sign a document for every stock market trade they make. Again, a creative solution was found. First, it became standard practice for banks to demand a power of attorney from clients to sign such assignments on their behalf. That way, clients did not need to sign anything anymore when trading, as the banks could do it for them. Second, the practice of the “global assignment” (Globalzession) was applied to fulfill the legal requirement of the written form. A Globalzession says something along the lines of “I hereby transfer all shares as I will indicate in the future”. If that sounds like another legal hack to you, then that’s because it is one. However, the Swiss stock market has functioned pretty well under such creative hacks for decades, even though it became increasingly hard to prove the fulfillment of all the legal requirements of a trade on the stock market.
(Note that I made some simplifications in the description of the situation above, in particular I focused on registered shares. For bearer shares, the situation is somewhat different. Also, I’m not a lawyer, so do not rely on the accuracy of my wrap-up of the legal history of uncertified securities in Switzerland.)
Today, we face the same problem again when tokenizing shares. How can they be transferred without providing a written signature? In theory, one could repeat what the banks did for many decades and rely on global assignments. However, it is not obvious in a decentralized world who would store these documents and who should be given the power of attorney to sign them? (Interestingly, Swiss law does not require your signature to authorize others to sign on your behalf, so everything could be done electronically as long as someone, somewhere, is authoried to sign the assignment of the claims and actually does it.) In a centralized world, one should resist introducing centralized, trusted parties. So von der Crone, Kessler and Angstmann came up with a new idea last summer by pointing out that - given the consent of all involved parties - claims can also be transferred without formal requirements. While an assignment of claims (which is a document that only needs to be signed by the former owner of the claim) must be done in writing, there is also a much older alternative, which was already known to the Romans. That alternative is to transfer a claim through an assignment agreement, which can be done informally, but requires the consent of all three parties (the former and the future owner, as well as the company). And that’s how we propose to transfer tokenized shares.
Based on that earlier article, our contribution now describes in more detail how this creative work-around for legal transferrability of claims can be applied to registered shares, for example looking at how the articles of association need to be structured and who has what responsibilities in the tokenization process. One company that already issued their share in the described way is Alethena, which offers the tokenization of equity as a service.