The English Law Commission’s digital assets final report: welding the scalpel, not the sledgehammer.
Introduction
Digital assets are increasingly important in modern society and are used for an expanding variety of purposes — including as valuable things in themselves, as a means of payment, or to represent or be linked to other things or rights — and in growing volumes. Smart contracts, cryptography, distributed ledgers and associated technology broaden the ways in which digital assets can be created, accessed, used and transferred with such technological development set only to continue.
The UK Government tasked the Law Commission, the public body for reform of the law in the UK, to make recommendations for reform to ensure that the law can accommodate digital assets in a way which allows the possibilities of this type of technology to thrive and to support the Government’s goal of attracting technological development to cement the position of the UK as a global hub for crypto-assets.
In this article I will analyse and will make a summary of the main proposals outlined in the recently published Law Commission’s final report on digital assets.
The Law Commission’s three pillars solution
Some digital assets, including crypto-tokens and non-fungible tokens (NFTs), are treated as objects of property by market participants. Property and property rights are vital to modern social, economic and legal systems and should be recognised and protected as such. A legal foundation for ownership of digital assets will have a host of real-life ramifications, such as providing consumers and businesses with protection and remedies in the event of fraud or hack, enabling distribution of digital assets in the event of insolvency, or allowing the creation of security over digital assets.
Over the last decade or so, English personal property law has proven sufficiently flexible to accommodate digital assets. The UK Jurisdiction Taskforce’s (UKJT) legal statement, which provided influential authority that certain crypto-tokens, such as Bitcoin, are objects of property, has been endorsed in courts in England and Wales as well as other jurisdictions. However, as the digital asset market and related technology continue to change, there remains some residual legal uncertainty and complexity.
Statutory confirmation that there is a separate category of property that includes digital assets
Although, the flexibility of English common law allows for the recognition of a distinct category of personal property that can better recognise, accommodate and protect the unique features of certain digital assets, the Law Commission recommends legislation to confirm the existence of this category: a thing will not be deprived of legal status as an object of personal property merely because it is neither a thing in action (such as debt or shares in a company) nor a thing in possession (tangible assets like gold). This is designed to remove any doubt that some assets (such as certain digital assets, including cryptocurrencies and NFTs) are objects of property that fall into neither of these traditional categories. The Law Commission acknowledges repeatedly that this will merely confirm the position at common law.
This simple change will unblock the English courts from devising new rules that apply to cryptocurrency, NFTs and other digital assets. The Law Commission does not intend to be overly prescribed and is not seeking to define the boundaries of any third category of property. Rather, it seeks to allow the English courts to gradually develop nuanced rules covering custody, transfer, security and similar situations.
Creation of an advisory panel consisting of technical experts, academics, legal practitioners and judges
The report generally aims to provide a foundation from which the English common law can develop incrementally in line with technological and market advancements. To ensure that the English courts can respond sensitively to the complexity of emerging technology and apply the law to new fact patterns involving that technology, the Law Commission recommend that Government create a panel of industry experts who can provide guidance on technical and legal issues relating to digital assets.
This panel’s advice would not be binding but is expected to be highly influential. Existing groups set up to advise on new technology, such as the UKJT, which includes senior judges as members, have already been widely quoted in legal decisions. However, handing a formal role to an advisory panel with technical expertise would still be a remarkable innovation. Judges would have the technical support to create sensible rules adapted to the latest technology, and industry would have the means to evaluate its latest innovations and develop them in legally robust ways.
There are a few specific areas where existing legislation is not adapted to digital assets
The Law Commission make recommendations to provide market participants with legal tools that do not yet exist in the UK, such as new ways to take security over crypto-tokens and tokenised securities. Here, new legislation is indeed proposed.
The report recommends amendments to the existing Financial Collateral Arrangements (№2) Regulations (FCARs), including to clarify that certain digital cash and digital securities models will fall within scope. Tangentially related to this, the report also recommends that UK companies’ legislation should be reviewed to support the issue and transfer of digital equity securities (as opposed to debt or other contractual securities which do not face the same barriers).
In relation to crypto-assets more broadly, the report recommends establishing an industry led multi-disciplinary group to formulate a bespoke statutory framework to facilitate collateral arrangements.
Conclusion
The Law Commission’s elegant solution is to take advantage of the flexibility of English common law — the ability of the judiciary to expand law into new areas with steady, incremental change — by combining it with technical expertise in the industry. It promises to create rules that are responsive to new technology. To achieve this, English common law needs an initial nudge — the statutory creation of a new category of property. Gradual development taking account of the precise features of digital assets can then fill in the gaps.
The specific recommendations for implementation outlined in the report are for the UK Government to consider and take forward, and the timelines for that remain unclear. Initially, only a single piece of legislation is needed and a support for the creation of the technical panel. Taking forward the recommendations would pave the way for greater clarity and security for crypto-asset holders and other market participants and support the ultimate Government’s goal to make the UK a global tech hub.
However, much of the impact of the Law Commission’s work is expected to be felt immediately, through the open publication of detailed analysis explaining the certainty and flexibility of the existing law. Even before any legislation changes are made, it is likely to be followed by English judges. The benefit of the Law Commission’s extensive analysis will likely also inform legal analysis and developments in other jurisdictions and in international fora.
