Insight

Upcoming legal reform – digital assets

Digital assets have become increasingly important to society – we often hear in the news of crypto currencies (something which certain hedge funds and pension funds believe are good long term investments) and NFT tokens (a digital certificate of ownership for an asset whether digital or physical).

However, these ‘assets’ have not fully regulated and, not surprisingly, there have been widespread calls for reform in the law to allow for these ‘assets’ or ‘things’ to be properly regulated.

Digital assets, in a broad sense, encompasses everything from digital signatures to means of payments such as Bitcoin or Ethereum and this has meant that the UK Government has taken a cautious approach before proposing any new legislation

On 18 November 2019, the UK Jurisdiction Taskforce published a Legal Statement expressing the view that there is nothing under English law preventing crypto-assets from having the legal status of property and for smart contracts to be legally binding, and in 2021 published its Digital Dispute Resolution Rules to be used for on-chain digital transactions.

On 29 July 2022 the Law Commission published a consultation paper in relation to digital assets and in particular has proposed that a third type of personal property should be recognised.

Current laws for digital assets

Whilst there is no set or singular definition of ‘property’ in English law, there is a distinction between ‘real property’ (interests in land) and ‘personal property’ (interests in all other things).  If digital assets are to be considered ‘property’ they would therefore need to be personal property.

In the case of Colonial Bank v Whinney (1885) Ch D 261, personal property was said to fall within one of two categories;

  • ‘things in possession’ i.e. capable of possession such as a physical item. In the case of OBG v Allan [2007] UKHL 21 the courts held that for something to be a possession, it must be a tangible item;
  • and ‘things in action’ i.e. there needs to be a person against whom you can enforce a right in relation to some asset. For example, a debt is a thing in action as you can enforce the debt against the debtor.

However, digital assets do not cleanly fall into either of the above categories:

  • as digital assets are intangible due to being an electronic or digital form, they cannot be a thing in possession; and
  • for some digital assets, there is no obvious person against whom you can enforce a right against.

New category of legal assets

The courts have, on a case-by-case basis, concluded that some digital assets attract property rights, such as in the case of AA v Persons Unknown [2019] where it was held that ‘crypto-tokens’ (a type of digital asset) were neither a ‘thing in possession’ nor a ‘thing in action’ yet could attract property rights.

In order to remove some of the uncertainty regarding this, the Law Commission has proposed a third category of ‘data-objects’ to specifically deal with digital assets, and would include a digital asset if:

  1. it is composed of data in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
  2. it exists independently of persons and exists independently of the legal system; and
  3. it is rivalrous (i.e. its use is not unlimited and only one person or entity can use or own it at any given time).

This would prevent pure information from falling within this category (such as emails), which does not attract property rights.

The Law Commission currently considers that the best way to regulate digital assets is to bring them within the definition of property as much of the current law concerning causes of action can be applied to this third category.

Nevertheless, the wider legal industry believes that this would not go far enough to provide sufficient reform. For example, it is unclear, if a digital asset such as crypto-currency, should be governed by the same principles if, say, an amount of stolen crypto-currency was sold to a bona fide purchaser and whether that purchaser should still obtain good title free from any competing interests.

At the Law Society’s Commercial Litigation Annual Conference 2022, it was argued that the crypto-currency exchanges themselves may become targets for claims from victims of fraud or investors. In particular, it was considered that the exchanges might themselves claim to be bona fide purchasers for value in those instances.

Other legal developments in digital assets law to be aware of

Legal reform relating to digital assets will not be limited simply on the basis whether they should be considered ‘property’. There are also developments in the following areas:

  • The High Court recently ordered in D’Aloia v Persons Unknown and others [2022] EWHC 1723 Ch that where a party cannot be located the Claim Form may be served via NFT on a blockchain where the party cannot be located;
  • HM Revenue & Customs have published a manual on crypto-assets;
  • HM Land Registry have published a new guide on use of digital signatures on land property transactions;
  • HM Treasury recently ran a consultation on crypto-assets; and
  • The Law Society has published the Second Edition of its “Blockchain: Legal & Regulatory Guidance”.

The courts have already been moving towards attributing certain aspects of property rights to digital assets and once the Law Commission’s consultation on digital assets has concluded, it is likely that the UK Government will legislate heavily as the technology behind digital assets evolves.

If a new class of property is created for digital assets, it is likely that there will be a large increase in claims relating to digital assets from regulators and investors and this is likely to lead to substantial changes in the law for all types of property.

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