The Law Commission of England and Wales has launched a very detailed consultation (with nearly 550 pages!) on proposals for new laws relating to digital assets, including crypto assets and NFTs.
The Commission points out that digital assets are used for a variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities. Because they are not tangible, digital assets have many different features to traditional physical assets. Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions.
The UK Government asked the Law Commission to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish. The Law Commission has already started work on electronic trade documents. Its digital assets project builds on the conclusions of the 2019 Legal Statement on the Status of Cryptoassets and Smart Contracts by the UK Jurisdiction Taskforce of the LawTech Delivery Panel.
The key proposals in the consultation document include:
- The explicit recognition of a “third” category of personal property which would be different from the two current categories of things in possession (an item you own) and things in action (eg contractual rights). The Commission says that this would permit a more nuanced consideration of new, emergent, and idiosyncratic objects of property rights. It has called this category “data objects”. It says that this could be facilitated either via common law reform or by (limited) statutory intervention. It describes the potential pros and cons for each option, and asks consultees for their views.
- It sets out criteria that a thing must exhibit to fall within the scope of the Commission’s proposed third category of personal property. They are (a) it is composed of data represented in an electronic medium; (b) it exists independently of people and the legal system; and (c) it is rivalrous (if I have something, you don’t have it at that time).
- The factual concept of control (as opposed to the concept of possession) best describes the relationship between data objects and persons.
- Crypto tokens satisfy the Commission’s proposed criteria of data objects and are appropriate objects of property rights. It analyses factual transfers of crypto-tokens (as a subset of data objects) and provisionally proposes that the rules of derivative transfer of title can be applied to such transfers, including in the context of the unauthorised disposal of a crypto-token.
- It proposes an explicit clarification that the special defence of good faith purchaser for value without notice should apply to crypto-token transactions.
- It proposes statutory law reform clarifying the scope and application of section 53(1)(c) of the Law of Property Act 1925 in connection with certain dealings in specified forms of equitable crypto-token entitlements.
- Law reform clarifying and simplifying the apportionment of shortfall losses arising out of commingled crypto-token holdings held on trust by an insolvent custodian would be beneficial.
- The Commission has started considering if it would be advantageous to develop bespoke statutory provisions designed specifically for collateral arrangements for crypto-tokens. However, it has not made concrete proposals at this stage.
- In relation to the tort of conversion, it says that there are arguments in favour of extending conversion (or a conversion-type cause of action) to data objects. However, it acknowledges that this would be a significant change for the law, and one which would need further consideration. Consequently, it has not made concrete proposals in this area either.
- There is an arguable case for law reform to provide courts with the discretion to award a remedy (where traditionally denominated in money) denominated in certain crypto-tokens in appropriate cases. Again, it has not yet made concrete proposals.
The consultation ends on 4 November 2022. It follows a recent speech by Sir Jon Cunliffe, the Bank of England Deputy Governor, Financial Stability in which he emphasised the importance of appropriate regulation.
It is also worth noting that the UK Jurisdiction Taskforce is now considering how English law can support the issue and transfer of equity or debt securities on blockchain and DLT systems. It is consulting on questions that its proposed Legal Statement on Digital Securities can most usefully answer. Its consultation ends on 23 September 2022. The questions are as follows:
- Can digital securities be validly issued under English law using a blockchain or DLT-based system?
- In what legal form(s) are digital securities capable of being issued, in addition to registered form?
- Can a blockchain or DLT-based system be used as a register of digital securities?
- Is a blockchain or DLT-based system for digital securities required to comply with the requirements of the Uncertificated Securities Regulations 2001?
While the law of England and Wales has gone some way to accommodate the rise of new technologies, the Commission argues that there are several key areas that require law reform, to recognise and protect the rights of users and maximise the potential of digital assets