Cryptoassets as property: the latest from the courts and legislators
The Property (Digital Assets etc) Bill
The Property (Digital Assets etc) Bill (the “Bill”) was officially published on 12 September 2024. This publication follows the government’s response statement to the Law Commission’s 2023 report on digital assets as well as the outcome of the 2024 consultation on the Bill. It is a pivotal development for digital asset law.
The Bill marks a significant step in affirming the recognition of certain digital assets as property under statutory law, a position currently dealt with in English common law. The Bill is the culmination of detailed consideration over the years, with the Law Commission starting the process with an initial request for evidence in April 2021, followed by an interim report later that year and a detailed consultation in July 2022. These efforts have resulted in the Bill, which clarifies that certain digital or electronic things, despite not fitting into the traditional property categories of a chose/thing in possession or a chose/thing in action, are nonetheless capable of constituting personal property.
The Bill itself is brief:
“Objects of personal property rights: A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither —
(a) a thing in possession, nor
(b) a thing in action.”
Most notably, the Bill does not go as far as to include the term “digital asset” in the wording, notwithstanding being a very broad term that encompasses a wide range of assets. It does, however, expressly refer to things that are “digital or electronic in nature”. Further, instead of seeking to define what a potential third category of property is, the Bill instead seeks to clarify that just because a thing does not neatly fit into the two longstanding categories of property, it is not prevented from constituting property. The wording clearly leaves space for English common law to fill in any gaps, arguably in recognition of the fact that it is best left to the common law to deal with developments in what is a fast-evolving area of law.
There is a body of English common law that has established that certain digital assets satisfy the test for property despite not being a chose in action or possession, most recently in the case of D’Aloia v Persons Unknown (discussed directly below). Nevertheless, the Bill is a welcome development to cement these judgments and allows for further future development.
D’Aloia v Persons Unknown [2024] EWHC 2342 (Ch) and its consideration of cryptoassets as property
Summary
In the recent High Court decision of D’Aloia, the High Court has found for the first time at a trial (rather than at the interlocutory stage) that cryptoassets, in this case Tether (“USDT”), constitute property. The judgment considers the status of cryptocurrency as property at length. Whilst the court’s comments were strictly obiter (as the claim failed on its facts), it discussed in detail the status of cryptoassets as property – demonstrating the English courts’ acute awareness of their important role in clarifying the law in this area when asked to, alongside Parliament. Indeed, the draft Property (Digital Assets etc) Bill was introduced to Parliament shortly before the court’s decision was handed down and, together with the Law Commission’s Final Report, is relied upon heavily in the judgment itself.
Background
The claimant, Mr D’Aloia, claimed that he was the victim of a cryptocurrency scam. The scam involved Mr D’Aloia being induced to transfer cryptocurrency in the form of Circle (irrelevant in the trial) and Tether. The value of the cryptocurrency handed over was circa £2.5 million.
After the claimant transferred the cryptocurrency into a wallet associated with a scam online trading account, a series of 14 ‘hops’ followed and a part of those funds found their way into a Bitkub wallet controlled by Ms Hlangpan (“82e6 Wallet”), a suspected ‘money mule’. A total of USDT 400,000 ended up in the 82e6 Wallet and USDT 42,291 of the USDT 400,000 was either Mr D’Aloia’s USDT or their traceable proceeds.
The judge was asked to determine whether the claimant could follow the USDT into the 82e6 wallet. As part of his decision, the judge had to consider whether USDT could attract property rights.
Consideration of cryptoassets as property
The judge held that USDT, whilst neither a chose in possession nor a chose in action, was capable of attracting property rights for the purposes of English law.
As a starting point for this consideration, the judge relied on the well-known test for rights capable of being admitted to the category of property in National and Provincial Bank v Ainsworth [1965] 1 AC 65, that is a right that is: (1) definable, (2) identifiable by third parties, (3) capable in its nature of assumption by third parties, and (4) has some degree of permanence or stability. Judge Farnhill held that the starting point was this test and that this will often be the end point when considering this question, as was the case here where USDT met the test and so could be considered property.
In addition, the judge made observations on recent cryptocurrency authorities to further support his determination of USDT as property. He noted that, whilst other authorities had specifically considered the specific cryptocurrency Bitcoin, USDT operated in a similar way. The judge also noted that cryptocurrency was rivalrous in that when one person owns it another person does not. Further, he highlighted that cryptoassets exist and are enjoyed conceptually outside of the legal system and their users.
The judge went on to consider what type of property USDT was, specifically whether cryptoassets were a chose in action or a chose in possession. He held that cryptoassets did not fit into either of these categories. The reason for this is that USDT does not confer Hohfeldian claim-rights (that is rights capable of being vindicated in legal proceedings), powers, privileges or immunities – and that this is what characterises property generally.
The judge then considered whether property can exist in the absence of a legally enforceable right and relied on a body of case law (Huggins, Nai-Keung and Gwinnutt) which makes clear that an expectation not based on a legal right, power, immunity or privilege may also be something to which property rights can attach, provided the expectation is clear and well founded. Judge Farnhill held that there was a well-founded expectation that USDT transactions would be honoured due to cryptographic security that was designed to make it happen. In making this decision, he considered the following from Professor Fox’s article (quoted in the Law Commission’s Digital Assets: Final Report[1]):
“The asset is more than mere data. It is a set of transactional functionalities. The most important of these is the capacity of the person who holds the private key to effect new transactions which will be recognised as valid by the rules of the system. Analysed in this way, the asset can be viewed as a specific transactional power over unique data entries on the ledger.” (Emphasis added)
Accordingly, cryptoassets are “not merely the data but the combination of the data and the transactional functionalities related to it” and as such the judge found that this combination gives the ‘expectation’ needed that cryptoasset transactions will be honoured in sufficient form to attract property rights.
Although Judge Farnhill's ruling focused on USDT, the underlying rationale extends to cryptoassets generally. The principles articulated by the judge suggest a broader judicial strategy for addressing any prospective asset that might be considered to have property rights under English law, particularly intangible or digital assets.
The judge finished off his consideration of cryptoassets as property by discussing the interaction between the court and Parliament in view of the Property (Digital Assets etc) Bill. The judge was clear in his view that the court was not barred from making determinations on matters that Parliament was enacting since the courts must decide matters that come before them. As such they are not precluded from making determinations that may be inconsistent with Acts of Parliament before they are enacted.
That said, the decision was consistent with the Bill, which itself places reliance on the interaction between the court and Parliament: the Bill does not say whether cryptoassets or certain classes of them are property, it merely clarifies that something can be property even if it is not a chose in action or possession. Indeed, tellingly the Bill does not clarify the questions raised and discussed in the judgment, as noted by the judge.
Conclusion
As we await further developments on the enactments of the legislation, the legal landscape for digital assets continues to evolve. It is clear that the courts will rule where needed in order to clarify the position and will not merely leave matters to legislature, even where draft legislation is on foot.
The Law Commission acknowledges that sweeping statutory reform may not resolve all complexities surrounding digital asset law and suggests that incremental common law development is preferable. As such, until such matters are adjudicated in court, some degree of legal ambiguity is anticipated to persist.
[1] Law Commission Report, Law Comm No 412 “Digital Assets: Final Report”.