Digital Assets consultation: an opportunity to influence a once-in-a-generation reform

On 19 November 2024, the House of Lords issued a call for evidence on draft legislation concerning digital assets (Call for Evidence). This follows the second reading of the Property (Digital Assets etc) Bill (the Bill) in the House of Lords.

The laws of England and Wales have traditionally recognised two categories of property: things in possession (tangible personal property that one can physically possess) and things in action (a right to recover money or debt, or some other performance under a contract).

The Bill seeks to provide statutory confirmation that assets, which are neither in possession nor in action, can still be recognised as property. This “third category” is for personal property rights for digital assets which do not easily fit within these categories.  

The proposed third category of property rights would accommodate, inter alia, crypto-tokens and non-fungible tokens (NFTs). The Bill responds to the Law Commission’s 2023 digital assets report, commissioned by the Ministry of Justice.

Enhancing legal certainty for FinTech innovations through digital asset recognition

The Bill would create a more certain and predictable legal environment for FinTechs. By recognising digital assets as property, the Bill would afford FinTechs greater confidence in their use of, for example, blockchain technology and smart contracts for a variety of applications, from payments and remittances to asset management and investment services.

Financing: The implications of treating digital assets as collateral

If digital assets were recognised as property, FinTechs could more effectively use them as part of strategies for growth. This is because lenders would be able to treat digital assets similarly to, for example, real property. Consequently, banks would be able to accept digital assets like cryptocurrencies and NFTs as collateral for loans, thereby creating new financing avenues for businesses looking to scale.

FinTechs, particularly those in the lending space, may need to update their business models to accommodate the use of digital assets as a form of collateral. This will require a re-evaluation of risk assessment models to account for the volatility and unique characteristics of digital assets. Additionally, these businesses would have to ensure that they have the necessary internal processes in place to manage defaults involving digital assets.

Regulatory considerations and compliance for FinTechs in the wake of digital asset recognition

The Bill's impact would extend to the regulatory environment. FinTechs would have to be prepared to navigate a landscape where digital assets were subject to property laws, which may include, for example, new reporting requirements and compliance checks. This could lead to increased operational costs and adjustments to FinTechs’ business models with a view to ensuring compliance.

For example, with the potential increase in the use of digital assets as collateral, FinTechs may consider offering custodial services. However, for those subject to regulatory oversight, this would necessitate investment in both cybersecurity and staff training in order to ensure businesses’ operational resilience. They would also have to consider planned regulatory reform in relation to various crypto asset activities, including the safeguarding of crypto assets.

Boosting FinTech innovation with legal clarity

More broadly, the clarity afforded by the Bill could prove to be a boon for innovation, as FinTechs could invest in and develop new products and services with a clearer understanding of the legal framework within which they operate. Additionally, this clarity could make the United Kingdom a more attractive jurisdiction for FinTechs working with digital assets.

Call for Evidence

The Special Public Bill Committee is asking for written evidence covering:

• Respondents’ views on the Bill (in 300 words or less).
• Unintended or negative consequences as a result of the Bill.
• Whether the Bill, in its current form, is necessary and effective.
• Possible improvements to the Bill and whether certain amendments to the Bill could and should be made to achieve these improvements.
• Any implications on the development of this area of common law (in the UK and in other jurisdictions).
• Whether the Bill should have retroactive effect.

This third category of property is being introduced with digital asset firms in mind. This is therefore an important opportunity for such businesses to tell the government what they need.  It would doubtless be useful for such firms to play an active part in the development of the legislation, including by responding to the Call for Evidence.

The deadline for responses is 20 December 2024. If you wish to discuss a possible response to the Call for Evidence, please contact Richard Ellis or Rebecca Wright.

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