Digital assets consultation by the Law Commission
Background
The Law Commission has launched a consultation on draft legislation relating to digital assets (Consultation). The Consultation centres on the question of how the law can be reformed to introduce a new category of personal property rights. This new category would accommodate certain digital assets, including crypto-tokens and non-fungible tokens (NFTs). The purpose of the Consultation is to test whether the draft legislation successfully implements the recommendations set out in an earlier June 2023 report.
The Consultation on digital assets has potentially significant implications given the importance of property rights. In contrast to other personal rights (such as contractual rights or privacy rights) that are recognised against an individual who has assumed a legal duty, property rights are recognised ‘against the whole world’. Further the proposed legislation would, if enacted, align England and Wales with other common law jurisdictions (such as Australia, the United States and Singapore) which have concluded that crypto-tokens are capable of being objects of personal property rights.
Traditionally the law has recognised two categories of property: (1) things in possession (i.e. an object that is capable of possession, such a gold coin) and (2) things in action (i.e. personal property enforceable by legal action, such as debts). However, the Law Commission recommends a “third category” of personal property rights for digital assets which – “do not sit easily in either of the traditionally recognised categories of things in possession or things in action (at least in the narrow sense)”. Central to the Consultation is the idea that a thing should not be deprived of legal status as an object of personal property rights just because it is not a thing in possession or a thing in action.
Draft legislation
Clause 1 in the draft Bill reads as follows:
“Objects of personal property rights
A thing (including a thing that is digital in nature) is capable of being an object of personal property rights even though it is neither -
- a thing in possession, nor
- a thing in action.”
Third category and what it means
The Law Commission’s draft legislation refers to “third category” in a technologically neutral manner in that it does not refer to any single or class of (digital) asset, or any protocol, system, network or technological feature but rather to things that are – “digital in nature”. This was not originally part of the recommendation in the Final Report. The Law Commission interestingly acknowledges that its definition of the third category if a thing is “somewhat circular” in nature.
The definition is deliberately fluid and the Law Commission explains that, while things that are “digital in nature”, are the main impetus behind the draft legislation, the new category could include non-digital things. The Law Commission adds that the proposed text has been widely drafted with a view to facilitating common law development.
This approach fits on with existing case law, such as AA v Persons Unknown where the High Court held in 2019 that cryptocurrencies were a form of property. While Mr Justice Bryan expressly recognised the difficulty in the classification of crypto-tokens, he stated that they could be objects of personal property rights while not strictly being considered as things in action.
What falls within the third category?
The Law Commission has not given a strict definition or circumstances under which a digital asset falls under the third category. However, it identifies distinguishing qualities within the category that are helpful in future case analysis, including – “the form of computer code, electronic, digital or analogue signals”. This is in line with the Law Commission’s expectation that intangible things and assets that are difficult to predict may develop under the third category.
The Law Commission also refers to how common law does not arbitrarily define “things in action” or “things in possession”. Similarly, it aims to apply this flexible approach to “a third thing” that is capable of being an object of personal property rights.
What falls outside the third category?
While the Law Commission does not identify “hard boundaries around the third-thing category”, it delineates examples that do not fall under the third category. This includes certain digital assets, such as – “
Pure information – that is, the intangible, abstract thing that is information, distinct from the means by or on which that information is recorded.
(2) Certain digital assets, such as (in most but not necessarily all cases):
- digital files and records
- email accounts and certain in-game assets
- domain names.”
Conclusion
The draft legislation on digital assets is pivotal in recognising that certain assets including crypto-tokens and NFTs are capable of being recognised at law as property. It would provide commercial certainty and confidence in relation to the growing use and interoperability of digital assets.
The Law Commission is asking stakeholders the following three questions – “
- Do you agree with the general approach of the draft Bill, and agree that it will achieve the desired effect?
- What do you consider the positive impact of the Bill to be? Could you quantify them (for example, by how much in £ or days/hours might a dispute be reduced)?
- What do you consider the costs and/or risks of the Bill to be?”
The consultation is currently seeking views from stakeholders on the draft legislation. The deadline for responses is 22 March 2024.
