The Law Commission today publish their recommendations for reform of the law on digital assets. The report is an excellent intervention that makes the most of the flexibility of our common law system and has the potential to provide much needed clarity and security to all those operating in this space.
It is made clear in the report that the term ‘digital asset’ is so broad as to capture a huge variety of things including digital files, digital records, email accounts, domain names, in-game digital assets, digital carbon credits, crypto-tokens (aka “cryptocurrencies”) and non-fungible tokens.
The proposals focus on digital assets to which personal property rights can relate including making payments for goods and services, speculation and investment and linking to or embodying debt and equity securities.
Because digital assets are not tangible and differ significantly from physical assets, and from rights-based assets like debts and financial securities, they do not fit within traditional categories of personal property and should therefore be clearly defined in law as a third category of personal property.
The report suggests a three-part approach.
First, thanks to the flexibility and strength of English and Welsh common law the report hopes to “draw its successes in the digital asset and crypto-token markets to the attention of market participants.”
Then two areas of residual uncertainty are identified that should be dealt with by statutory law reform.
One is that some digital assets are not easy to place within traditional categories of things to which personal property rights can relate and this should be made clearer with targeted legislation defining this new category of personal property rights. This will be a new category of personal property rights in law, distinct from a ‘thing in possession’ (eg a car) or a ‘thing in action’ (eg a debt) and will become a third category thing (eg a crypto-token).
A second area in which common law doesn’t currently provide enough legal certainty is connected to collateral arrangements involving digital assets (specifically, crypto-tokens and cryptoassets) for which a new regime is recommended. The report recommends that, “as a matter of priority, the Government sets up a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of (certain) crypto-token and (certain) cryptoasset collateral arrangements.”
The third part of this approach is a recommendation that the Government creates or nominates a panel of industry-specific technical experts, legal practitioners, academics and judges to provide guidance on the complex and evolving issues relating to control.
This report by Law Commissioner Professor Sarah Green builds on her excellent work with the Electronic Trade Documents Bill in which a simple, elegant addition to English and Welsh law will soon provide clarity and legal certainty for the digitisation of trade documents such as bills of lading. It will soon be established in law that electronic documents may have the same legal status (as possessive documents) as their paper counterparts have had under law for hundreds of years.
It also coincides with the Financial Services & Markets Bill passing through its final stages. The FS&M Bill when it passed into law will bring activities facilitating the use of certain stablecoins (where used as a means of payment) into the UK regulatory perimeter, primarily by amending the existing electronic money and payment system regulatory frameworks.
The Bill also introduces a definition of ‘digital settlement assets’ (DSAs), a new concept which has not been previously defined in legislation ‘a digital representation of value or rights, whether or not cryptographically secured, that (a) can be used for the settlement of payment obligations; (b) can be transferred, stored or traded electronically; and (c) uses technology supporting the recording or storage of data (which may include distributed ledger technology)’.
In addition, the Bill will grant HM Treasury the power to create sandboxes which will allow financial market infrastructures and other designated persons, to test and adopt new technologies and practices (such as distributed ledger technology) by temporarily disapplying, modifying or even applying certain legislation for specific purposes.
Taken together these positive, coherent developments demonstrate what we can achieve collectively through optimizing our opportunities: our financial ecosystem, geography, time zone, our system of common law.
While the US seems stuck in regulatory purgatory (dealing with both an overzealous regulator and a politically paralyzed legislature) and the EU Markets in Crypto Assets Regulation (due for implementation in 2024) is ambitious but unproven, the UK has a real chance to put this opportunity into action and turn the UK into a crypto hub.
I look forward to the Government’s response to the Law Commission report and urge them to proceed with pace on the excellent recommendations.