Milk quotas and crypto-tokens may have more in common than you think. The Law Commission (“Commission”) has been considering the legal status of digital assets as part of a long running project, specifically recommendations for reform to ensure that the law is capable of accommodating property rights for digital assets such as crypto-tokens in a way that allows these technologies to flourish.

Digital assets such as crypto-tokens are increasingly treated as objects of property by market participants. The recognition and protection of property and property rights are vital to ensure the proper functioning of social, economic and legal systems.

English law recognises real property (land) and personal property (interests in other things), with two established categories of personal property:

1. Rights to things in possession (tangible things). Things in possession exist regardless of whether anyone lays claim to them, and regardless of any legal system that recognises or is available to enforce such claims.
2. Rights to things in action (legal rights or claims enforceable by action). Things in action can only be claimed or enforced through legal action (e.g. debts and rights to sue for breach of contract) and have no independent form.

As we reported in detail in this article, the Commission in its June 2023 report found that certain digital assets such as crypto-tokens manifested by a distributed, public, permissionless system can be personal property that is neither a thing in possession or a thing in action (“Third Category things”) if:

1. It can exist independently from, or be used regardless of, their legal enforceability. Crypto-tokens, such as Bitcoin, can be used and enjoyed independently of whether any rights or claims in relation to them are enforceable by action, and can be alienated from a person without a legal process and without their consent.
2. It is rivalrous. This is the key indicia that distinguishes Third Category things from other digital assets. For example, a crypto-token that is a notional quantity unit and cannot be double-spent.

Draft legislation for the Property (Digital Assets etc) Act 2024

In the Commission’s view certain digital assets that meet the indicia above are capable of being Third Category things. This aligns with English court decisions over the past 10 years that have recognised crypto-tokens, as well as other digital assets such as milk quotas, carbon emission allowances and export quotas, as distinct things capable of being the object of property rights. This reflects the gradual carving out of a third, common-law based category of personal property things that do not fall easily within the other two traditionally recognised categories of personal property.

The Commission has now published a consultation paper including draft legislation for the Property (Digital Assets etc) Act 2024 to establish Third Category things under the laws of England and Wales (“Bill”). The Bill states that:

“A thing (including a thing that is electronic in nature) is capable of being the object of personal property rights even though it is neither: (a) a thing in possession nor (b) a thing in action.”

The Bill is intended to recognise explicitly, in statute, the existence of Third Category things, reflecting what has become the common law position, to provide legal certainty for the recognition of personal property outside of the two traditionally recognised categories. The certainty provided by the Bill is likely to be welcomed by many for a number of reasons:

• Reduce the amount of time spent on categorising the personal property rights of digital objects and instead focus on substantive issues.
• Protect digital objects from intermediation from ill-suited private law principles or regulation (e.g. that would arise from applying rules as if a digital object were a thing in action), and support an individual’s ability to self-custody their own asset (as a Third Category thing can be “owned”).
• Signal that the laws of England and Wales will protect personal property rights, including for emergent forms of digital property. Establishing that certain digital objects can now be “owned” will surely facilitate and encourage innovation.
• Clearly establishes the fundamental difference between Third Category things that can be “owned” compared to other types of digital or electronic assets (e.g. software, digital files, data) the rights to which are otherwise governed by a mixture of statute (for example, intellectual property rights that may exist in those digital objects) and contract (for example, software licences granted by a licensor governing how rights in digital object may be used or distributed) that do not attract clear principles of “ownership” as personal property.

The Bill however does not, and deliberately so, define exactly what falls within this Third Category, the rights that will attach to such things, or the consequences of such rights (such as tortious liability). These are matters to be determined by common law.

While the Bill does not seek to define Third Category personal property, the consultation paper and previous publications underscores what has already been established under common law. For example, digital assets cannot attract personal property rights if they do not meet the indicia of Third Category things, which includes that it must be rivalrous (i.e. the use of the asset by one person precludes the ability of others to make equivalent use of it at the same time). Examples of non-rivalrous digital assets (that would not be considered Third Category things) include digital files, email accounts, domain names and certain in-game assets.

The consultation seeks input on whether the proposed Bill successfully implements the Commission’s recommended Third Category approach as well as its potential impact, cost and benefits, in order to inform the Government’s decision on whether to proceed with implementation. It does not seek further input on the underlying policy.

For more information and to respond to the consultation, which closes on 23 March 2024, click here.