The Law Commission has published a supplemental report and draft Bill in relation to its ongoing work on digital assets as personal property (“Report”) following the conclusion of its consultation conducted earlier this year (see our analysis here).

The Report follows an earlier report in June 2023 (see our analysis here and in more detail here) in which the Law Commission concluded that certain types of digital assets are things to which property rights relate, but that they do not easily fit within the categories of personal property that the law has traditionally recognised. Therefore, it said that certain digital assets, including crypto-tokens, should be “better regarded as belonging to a separate category” and recommended that legislation be drafted to confirm the existence of a ‘third category’ of personal property rights. This Report explains that recommendation in more detail and includes its suggested draft legislation intended to implement it.

Arguments for and against recognising third category things

This Report considers in detail the views of consultees who submitted evidence to the Law Commission as it undertook its work. Whilst the majority of the consultees agreed with the Law Commission’s recommendation to recognise a third category things, some expressed concerns varying from disagreement with the use of certain terminology both in the Law Commission’s analysis and its draft legislation to outright disagreement that digital assets should be property at all (stemming from a belief that, from a policy perspective, their use should not be encouraged), while others raised questions about whether digital assets should be a residual sub-category things in action rather than a ‘third category’ thing.

Do and should (certain) digital assets attract property rights?

English courts have for some time now recognised that certain digital assets attract property rights when applying existing legal principles and indicia of property.

From a policy perspective, property rights should attach to certain digital assets to ensure appropriate legal treatment e.g. to ensure they are part of a bankrupt or insolvent estate, or to ensure that there is a remedy where such digital assets have been interfered with. A key function of property law is to allocate rivalrous objects between persons, and to protect a person’s liberty to use such objects from interference by others. Certain digital assets, including cryptoassets, are and should be capable of attracting property rights when applying existing legal principles and indicia of property.

Should we recognise third category things distinct from other categories of personal property?

The vast majority of consultees agreed with the recognition of a third category of personal property rather than to create a residual sub-category of things in action. Certain digital assets like cryptoassets are fundamentally different from traditional things in action – they are rivalrous, independent from persons and the legal system, and therefore voluntarily alienable. They are a thing in itself to which property rights can relate, not just a right asserted by taking legal action. It’s not possible to “steal” a debt or copyright, but it is possible to steal someone’s Bitcoin. So if something is to be treated differently, it should be recognised separately.

Equally, just because certain digital assets do not easily fit within the traditional categories of personal property does not mean that they are, or should be, deprived of having legal status as object of personal property.  The law therefore should recognise a third category things to reflect the unique characteristics of digital assets that are neither purely intangible nor conventionally tangible objects, and that the law is capable treating such things as objects of personal property rights.

To maintain this distinction, the Report establishes that, as before, the categories of property should be seen as mutually exclusive, meaning they cannot be different “things” at the same time. However, it states this exclusivity does not prevent a third category thing from being linked or associated with another category of thing. For instance, it gives the example that a crypto-token could fit into a third category while still being connected to a legal right or a physical asset. The fact the property is connected to or shares certain features with property within the other two categories, does not prevent its designation as a third category thing.

The Report also maintains that, importantly, there should be no hierarchy among the categories; the legal treatment should reflect the inherent characteristics of each. Categorisation will depend on the nature of the thing itself, assessed objectively, and digital assets should be allowed to be recognised as a third category thing without first being attempted to be forced into one of the traditional categories.

If the law is already clear, then why do we need statute to intervene?

Importantly, the Report reiterates that while English courts have already moved towards this position of recognising certain digital assets as third category things, the absence of an appellate court ruling on the status of digital assets inevitably brings a considerable level of uncertainty as to the legal position.

Statutory confirmation would remove that uncertainty, allowing the law to develop from a strong conceptual foundation:

• Clear up legal uncertainty. Statutory confirmation would alleviate and lingering judicial uncertainty that it was not for the judiciary to introduce a new ‘third category’ and disturb the traditional dichotomy of things in action and things in possession (even though on numerous occasions this dichotomy has already been disturbed and are by no means exhaustive).
• Refocus further development of the law. The recognition of third category things would allow the law to turn its focus on the attributes or characteristics of such digital assets in question rather than whether the digital asset meets the criteria of things in action or things in possession.
• Protection for new forms of digital assets. Statutory confirmation would help protect new and emergent forms of digital assets from intermediation imposed by the application of ill-fitting private law principles (e.g. that a digital asset is a right enforced by legal action, such as to treat digital assets as rights to software) and from regulation that would otherwise mandate intermediation or reduce a person’s ability to hold their own digital assets directly (e.g. that digital assets must be held through a wallet provider).
• Jurisdictional certainty. Forward looking statutory confirmation also sends a strong signal to the market that the law of England and Wales is robust in continuing to recognise and protect personal property rights, including in these new and emergent forms of digital assets.
• Global standards and consistency: Courts in several common law jurisdictions, such as Australia, Canada, Singapore, and the United States, as well as some civil law systems like Japan, Switzerland, and the Dubai International Financial Centre, have already recognised crypto-tokens as objects of personal property rights. Statutory confirmation in England and Wales would align with these international developments, ensuring consistency and supporting the global recognition of such digital assets as property.

The proposed legislation and its implications

As for the draft legislation itself, the substantive provision is intentionally short:

Property (Digital assets etc) Bill

1. 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 thing in possession, nor
• a thing in action.

Interestingly, the wording of the draft Bill in the Report differs from the wording in the consultation paper in specific ways:

• A qualifying thing includes a thing that is electronic or digital in nature. This is to reinforce the types of thing currently envisaged as being immediately covered as a third category thing.
• The statutory confirmation is now stated in the negative – that a thing is not prevented from being an object of personal property rights just because it does not fit into either of the two traditional categories. This was to avoid the recognition of personal property in things to which no rights relate (e.g. pure information).

While the purpose of the proposed Bill is to remove any lingering doubt that there are only two categories of personal property by firmly establishing that a thing can be personal property even if it is neither a thing in action nor a thing in possession, it is deliberately agnostic about the characteristics of such third category things to allow flexibility for future developments.  What digital or electronic assets may be a third category thing and what personal property rights attach to such third category things are matters for the common law to develop.

In a way that will make civil law jurisdictions uncomfortable, the proposed Bill is intended only as a means of ‘unlocking’ the development of the common law regarding third category things, without unduly restricting how the common law can respond to technological developments and the varied ways in which people are likely to use digital assets.

To read the Report in full, click here.