July 7, 2023
Almost a year after launching a public consultation on the status of digital assets (including crypto tokens and NFTs), the Law Commission (Commission) has published its final report on Digital Assets (Report). Released in June 2023, the Report underscores how the private law of England and Wales remains a dynamic, flexible tool to recognise rights in token based digital assets to give a high degree of legal certainty to markets and participants.
While the common law has all but confirmed that certain digital assets can be afforded the same treatment as personal property, there remains “highly nuanced and complex” areas of uncertainty that can be addressed through statute, law reform and further development of the common law.
The Report makes four key recommendations:
- Recognising by statute that a thing that is neither a (1) thing in action nor (2) thing in possession can be personal property (being “Third Category” personal property).
- Forming a panel comprised of crypto token experts, technical experts, lawyers, academics and judges to provide non-binding guidance to aid the further development of the common law.
- Clarifying whether crypto tokens fall under the remit of the Financial Collateral Arrangements Regulations.
- Creating a multi-disciplinary project to create a framework for regulating the enforcement and operation of certain crypto asset collateral arrangements.
These recommendations will now go to the UK Government who will consider implementation.
While Third Category personal property is already recognised under common law, the Commission’s first recommendation would be a timely update to the traditional personal property dichotomy of things in action and things in possession. Legislative confirmation of Third Category personal property would help to provide greater legal certainty and foster further common law development from a clear conceptual foundation by shifting focus to considering substantive issues regarding the relevant digital assets. In doing so the Report sets out indicia (and not, importantly, requirements) for determining whether a digital asset is considered a Third Category personal property, namely whether it (1) exists independently of persons and the legal system and (2) is rivalrous, the latter indicia going to the core of the definition of a crypto token being a notional quantity unit manifested by consensus-based system that cannot be double-spent that makes it different from other digital assets.
There’s much to be said for the recognition to date of cryptoassets by English courts through the incremental development of the common law, including: certain crypto tokens like Bitcoin are capable of being personal property; a resident claimant regarding their rights in crypto token has jurisdiction to bring a claim; service via NFT is valid; and the bona fide purchaser defence also applies to purchasers of cryptoassets. The Report identifies a number of areas of further development that is best left to the common law, such as applying established legal and equitable principles to arrangements involving Third Category personal property in the same way as they apply to arrangements involving other personal property. The Report’s conclusion that the common law is sufficiently flexible, dynamic and resilient to continue evolving to accommodate digital assets underscores the importance of its continued development in this ever-evolving area.
The Report otherwise identifies areas where statute or other law reform is likely needed to provide market certainty regarding particular aspects of certain digital assets, such as (1) using crypto tokens to issue and transfer equity or corporate securities (2) enforcing and operating certain cryptoasset collateral arrangements and (3) clarifying whether certain crypto tokens satisfy the definition of cash or money under the FCARs.
The Report also presents arguments and conclusions for questions that have been hotly debated in the digital assets, such in analysing the transfer of a crypto token whether as a result of the transfer operation: (1) the pre-transfer token is extinguished and a new post-transfer token created; or (2) the token persists through the transfer operation. The Report concludes the latter approach, which is consistent with the recognition of Third Category personal property continuing at system level rather than account level.
For a detailed summary and full analysis of the report, please click here. We’ll be further exploring the recommendations of the Report and implications for additional reforms for the recognition of arrangements involving crypto tokens in upcoming articles.
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 AA v Persons Unknown  EWHC 3556 (Comm), which has been cited by over a dozen cases since including the Court of Appeal to support the conclusion that a particular digital asset is capable of being personal property