The Law Commission's final report on law reform recommendations in relation to digital assets ("the Report") was published at the end of June.
The Report follows a consultation during the second half of 2022 which sought responses from legal experts, technologists and users on Law Commission proposals. The purpose, in the Law Commission's words, was "to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish."
Ultimately the Report makes 4 recommendations for law reform.
The approach taken by the Law Commission
The Report casts its net wide covering issues including digital assets as property, control, transfers, intermediated holding arrangements, collateral arrangements as well as causes of actions and remedies.
In terms of the law reform proposed in respect of these various aspects, the Law Commission sought to take a tripartite approach as follows:
- Championing the development of the common law of England & Wales. The Law Commission states that it hopes to draw the common law success in this area to the attention of market participants. As a result, the Report makes limited recommendations for legislative change.
- Targeted statutory law reform. There are essentially two recommendations for statutory law reform: (1) establishing in statute a third category of things to which personal property rights can relate, and (2) the provision of legal certainty to market participants through developing a new regime of collateral arrangements involving digital assets.
- Support from technical experts. The Law Commission recommends a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding guidance to the judiciary on the complex and evolving factual and legal issues relating to control involving certain digital assets.
Specific recommendations made in the Report
A third category of personal property.
The Report recommends statutory confirmation that a 'thing' will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession. This effectively confirms the existing common law position that such a third category exists.
The Law Commission does not, however, consider it to be necessary or appropriate to define in statute the hard boundaries of such a third category of thing. It concludes that common law is the better vehicle for determining what should fall within the third category. Indeed, it also flags that these 'things' might not always be digital assets.
The Law Commission has taken the view that much of the current law concerning causes of action and remedies can be applied to third category things without law reform and indeed no statutory reform is recommended in this area.
A panel of industry experts
It is recommended that the Government create or nominate a panel of industry specific technical experts, legal practitioners, academics and judges. The panel will be able to provide non-binding guidance to the judiciary on issues relating to digital assets, as well as digital asset systems and markets more broadly.
This will assist the judiciary in staying in touch with technological developments and enable it to apply and develop the common law appropriately.
Statutory amendments to the Financial Collateral Arrangements (No 2) Regulations 2003
The Report also makes recommendations for statutory amendments intended to:
- Clarify the extent to which and under what holding arrangements cryptotokens, cryptoassets and record/register tokens can satisfy the definition of cash.
- Confirm that the characterisation of an asset that by itself satisfies the definition of a financial instrument or a credit claim, will be unaffected by that asset being merely recorded or registered by a crypto-token within a blockchain or DLT-based system.
- Confirm that, where an asset that satisfies the definition of a financial instrument or a credit claim is tokenised and effectively linked or stapled to a crypto-token that constitutes a distinct object of personal property rights from the perspective of and vested in the person that controls it, the linked or stapled token itself will similarly satisfy the relevant definition.
Multi-disciplinary project team
The government should set up a multi-disciplinary project to 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.
Conclusion
The Report is light on recommendations for statutory law reform. The key principle recognised in the Report, certainly from a legal practitioner's perspective, relates to the recognition of digital assets as a third category of thing to which personal property rights can attach. This is not a new concept.
As the report confirms, the common law has already successfully begun to grapple with questions around how to treat digital assets. It has done so by using and adapting established legal principles and remedies to suit the cases coming before it.
A light touch approach therefore seems to be what is required. It is envisaged that this will allow the common law to continue to adapt and develop in line with technological advancement in this area.
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