E&W judicial authority states crypto-assets are to be treated as property
The pronouncement, based on an investigation by the UK Jurisdiction Taskforce (UKJT), which Vos chairs, has important consequences for succession, the vesting of property in personal bankruptcy, the rights of liquidators in corporate insolvency, and in cases of fraud, theft and breach of trust.
The UKJT’s Legal statement on crypto-assets and smart contracts is based on the 140 consultation responses received from businesses, academics and the legal sector, and was prepared under the authority of the UKJT following a six-month consultation launched in May 2019.
Vos said the occasion was 'a watershed for English law and the UK's jurisdictions', and the statement suggests that no other common law jurisdiction has yet attempted to make ‘any authoritative decision’ on the legal status of crypto-assets and smart contracts, which were also deemed valid and binding by the UKJT.
The objective, said Vos, is to 'provide much needed market confidence and a degree of legal certainty as regards English common law' in an area that is critical to the successful development and use of crypto-assets and smart contracts in the global financial services industry.
The classification of crypto-assets as legal property has been widely anticipated in financial services practice, despite previous case law deeming that information cannot itself be property. Crypto-assets are essentially digital files, which raised a question about their true status among some academic lawyers, and the perceived legal uncertainty has led to some lack of confidence among market participants.
This should now be resolved by the UKJT's assertion that 'crypto-assets have all the indicia of property'. The fact that they have other features, such as being intangible, decentralised, ruled by consensus, or the fact that they use a distributed transaction ledger and cryptographic authentication, does not preclude them from being property.
Nor are crypto-assets disqualified from being property as 'pure information', or because they might not be classified as intangible 'things in possession' or as 'things in action', in the traditional legal phrases.
‘This matters because proprietary rights are recognised against the whole world, whereas other rights – personal rights – are recognised only against someone who has assumed a relevant legal duty,’ says the statement. ‘Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by creditors, and when someone seeks to recover something that has been lost, stolen or unlawfully taken. They are also relevant to the questions of whether there can be a security interest in a crypto-asset and whether a crypto-asset can be held on trust.’
However, the UKJT report also set limits on the legal properties of crypto-assets. As they are virtual they cannot be physically owned, so they cannot be the object of a bailment, a pledge or a lien. Only some types of security can be granted over them, such as mortgages or equitable charges. The statement also makes clear that crypto-assets are not documents of title, documentary intangibles or negotiable instruments, and are not instruments under the Bills of Exchange Act 1882.
Moreover, the statement cautions that crypto-assets ‘cannot meaningfully be treated as property unless it is possible in principle to determine who owns it, and how ownership can be transferred.’ A person who has lawfully acquired knowledge and control of the corresponding private key would be treated as the owner of the crypto-assets. Accordingly, the document also asserts that private cryptographic keys can act as signatures to transactions in which crypto-assets are transferred between parties. They can also be used as valid signature to electronic documents generally, says the report.
'This is excellent news, as it reflects the reality of modern-day interactions, where it is not practical to, for example, suggest that documents need a wet ink signature to be validly signed', commented experts at law firm Eversheds Sutherland. 'Indeed, given the weaknesses of the traditional signature in terms of fraudulent copying, a private key that is only under one individual's control could be better in terms of providing evidence of an actual agreement.'
The next step in the process will require the Law Commission of England and Wales to assess whether any legislation is needed. Meanwhile, users of crypto-assets can assume that they will be treated in line with the legal statement, at least under English and Welsh law.
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