Legislation needed to protect crypto-assets as 'third category' of property, says Law Commission of England and Wales

Thursday, 29 June 2023
A report from the Law Commission of England and Wales (the Law Commission) recommends that a distinct legal category of personal property should be formally recognised to cope with intangible cryptocurrencies and non-fungible tokens, in addition to the two existing choses of possession and action.
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The Law Commission's report follows a consultation conducted in 2022, focused on the question of whether a third legal property category of 'data objects' was needed and, if so, how the category boundaries should be determined. The UK Jurisdiction Taskforce had already decided in 2019 that the common law, as it stood, was capable of recognising digital assets. Nevertheless, the Law Commission's report concludes that although that England and Wales law is well-placed to provide a coherent and globally relevant regime, more certainty is desirable. It wants specific legislation to confirm that a thing will not be deprived of legal status as an object of property rights merely by reason of the fact that it is neither 'a thing in action' nor 'a thing in possession'.

However, the report stops short of trying to define this third category. Instead, it suggests that common law is the best vehicle to determine which objects can fit within it, thereby allowing for a 'nuanced approach to recognising that things such as crypto-tokens…can be objects of personal property rights'.

Moreover, things fitting into this third category need not always be digital, it said: they could include assets such as milk quotas or carbon emission allowances, the report states. According to law firm Shoosmiths, the indicating factors for the existence of this right include ‘where that property usually, but not always, is composed of data, exists independently of persons and the legal system and is rivalrous’.

The report acknowledges that the courts will need help in developing this common law. It recommends the setting up of an expert panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding advice to courts on disputes about the control of digital assets. It also suggests creating a bespoke legal framework to help the initiation, operation and enforcement of arrangements relating to using crypto-tokens and other crypto-assets as collateral.

'We agree that the law should recognise that property rights can and should attach to things that are not conventional possessions,' comments STEP. The Society notes that its Digital Assets Special Interest Group and UK Technical Committee made this clear in the consultation response to the Law Commission in 2022. 'The nuances of digital assets still require further work to explore the conflicts in cross-jurisdictional legislation, especially in relation to the location of digital assets and the question of jurisdiction over disputes.'

The UK government now has to decide whether and when to implement the recommendations. Its earliest opportunity to do so would be to amend the Digital Markets, Competition and Communications Bill, currently at committee stage in the House of Commons, or late-stage amendments to the Financial Services and Markets Bill. In particular, it needs to clarify in statute whether certain digital assets fall within the scope of the Financial Collateral Arrangements (No 2) Regulations 2003.

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