Today on 28 June 2023, the Law Commission has published its long-awaited final report on Digital Assets. The report is welcome news for members of the digital asset ecosystem, such as individuals, investors, businesses, and banks who deal in digital assets and are seeking comfort on how the rights to digital assets can be safeguarded. The report also provides clarity to the wider market on how the operations of large institutions such as exchanges will be governed.
The full report is a lengthy 304 pages and no doubt those across the industry will be digesting its contents and the wider implications over the coming days but below is our brief overview of some of the key takeaways from the report:
- The (correct) nomenclature: Digital assets are fundamental to modern society and the Law Commission has been careful to acknowledge the wide variety of digital assets in existence from email accounts to assets where complex markets have evolved such as crypto-tokens. Their report places a greater emphasis on the latter due to the novel issues posed by these kinds of digital assets and the need to reinforce the strength of the digital asset ecosystem, particularly focusing on related personal property rights.
- A tripartite approach: The Law Commission based its final report on three core principles: (1) prioritising the common law development on the law of proprietary rights in digital assets by the judiciary; (2) adopting a targeted approach to any law reform, where required; and (3) seeking guidance from industry experts to support the development of common law and statute.
- Know your rights: The law surrounding the existence of proprietary rights in digital assets is now “relatively certain and that the areas of legal uncertainty that remain are highly nuanced and complex”. The complexity is attributable to the evolving nature of the underlying technologies in digital assets as well as the continuously developing markets. Even in this context, the judiciary has accurately set out the position at common law – some digital assets can attract personal property rights. Consultees within the judiciary did however express a desire to formulate the common law position in statute.
- A class of their own: It is best to avoid categorising crypto-tokens as “things in possession” or “things in action”, two common categories to which proprietary rights in commonplace assets may relate (as they would, for example, in the case of a car or a mortgage). Their recommendation is to instead create a third, separate category for digital assets. Establishing one’s ‘property’ within this third, distinct category would be central to providing certainty in legal interests capable of existing in digital assets, such as crypto-tokens, whilst avoiding the possibility that onerous boundaries on the ways in which property law could continue to develop in this respect may evolve.
- Ownership and control: Concepts of legal and factual ownership would need to be construed differently in the case of digital assets. The Law Commission has recommended that the Government establish a panel of industry experts to facilitate and normalise the legal analysis of factual and legal control, and to reduce the burden of establishing this analytical framework on the judiciary.
- Use of digital assets in collateral arrangements: Furthermore, the Law Commission acknowledged that the judiciary is constrained in its ability to develop a framework governing the use of (certain) crypto-token and (certain) cryptoasset in collateral arrangements as security (for example, in commercial lending). Their recommendation is that the Government should take steps to implement an effective statutory legal framework.
- Trusts: Crypto-token intermediated holding arrangements can be characterised and structured as trusts due to the way in which the benefits of multiple users and those of the intermediary itself may be organised within these arrangements.
- Remedies: Causes of action, such as restitution or unjust enrichment, and associated remedies usually available to claims made in respect of “things in action” and “things in possession” would equally apply to digital assets capable of belonging within the new third category of property, and assuming that these digital assets have not been “burned” or removed from circulation.
- Forum shopping: The Courts of England and Wales are the primary forum for resolving disputes in the digital asset space, due to their flexibility, willingness to keep up with constantly evolving technologies, and global appeal.
The full final report and its summary may be viewed here: Digital assets - Law Commission.