The Law Commission published proposals in July to reform the law relating to digital assets, and specifically to create a place for them alongside traditional categories of property.
Recognising the increasing importance of digital assets in modern society - whether for their intrinsic value, as a means of payment, or to represent or be linked to other things or rights - the Commission is focusing on a number of specific areas that it considers require reform, to recognise and protect the rights of users and maximise the potential of digital assets.
While recent case law has clarified that digital assets can confer property rights under English law, it remains the case that many digital assets do not fit easily into traditionally recognised private property law categories or definitions. Given the unique features of digital assets, the Commission has determined that property law needs to be reformed to provide a strong legal foundation, that is dynamic, highly competitive, and flexible enough to support transactions and other arrangements involving digital asset technology.
Specifically, the Commission is proposing the explicit recognition of a third category of property, which it labels "data objects". Currently there are two recognised property categories - things in possession (those that are tangible, movable and visible, e.g. a bag of gold) and things (or choses) in action (traditionally, those that can only be claimed or enforced through legal action or proceedings rather than by taking physical possession, e.g. shares, debts or a right to sue).
The Commission's paper argues that digital assets do not fall properly into either of the traditional categories, being neither tangible in the usual sense nor claimable or enforceable only by legal action or proceedings. It argues that a third category would allow the law to develop by analogy with things in possession or in action, where appropriate, while recognising that certain things do not fall neatly within either category. This would allow the law to focus on attributes or characteristics of the item in question without being fettered by analysis or principles applicable to other objects of personal property rights.
It would also allow the law in respect of this category of property to take account of international legal developments, potentially helping to create a consistent global legal framework. This is of particular relevance for a form of property that is being traded on global markets and has fewer ties to individual jurisdictions.
The consultation paper also proposes certain criteria that an item must exhibit if it is to fall within the proposed third category, and analyses each of these criteria. They are, as follows:
- it should be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
- exist independently of persons and exist independently of the legal system; and
- be rivalrous, i.e. that that use of the resource by one person necessarily prejudices the ability of others to do so at the same time.
The paper looks at crypto-tokens (such as Bitcoin), which are constituted of data strings or structures that only achieve functionality as a result of, and within, a particularly actively operated crypto-token system. It identifies that they are data objects within the Commission's proposed third category of personal property, and sets out their defining features, as well as suggesting a short-form description for the term crypto-token, together with accompanying commentary.
Consequential legal developments are considered including, among others, the use of the concept of control rather than possession to describe the relationship between data objects and persons, the characterisation of a transfer in the context of crypto-tokens, and whether the law should develop through the common law or be reformed by statute.
Among other topics, non-fungible tokens (NFTs) are considered separately, due to the increasing interest in the NFT market and their potential as a novel and flexible legal structuring tool. The aim of this focus is to determine whether there may be anything in relation to NFTs that requires different treatment from other crypto-tokens under English law.
The Law Commission also addresses the issue of trusts, specifically in relation to crypto-assets custody arrangements. It concludes that no law reform is required to clarify the legal position in relation to creating a valid trust in this situation, and that the courts will be able to develop coherent legal principles relating to crypto-token custody arrangements that can be characterised as trusts, where appropriate. However, the consultation does request views on this conclusion.
The paper is lengthy, at over 500 pages, and broad in scope. Responses are sought by 4 November, and it will be interesting to see whether the Commission's proposals are received favourably, particularly in relation to the recognition of a third property category.
Even if the response is positive, however, adoption of Law Commission proposals is rarely a speedy process. However, as one of the Commission's aims is to help to achieve the UK Government’s stated goal of the jurisdiction of England and Wales becoming a global hub for digital assets, and in particular, for crypto-tokens and crypto-token systems, perhaps progress may be more rapid than usual in relation to this novel and fascinating area of law.
Want to hear more from us? 
