Out-Law News 2 min. read

Law Commission digital asset proposals ‘reassuring’


Law Commission proposals for how digital assets should be treated in English common law are “reassuring” and will help eliminate uncertainty over their legal status, according to two legal experts.

The Commission said that digital assets like cryptocurrencies and non-fungible tokens (NFTs) do not fit within the two categories of personal property that currently exist in English law. It proposed keeping the two existing categories, which comprise ‘things in possession’ – such as tangible assets – and ‘things in action’ – like shares in a company, and adding a third separate category for digital objects.

The proposals came after the UK government asked the Commission to carry out an in-depth analysis of how well common law accommodates various legal issues related to digital assets. The Commission’s final report (304 pages / 2.32MB PDF) found that personal property law in England and Wales has proven sufficiently flexible to deal with these emerging technologies, but that some legal uncertainty and complexity remained.

Laura Gallagher of Pinsent Masons said: “It is reassuring for litigators that the Law Commission concluded that there is no need for bespoke rules, or for law reform, in relation to the application of causes of action and associated remedies to a third category for digital assets.” 

“Instead, the Commission has recommended that the courts should apply existing legal principles to this proposed new category – continuing to recognise the nuances, technical characteristics and distinct features of digital assets – just as they would when dealing with ‘things in possession’ and ‘things in action’,” Gallagher said.

Laura Gallagher

Associate

The Commission has recommended that the courts should apply existing legal principles to this proposed new category – continuing to recognise the nuances, technical characteristics and distinct features of digital assets

She added: “While the recommendations would mean that we are left to rely upon the courts’ judgment and the common law development of digital assets, we can take some comfort in how the courts have dealt with these issues so far. In the recent Tulip Trading case, for example, the court expressed a willingness to adapt to the novel circumstances presented by the use of new technologies.”

The Commission said that digital assets do not fit within traditional categories of personal property in common law because they are not tangible and differ significantly from both physical assets and from rights-based assets like debts and financial securities.

It concluded, however, that common law is flexible enough to accommodate a distinct third category of personal property to better recognise and protect the unique features of digital assets. The Commission recommended that the government introduce new legislation to confirm the existence of the third digital objects category and to provide more certainty over the legal status of digital assets.

The report also called on ministers to convene a panel industry-specific experts, legal practitioners, academics and judges to provide non-binding guidance to courts on technical and legal issues related to the control of digital assets. In addition, it recommended giving new legal tools, including ways to take security over crypto-tokens and tokenised securities, to market participants in England and Wales.

Alexandra Algazy of Pinsent Masons said the Commission had considered the models used in other jurisdictions, such as the specialist courts for crypto claims recently established in the Dubai International Financial Centre (DIFC).

“The downside of this approach is, however, that it requires expensive expert evidence for emergency applications. In contrast, the Commission’s proposals are likely to reduce the scope of such evidence and therefore its cost as well,” Algazy said.

She added: “The Commission’s statutory law proposals will go a long way to eliminating any uncertainty that remains as English law develops in response to digital assets and other emerging technologies.”

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