Law Commission final report on digital assets
by Professor Sarah Green, Law Commission for Commercial and Common Law of England and Wales
English law is the source of domestic law in over 80 jurisdictions across the world, and around 80% of global trade is based on English common law. Given the growing importance of the digital world and the creation and transactions involving digital assets it is important to have legal clarity in relation to digital assets.
The Law Commission of England and Wales published its Final Report on Digital Assets on 28th June 2023. This follows the publication of its Consultation Paper on the same topic in July 2022 and the subsequent analysis of the responses to that earlier paper. The Report addresses the question of how the law of England and Wales needs to adapt or change in order to accommodate the increasing use of digital assets by organisations and individuals.
In essence, it concludes that the common law is well-suited to making the necessary developments, and sets out which issues, principles and analysis the courts could usefully take into account when doing so. The Report, which aims to provide a framework and a guide on which those developments can draw, is the culmination of two years of legal analysis and of consultation with market participants, whose views and markets have developed significantly during that time. Its recommendations aim to ensure that this highly iterative and innovative process of evolution of the digital assets markets can continue under the law of England and Wales.
The Report considers how principles of property law can respond to the development of digital assets. “Property” in this sense refers not to things but rather to the relationship between those things and people. Legal property rights are important for many reasons and feature in most commercial transactions relating to things of value. Such rights are useful because, in principle, they are recognised against the whole world, whereas other — personal — rights are recognised only against someone who has assumed a relevant legal duty, such as under a contract or a sufficiently proximate relationship in tort.
In the 1885 case of Colonial Bank v Whinney Lord Justice Fry famously said:
“All personal things are either in possession or in action. The law knows no tertium quid between the two.”
These categories no longer exhaust the possibilities for the classification of personal property. As the Report explains, the common law of England and Wales now effectively recognises a “third” category of personal property.
Over time, the courts of England and Wales have incrementally redefined the categories of common law personal property; initially, in response to other forms of intangible property and more recently, in the context of digital assets.
The Final Report reaches the following conclusions:
(1) The legal concept of possession is not limited to tangible things. It has long been bound up with tangibility and has traditionally relied on the physical boundaries of a thing to help define the contours of the legal duties and liabilities that arise in relation to it. Digital assets are not tangible in the conventional sense of the term and, given that they are often functionally different to the tangible things with which the law is familiar, it is neither necessary nor appropriate for them to be categorised as things in possession.
(2) There exist certain objects of property rights that cannot be things in action in the narrow sense (that is, rights or claims enforceable only by action). In fact, some crypto-tokens and other intangible objects of property rights are explicitly designed not to consist of a legal right or claim against a legal person. It is therefore not helpful for such objects to be categorised as things in action.
(3) The previous two points reflect the current state of the common law, which clearly recognises a third category of objects of property rights. Another conclusion of the Report is that the law has now moved beyond the debate on the categorisation of digital assets to answering substantive questions as to the legal principles applicable to those assets. Drawing analogies between conventionally tangible things and digital assets, and between things in action and digital assets is helpful to a point but, inevitably, those analogies break down. This is particularly true in respect of those digital assets that rely on novel and idiosyncratic technology, such as publicly available open-source code, distributed consensus mechanisms and public key cryptography.
(4) Legislation is not the best means of defining the boundaries of a third category of personal property. Whether or not a thing amounts to a third category object of property rights under the law of England and Wales is a complex and dynamic question, ill-suited to static statutory definition. Defining the parameters of digital assets, including identifying exactly what the “asset” consists of, can be extremely challenging and will differ across different types of assets. We conclude that specifying certain digital assets as capable of attracting property rights in statute simultaneously risks drawing parameters that are too narrow or too wide, and risks reducing, rather than increasing, certainty in the law.
(5) Within the third category of things, there exists a certain type of asset — namely crypto-tokens — that clearly satisfy the criteria set out in the consultation paper: they are composed of data, are rivalrous (in that they can only be used in a singular sense at any one time – if one person eats an apple, nobody else can then eat it, for example) and independence from persons and the legal system (this describes, say, a watch, because it exists in the world regardless of whether anyone lays claim to it, or whether a legal system recognises it. It does not, however describe a debt, which is co-extensive with the rights to which it gives rise). While those criteria accurately describe those “core” type of digital asset, the Report concludes that it is not appropriate for them to delimit absolutely the contours of a category of personal property. Instead, it is better that the common law continues to describe the parameters of third category things that are objects of property rights. This will allow the law of England and Wales to continue its nuanced approach to recognising that things such as milk quotas, export quotas, waste management licences and different types of carbon emissions allowances are capable of being objects of property rights. The Report refers to such things as “third category objects”.
(6) The Report concludes that the need for law reform in respect of the categories of personal property is limited, and its recommendations are therefore largely clarificatory. It recommends simply the explicit recognition that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession. Such things include crypto-tokens like bitcoin or ether. The view is expressed in the Report that although this is already the case as a matter of common law, it would be helpful (albeit not strictly necessary) to express this negative proposition in legislation, and that such a negatively expressed statutory provision would be constructive as part of wider statutory law reform in respect of digital assets. This approach is intended to be the least interventionist means of facilitating the law’s development on this point. The detailed analysis in the Report will provide a basis on which future common law decision-making can be based. This, alongside the targeted statutory reforms recommended by the Law Commission, should generate greater legal certainty in terms of the treatment of digital assets in the jurisdiction of England and Wales.