In 2023, the UK Law Commission released a report on digital assets, presenting recommendations for the reform and advancement of the law in this area. Although the report primarily addresses the legal framework in England and Wales, its insights are valuable and relevant to a broader audience, especially in common law jurisdictions.
It is also a useful resource for anyone looking to deepen their understanding of the legal aspects of digital assets. Digital assets have become a crucial part of both modern society and the global economy. They serve a wide range of functions, such as being valuable in their own right, acting as a form of payment, or representing or being connected to other assets or rights. The increasing use of digital assets is supported by advancements in technology, including electronic signatures, cryptography, distributed ledgers, and smart contracts, all of which have expanded the ways in which digital assets can be created, accessed, and transferred.
As technology continues to evolve and as people spend more time online, our interaction with digital assets is expected to grow even more significant. It will hence be important for both governments and non-government organisations to understand this shifting landscape.
Digital assets
The term "digital assets" is broad and encompasses a wide array of items, including digital files, records, email accounts, domain names, in-game assets, digital carbon credits, crypto-tokens, and non-fungible tokens (NFTs). The technology behind each type of digital asset varies, as do their characteristics and features. In our report, we use "digital assets" as an umbrella term, but our focus and recommendations mainly address specific types of digital assets
The report
The report represents a significant effort to align legal frameworks with the realities of modern technology and its impact on the economy. Digital assets, which include everything from cryptocurrencies to digital tokens and carbon credits, have become integral to various aspects of commerce and finance. This report focuses on how the legal system of England and Wales can adapt to accommodate these assets, particularly in the realm of personal property rights. The recommendations provided are designed to ensure that the legal system remains robust, competitive, and capable of handling the complexities introduced by digital assets.
Understanding digital assets
Digital assets are described as a broad category encompassing various types of digital representations that hold value. These assets can include digital files, records, email accounts, domain names, and more sophisticated items like crypto-tokens and non-fungible tokens (NFTs). The diversity in the nature and use of digital assets makes them difficult to classify under traditional legal frameworks. As the report notes, digital assets can be used for multiple purposes, including payments, recording ownership, transferring value, and investment.
Personal property rights and digital assets
Personal property rights are a cornerstone of legal and economic systems. These rights are crucial in the context of digital assets, as they determine the legal recognition and protection of ownership. The Law Commission highlights that, over the past 15 years, the legal framework in England and Wales has shown flexibility in recognising digital assets as objects of personal property rights. However, as the technology continues to evolve, there remain areas of legal uncertainty that need to be addressed.
The need for law reform
The report outlines a tripartite approach to law reform, emphasising the need to adapt existing legal frameworks to the unique challenges posed by digital assets. Firstly, it advocates for the development of common law, which has proven to be sufficiently adaptable to digital assets. This approach allows the legal system to evolve naturally in response to changes in technology and market practices.
Secondly, the report recommends targeted statutory law reform. Although common law provides a solid foundation, there are areas where statutory clarification is necessary to ensure legal certainty. For example, the report suggests that legislation could explicitly confirm the status of certain digital assets as objects of personal property rights, thereby supporting the existing common law position.
Thirdly, the report recognises the importance of industry-specific technical expertise in shaping the legal framework for digital assets. As technology advances, the complexity of digital assets will increase, requiring specialised knowledge to inform legal decisions. The creation of a panel of experts from various fields, including law, technology, and finance, is recommended to provide non-binding guidance on the evolving issues related to digital assets.
A "third" category of personal property
One of the report's key conclusions is the recognition of a "third" category of personal property that includes digital assets. Traditional categories of personal property are limited to things in possession (physical objects) and things in action (rights that can be claimed or enforced). However, digital assets do not fit neatly into either category. The report suggests that a third category, encompassing digital objects, would better reflect the nature of these assets.
This third category would allow digital assets to be treated as objects of personal property rights, providing them with the same legal protections as traditional assets. The report advises against defining the boundaries of this category too rigidly, as the nature of digital assets is likely to evolve. Instead, it recommends that the common law continues to develop organically to address specific cases involving digital assets.
Control and legal consequences
Control is a central concept in the legal treatment of digital assets. The report discusses the importance of control in determining the legal status and transferability of digital assets. Factual control, which refers to the ability to exclude others from access and use of a digital asset, is crucial for establishing legal ownership. However, the legal consequences of control are complex and vary depending on the type of digital asset.
The report suggests that the law should recognise different levels of control for different types of digital assets. For instance, some digital assets function like "digital bearer instruments," where control equates to ownership, while others may involve more intricate legal arrangements. The establishment of a specialised panel to provide guidance on these issues is recommended to ensure that the legal system can effectively respond to the challenges posed by digital assets.
Intermediated holding arrangements
Intermediated holding arrangements, where digital assets are held by a third party on behalf of the owner, are another area of focus in the report. The legal treatment of these arrangements is critical for the functioning of digital asset markets. The report distinguishes between custodial and non-custodial arrangements, each with different legal implications. Trust law is identified as a potential framework for managing custodial intermediated holdings, but the report also explores alternative legal structures that could be more suited to the unique characteristics of digital assets.
Collateral arrangements and security interests
The report also addresses the use of digital assets as collateral in financial transactions. It examines the applicability of existing legal frameworks, such as title transfer and non-possessory security arrangements, to digital assets. However, the report concludes that these frameworks may not be adequate for all types of digital assets. It recommends the development of a bespoke statutory legal framework to facilitate the use of digital assets as collateral, ensuring that these transactions are legally sound and enforceable.
Remedies and causes of action
The report explores the application of existing legal remedies and causes of action to digital assets. It concludes that many of the current legal principles can be extended to cover digital assets without the need for significant law reform. However, there are some areas, such as the burning of crypto-tokens, where the current legal framework may not provide sufficient remedies. The report suggests that the courts could develop new principles of tortious liability to address these gaps, ensuring that digital assets are adequately protected under the law.
Conclusion
The Law Commission's report on digital assets provides a comprehensive analysis of the challenges and opportunities presented by these new forms of property. The recommendations are designed to ensure that the legal system of England and Wales remains flexible, dynamic, and capable of accommodating the rapid evolution of digital assets.
By recognising a third category of personal property, clarifying the concept of control, and proposing targeted law reforms, the report lays the groundwork for a legal framework that can support the continued growth and integration of digital assets into the economy. As technology continues to advance, it will be crucial for the legal system to keep pace, ensuring that digital assets are effectively integrated into the broader legal and economic landscape.
References
Law Commission (2023) - Digital assets. https://cloud-platform-e218f50a4812967ba1215eaecede923f.s3.amazonaws.com/uploads/sites/30/2023/06/Final-digital-assets-report-FOR-WEBSITE-2.pdf
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