Law Commission Report on Digital Assets
Law Commission publishes its long-awaited recommendations for the development of the law relating to digital assets1
On 28 June 2023, the Law Commission of England and Wales published its Final Report on Digital Assets (the Report). This project initially commenced in 2020, and the intervening period has seen the English courts increasingly having to deal with cases involving digital assets.
The Report sets out the Law Commission’s recommendations for the reform and development of the law relating to digital assets, with the aim of creating a clear, consistent and transparent legal framework for digital assets that will provide greater clarity and security to users and market participants alike.
A copy of the Report can be accessed here.
England and Wales as a “global financial hub for crypto-tokens and cryptoassets”?
The Report follows neatly on from several landmark publications from the UK Jurisdiction Taskforce (UKJT), which was established to clarify key questions regarding the legal status of cryptoassets, distributed ledger technology and smart contracts under English law.
Building upon the UKJT’s: (a) Legal Statement on Cryptoassets and Smart Contracts (see our analysis here); and (b) Legal Statement on the issuance and transfer of digital securities under English private law, the Report represents a further indication of the private law of England being a dynamic and globally competitive tool for market participants in the digital assets space.
The Law Commission’s tripartite approach in the Report to digital assets, and their recommendations with respect to the same, is as follows:
- First, the Report recognises that the common law system in England is very well placed to provide a coherent legal regime for existing and new types of digital asset and should serve as the primary means (rather than through legislation) by which reform in this area should occur. The Report accepts that the common law allows for the recognition of a distinct, third category of personal property (in addition to the traditional two categories of “things in possession” (i.e., tangible property) and “things in action” (i.e., rights capable of enforcement)) that can better recognise, accommodate and protect the unique features of certain digital assets.2
- Second, the Report recommends only targeted statutory reform to confirm and support the existing common law position or where common law development is not realistically possible. In particular, the Report recommends that the Government set up a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of (certain) crypto-token and (certain) cryptoasset collateral arrangements, as this is an area in which the common law cannot provide sufficient certainty.
- Third, to ensure that the English courts can respond diligently to the complexity of current and emerging digital technologies, the Report calls upon Government to create a panel of industry technical experts, practitioners, academics and judges to provide non-binding guidance on the complex and evolving factual and legal issues relating to certain digital assets. The rationale for this novel approach is that it should drive consistent and informed decision making going forwards, thereby driving confidence in market users.
Overall, the Report does not propose significant legislation is required, concluding that the common law of England and Wales has proven itself “resilient in the face of new technology and flexible enough to answer legal questions concerning digital assets”. Consistent with the UKJT Legal Statements that have gone before, the Report provides a further welcome vote of confidence in the ability of the laws and courts of England and Wales to deal with an increasingly digital future.
Should you have any questions arising out of the findings in the Report, or how these recommendations may impact your operations in the future, please reach out to Chris Harvey, Dan Jewell or Sam Gokarn-Millington.
1 The Report recognises the breadth of the term Digital Assets, which covers digital files / records, domain names, in-game digital assets, digital carbon credits, crypto-tokens and non-fungible tokens.
2 The Law Commission’s view is that an asset will fall within its proposed third category of thing to which personal property rights can relate if: (i) it is composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals; (ii) it exists independently of persons and exists independently of the legal system; and (iii) it is rivalrous (i.e., the use or consumption by one person / group necessarily prejudices the use or consumption of that thing by one or more other persons).