The Legal Classification of Digital Assets as Property

The rapid growth of digital assets presents a unique legal and financial paradox. What began in 2009 as a niche experiment in decentralized currency has expanded into a vast, multi-trillion-dollar ecosystem that is increasingly intertwined with global finance and commerce. Yet, despite their widespread adoption, fundamental legal uncertainties remain.

One of the most pressing questions concerns the very nature of digital assets. How should they be classified within the framework of private law? These intangible, code-based holdings exist solely as entries on blockchain networks, challenging traditional notions of property. Should they be recognized as legal property with enforceable ownership rights? If so, where do they fit within conventional property law, and what regulatory mechanisms should govern their use?

The implications of these questions extend far beyond academic debate. Courts must decide if stolen digital assets qualify as “property” recoverable through traditional remedies. In lending and finance, clarity is needed on how security interests in digital assets should be structured, particularly when used as collateral. Bankruptcy proceedings introduce another layer of complexity—should customer deposits in digital asset platforms be considered part of a debtor’s estate, or do they rightfully belong to account holders?

As institutional investors, financial entities, and regulatory bodies continue to enter the digital asset space, clear legal frameworks are essential. Addressing these legal challenges will shape the future of digital asset integration into the broader financial system, influencing everything from consumer protections to cross-border trade and investment strategies.

Disputes involving digital assets often revolve around several key issues, including the classification of digital assets as property, the determination of jurisdiction and applicable law, and the remedies available to parties affected by digital asset fraud or misappropriation.

 

Challenges in classifying digital assets as property

Introduction

Classifying digital assets as property presents several challenges due to their unique characteristics and the limitations of traditional property law.

Traditional property classifications

Property law traditionally divides personal property into two categories:

• Things in possession: Tangible items that can be physically held, such as furniture or electronics.
• Things in action: Intangible rights that can only be claimed or enforced through legal action, like a debt or contractual right.

Digital assets: The problem of being everywhere and nowhere at the same time

Digital assets, including cryptocurrencies and NFTs, do not fit neatly into traditional property categories. Because they cannot be physically possessed, they do not fall into the category of things in possession. However, they also cannot be things in action because their existence is not dependent upon their recognition by a legal system and claims made in relation to them.

As they are intangible they can be transferred without physical exchange, relying on cryptography and blockchain technology. The use of blockchain technology can mean that the act, event, or object arguably exists “everywhere and nowhere, at the same time” ¹. Apart from creating problems with classification, it also creates problems with determining the appropriate jurisdiction and applicable law when a dispute involving digital assets arises ².

The development of the legal classification of digital assets

The UK Jurisdiction Taskforce’s Legal Statement on Cryptoassets and Smart Contracts (UKJT) issued in 2019 provided crucial guidance, affirming the legal status of digital assets and smart contracts. It confirmed that digital assets are capable of being treated as property under English law. The UKJT also indicated that digital assets constitute a third type of property, distinct from 'things in action' or 'things in possession'.

In 2019, the English Courts also took significant steps in the common law development of digital assets. A pivotal case that year, AA v Persons Unknown, saw the English High Court rely on the UKJT analysis on digital assets. The court found that while crypto assets might not fit into traditional property categories like ‘things in possession’ or ‘things in action,’ they could be recognized as a distinct type of property. This led the court to issue an interim proprietary injunction for a bitcoin ransom payment, thereby establishing cryptocurrencies as a form of property. This decision paved the way for the courts to grant a range of proprietary remedies in cases involving the theft of digital assets.

On 12 September 2024, the UK introduced the Property (Digital Assets etc.) Bill (the "Bill"). The Bill confirms that certain digital assets - such as crypto tokens - can attract property rights even if they do not fit into the two traditional categories of personal property in English law. The Bill deliberately does not state what digital assets fall within a “third category” of personal property rights or how the law will treat them. Instead, these details will be developed by the courts, who can deal with issues on a case-by-case basis. This will help provide certainty and protection for people and businesses who own and transact with such assets.

Globally, the regulatory and disputes landscape for digital assets has been evolving rapidly. Countries like the United States, Japan, and Switzerland have implemented comprehensive regulations to manage and foster the growth of digital assets. Most common law jurisdictions now recognize digital assets as property.

Dubai is emerging as a significant player in the digital asset space. The UAE authorities have introduced comprehensive regulations for digital assets and blockchain technology, aiming to create a secure and innovative environment for digital asset transactions.

The DIFC Courts have been instrumental in shaping the legal landscape for digital assets. In the case of Gate Mena DMCC & Huobi Mena FZE v Tabarak Investment Capital Limited & Christian Thurner, the DIFC Court of Appeal endorsed the English High Court’s analysis in AA v Persons Unknown, recognizing crypto assets as a distinct third category of property.

The judgment, coupled with the new DIFC Digital Assets Law (see below), highlights the evolving legal landscape for digital assets in the DIFC.

On 8 March 2024, the DIFC enacted the Digital Assets Law No. 2 of 2024 (Digital Asset Law). The Digital Assets Law details the legal characteristics of digital assets as a form of property. It also sets out how digital assets may be controlled, transferred, and dealt with by interested parties providing legal certainty for investors and users.

These developments also underscore the importance for market participants to remain informed about the ongoing developments in this ever-evolving area.

 

Conclusion

The legal classification of digital assets as property is a complex and evolving area of law. As digital assets continue to integrate with traditional finance and global trade, it is crucial for legal frameworks to adapt and provide clarity. The developments in the UK, the UAE, and other jurisdictions highlight the importance of recognizing digital assets as a distinct category of property. This recognition not only ensures legal certainty for investors and users but also fosters innovation and growth in the digital asset space. As the legal landscape continues to evolve, staying informed and adaptable will be key for all stakeholders involved in the digital asset ecosystem.

If you or your organization are facing issues related to the recovery of digital assets, please do not hesitate to contact us.

At DLA Piper, our experienced team of lawyers are at the forefront of the rapidly evolving legal landscape of digital assets and digital finance. Our team has a proven track record of successfully representing clients in complex, high-value disputes in both onshore litigation and offshore litigation including in the DIFC Courts, the ADGM Courts and international arbitration. We can provide the strategic advice needed to protect your interests and navigate the challenges of operating in this emerging space.

Whether you require assistance in recovering misappropriated digital assets, advice on structuring digital asset transactions, or representation in litigation or arbitration, DLA Piper possesses the knowledge, experience, and global reach to achieve the outcomes you need.

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¹ Law Commission's Summary of the Call for Evidence, February 2024 - Digital assets and ETDSs in private international law, which court, which law?
² These issues will be dealt with later in the series.