The Law Commission of England and Wales has launched a consultation on proposals for new laws relating to digital assets, including crypto assets and NFTs.
The Commission points out that digital assets (crypto-tokens including cryptocurrencies and non-fungible tokens (NFTs)) play an increasingly important role in modern society. The emerging technologies are used for an increasing variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities.
Because they are not tangible, digital assets have many different features to traditional physical assets. Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions.
The UK Government asked the Law Commission to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish. The Law Commission has already started work on electronic trade documents. Its digital assets project builds on the conclusions of the 2019 Legal Statement on the Status of Cryptoassets and Smart Contracts by the UK Jurisdiction Taskforce of the LawTech Delivery Panel.
The Law Commission’s key provisional proposals include:
- The explicit recognition of a “third” category of personal property distinct from things in possession and things in action, which it says would allow for a more nuanced consideration of new, emergent, and idiosyncratic objects of property rights. It labels this category “data objects”. It describes two options for the development and implementation of this provisional law reform proposal: iterative, common law reform or (limited) statutory intervention. It outlines the potential benefits and drawbacks for each, but does not conclude with a preferred option, asking consultees for their views.
- It proposes certain criteria that a thing must exhibit if it is to fall within the scope of the Commission’s proposed third category of personal property.
- It concludes that the factual concept of control (as opposed to the concept of possession) best describes the relationship between data objects and persons.
- It makes a provisional conclusion that that crypto tokens satisfy its proposed criteria of data objects and are appropriate objects of property rights. It analyses factual transfers of crypto-tokens (as a subset of data objects) and provisionally proposes that the rules of derivative transfer of title can be applied to such transfers, including in the context of the unauthorised disposal of a crypto-token.
- It proposes an explicit clarification that the special defence of good faith purchaser for value without notice should apply to crypto-token transactions.
- It proposes statutory law reform clarifying the scope and application of section 53(1)(c) of the Law of Property Act 1925 in connection with certain dealings in specified forms of equitable crypto-token entitlements.
- It concludes that law reform clarifying and simplifying the apportionment of shortfall losses arising out of commingled crypto-token holdings held on trust by an insolvent custodian would be beneficial.
- The Commission has started considering if it would be desirable to develop bespoke statutory provisions designed specifically for collateral arrangements for crypto-tokens. However, it has not made law reform proposals at this stage.
- In relation to the tort of conversion, there are arguments in favour of extending conversion (or a conversion-type cause of action) to data objects. However, it acknowledges that this would be a step change for the law, and one which would need further consideration. Consequently, it has not made law reform proposals at this stage.
- There is an arguable case for law reform to provide courts with the discretion to award a remedy (where traditionally denominated in money) denominated in certain crypto-tokens in appropriate cases. However, it has not made law reform proposals at this stage.
The consultation ends on 4 November 2022.