The UK’s Law Commission (the Commission) published a consultation paper on July 28, 2022, proposing certain reforms to private property law in relation to digital assets, which was in response to the UK government requesting the Commission to ensure that the law can accommodate digital assets as they continue to evolve and expand. The Commission acknowledged the increasingly important role digital assets play and that property rights are key for the proper characterization of novel and complex legal relationships involving digital assets.
The Commission agreed that it should avoid the creation of a new legal and regulatory regime that discourages the use of new technologies rather than provide the foundation for them to flourish. While the Commission considers the law of England and Wales sufficiently flexible to accommodate digital assets, it believes that certain aspects of the law need reform to ensure that digital assets benefit from consistent legal recognition and protection. As such, it proposes some foundational law reforms that seek to build on existing principles of private personal property law, and which will enable the court to continue to iterate and innovate.
One of the Commission’s key proposals (and points for consultation) relates to the categories of personal property. The Commission’s view is that digital assets (e.g., crypto tokens) cannot be categorized properly in either of the traditionally recognized categories of “things in possession” or “things in action,” and instead proposes a third category of personal property called “data objects.” This new category is intended to enable a more nuanced consideration of these emergent objects of property rights.
The Commission proposed the following set criteria that an item must exhibit to be a data object:
- It must be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital, or analog signals.
- It must exist independently of persons and legal systems.
- It must be rivalrous.
The consultation goes on to analyze the application of this criteria to crypto tokens, concluding on a preliminary basis that crypto tokens satisfy the criteria and therefore are appropriate objects of property rights that fall within this new category of data objects. The Commission further considers other related areas that may benefit from law reform, typically by reference to existing market practice regarding crypto tokens, including non-fungible tokens.
The Commission’s proposed reforms reflect the constantly developing digital asset environment and are designed to ensure that the law remains dynamic, competitive, and flexible to support transactions and other arrangements involving digital assets. They also aim to help to achieve the government’s recently announced intention to make the United Kingdom a global hub for cryptoassets. Delivering wider recognition and legal protections for digital assets in this area would undoubtedly help to accelerate further investment in UK cryptoasset technology and businesses.
As always, the devil is in the details, but the implementation of some of the key proposals put forward by the Commission would provide some welcome certainty and additional robustness to an emerging asset class in what is already a (relatively) accommodating legal and regulatory framework that the United Kingdom affords stakeholders. Private fund and other investors in the space should welcome the extra certainty that the proposals largely represent. Whether they help introduce the tools which may be used later on to stifle innovation and growth remains to be seen, but the stated intentions are certainly positive.
The consultation closes on November 4, 2022. For more information, read the full consultation paper.