The Law Commission's latest report provides fundamental support to the emerging legal framework for digital assets under English law. The Commission has also proposed small but important areas for statutory reform. If the recommendations are adopted, it will reinforce the benefits of using English law for digital assets transactions even further.
This is the first in a series of articles where we address different aspects of the Report, with a focus on issues that affect both traditional finance and digital market participants.
The latest report from the influential Law Commission of England and Wales describes digital assets as "fundamental to modern society". This is the latest, and most far reaching report in a series from the Law Commission addressing critical legal issues for emerging technologies.
The Report makes a number of recommendations for the reform of English law relating to digital assets, with a focus on using the existing flexibility of the English common law system to provide much needed clarity and consistency of outcomes.
While the Report notes the breadth of what can be called a "digital asset", the proposals largely focus on digital assets giving rise to personal property rights, such as cryptoasset payment tokens, digital assets used for investment or trading, or those embodying debt and equity securities.
Importantly, as digital assets are not tangible and differ in some material respects from physical assets, the Report concludes that digital assets need to be clearly defined in English law as a third category of personal property.
Here are 4 key findings and recommendations from the Report
1. Common Law development will continue: The report highlights that English common law has already recognised that new forms of digital assets are capable of being personal property, and have accommodated them in a legal framework without the need for statutory intervention.
There is a stark acknowledgment that English common law development is far better suited to keep up with the pace of technological change and embrace the breadth of the digital assets landscape, than statutory law reform. The Commission also highlighted the ability of the English Courts to distinguish between different implementations of similar technology efficiently and fairly, in a way that statutory reform might not. As a result, we can expect the majority of legal development to continue iteratively through case law, rather than expecting significant new legislation in the UK.
2. Ownership and Control of Digital Assets: The report delves into the complex issue of ownership and control of digital assets and acknowledges that some traditional concepts of "ownership" may need to be construed differently in the case of digital assets. The Law Commission's recommendation is for statutory intervention to confirm and support the existing common law position, that there is a third category of personal property rights under English law for digital assets.
3. Collateral Framework: One of the more technical conclusions of the Report is that a new statutory legal framework is needed in England and Wales to support collateral arrangements for certain types of cryptoasset transactions. While this may sound like a niche point, it is something that is seen as absolutely fundamental to the development of cryptoasset-related financial products under English law.
4. Application of English Trust law: while the Report concludes that there is no presumption that a trust exists in all cases, it confirms that a broad range of custodial intermediated holding arrangements for cryptoassets can be covered by the establishment of a trust arrangement under the law of England and Wales. Again, this is a critical confirmation which will support the application of existing English law finance structures across into this new asset class.
Key Outstanding Issues
While the Report offers valuable insights and is a major step forward, there are also a number of issues highlighted that will require future attention:
1. International Harmonisation: Given the global nature of digital assets, harmonisation and inter-operability of laws across jurisdictions becomes crucial. The Report highlights that establishing international frameworks and standards will facilitate cross-border transactions and provide legal certainty to businesses and individuals operating in different countries.
2. Taxation and Regulation: While the UK is continuing to lead in both areas, digital assets present unique challenges in terms of taxation and regulatory oversight. More guidance will be needed from HMRC and the FCA in these key areas, following the Report.
3. Insolvency and Digital Estate Planning: The conclusion in the Report that digital assets are a form of personal property is welcome, but will need to be considered in the context of intervening legal regimes, such as insolvency or under inheritance law.
4. DeFi and DAOs: there is little discussion of decentralised finance and decentralised autonomous organisations in the Report, as the Law Commission has separately asked for evidence on the legal treatment of DAOs at the end of 2022. The Report confirms the Commission is preparing a follow-up scoping paper for publication.
Conclusion
The Law Commission's Report is a further step towards a clear and certain legal framework for digital assets under English law. It reinforces the existing position established by the English Courts, the UK Joint Legal Taskforce and other policy and legal experts. The proposed areas for statutory reform are seen as important by many digital assets market participants and perhaps underlines the willingness and openness of the UK to these new technologies, while ensuring that standards are maintained and consumers are protected.
