UK: Are Cryptoassets Property Under English Law?

Last Updated: 23 July 2019
Article by Ferdisha Snagg

Co-authored by Anne Lim

In May 2019, the UK Jurisdiction Taskforce (the "UKJT") of the LawTech Delivery Panel published its public consultation paper on the status of cryptoassets and distributed ledger technology, as well as the enforceability of smart contracts, under English private law. While much of the literature around cryptoassets in the legal context has been centred on their regulation, the UKJT's consultation paper focuses on the legal characterization of these instruments themselves. In this article, we consider how cryptoassets can be defined using the existing vocabulary of English private law and the implications of this characterization.

There is still no single agreed definition of cryptoassets. The consultation adopts a broad definition of the term as being "often used to describe something which is, or of which at least a component is, represented by certain data (often, although not necessarily, recorded on a distributed ledger) which, by virtue of the design of a broader system, can only be updated upon the satisfaction of specific conditions."

Under what circumstances would a cryptoasset be characterized as personal property?

This question is fundamental to realizing both the inherent nature and the developing potential of cryptoassets as a means of acquiring, holding and trading international securities. Characterizing a cryptoasset as personal property allows the law to recognize the legal rights of investors in this increasingly valuable asset class.

English personal property law developed in circumstances very different from today's digital age, but has proved itself capable of innovation in the service of commercial practice. Taking that as the starting point, a close examination of cryptoassets reveals a striking resemblance with traditional types of personal property. In particular, "security tokens"1 "capture" the obligations of the issuer under a security; the token is a means of recording and transferring title to the securities. The traditional analogue is the bearer security, which is a type of "documentary intangible" – which means that, by legal fiction, the instrument is deemed to constitute and not merely evidence the debt of the issuer.2

"Exchange tokens"3 differ from security tokens and bearer securities because they do not represent or constitute financial claims against an issuer. However, they also share functional similarities with recognized types of bearer instruments – for example, they can be lost for all practical purposes.

Let's alight on the concept of the "documentary intangible":

"Documentary intangibles are instruments or documents that are so much identified with the obligation embodied in them that the appropriate way to perform or transfer the obligation is through the medium of the document. The abstract intangible right acquires such a degree of concretized expression that it takes on some of the characteristics of a chattel. The document recording the right is itself a tangible thing and thus a chattel, and the right is thoroughly fused with the document".4

Documentary intangibles benefit from the principle of negotiability, which gives them a privileged status over and above other types of personal property. It is possible to acquire good title to a negotiable instrument from a thief!5 This is the feature that allows transactions in bearer securities to take place without the legal uncertainty that might otherwise arise. Indeed, whilst the current ways in which international securities are transferred have significantly reduced the operational risk associated with the settlement of securities transactions, with electronic transfers across the books and records of regulated custodians replacing movements of paper, thereby increasing liquidity in capital markets, they are inferior from a legal certainty standpoint to dealing in negotiable paper instruments6. The documentary intangible/negotiable instrument thesis for analyzing cryptoassets would seem to allow us to have the best of the worlds of digitization and negotiability.

An understandable reaction to the documentary intangible/negotiable instrument analysis is to observe that cryptoassets are not documents or even necessarily evidenced by documentation! However, "documentary intangible" and "negotiable instrument" are not concepts that are "fixed" or "stereoptyped"7 (in other words, the concepts can be expanded to accommodate new types of assets if that accords with the practice of market participants). Therefore, even without legislation, commercial custom may also come to demand that at least some types of cryptoassets be negotiable8, which would make them a powerful tool for the international capital markets.

If the documentary intangible/negotiable instrument analogy is not considered the appropriate model for analyzing cryptoassets, rest assured that English law recognizes other means of conferring title to intangible assets that could be applied. For instance the UKJT paper asks whether a distributed ledger could be a register of title (like the CREST system operated by Euroclear UK & Ireland for the settlement of UK shares). For the reasons explained above, amongst others, negotiable instrument status is preferable but the registration model is conceivable too.

Ultimately, it should depend on what the market wants.

Implications

Characterizing cryptoassets as personal property has wide-reaching implications on how they can be owned, used and transferred. By refusing to make too much of the formal differences between cryptoassets and traditional asset classes and grounding the analysis of cryptoassets within the established doctrines of English private property law, the secondary questions of how they function, and a starting point for how they should be regulated, fall into place intuitively. For example, the means of transfer of title (arguably, by delivery9), whether security can be validly granted over them (yes), how they are to be treated for the purposes of the Insolvency Act 1986 (as "property" within the meaning of section 436), whether they are "goods" under the Sale of Goods Act 1979 (no because, arguably, they are "things in action"10) and whether they are "transferrable securities" (we may first need to reconsider the current regulatory framework for securities settlement) become more straightforward.

The conclusion that can be drawn from this is that the established concepts within English property law already present a robust and viable structure for the classification of cryptoassets. Even if we do have to expand our current understanding of traditional concepts, we may not need to reinvent the wheel. The focus can instead be shifted to developing a suitable regulatory framework to mitigate the risks of dealing in cryptoassets.

Going forward

The UKJT plans to publish its conclusions in the late summer of 2019 which should provide greater legal clarity and investor confidence. Cryptoassets are only in their infancy, but answering the questions the UKJT's consultation asks will help us pin down what they fundamentally are, and shape the discourse of the how going forward in what promises to be an ever-changing space.

Footnotes

[1] The Financial Conduct Authority ("FCA") identifies as "security tokens" cryptoassets whose characteristics means that they constitute shares, debt or other types of regulated investments (see FCA CP19/3 on "Guidance on Cryptoassets", available at https://www.fca.org.uk/publication/consultation/cp19-03.pdf).

[2] J. Benjamin, Interests in Securities (Oxford, Oxford University Press, 2000) 2.05.

[3] The FCA classifies cryptoassets that are not issued or backed by any central authority and are intended and designed to be used as a means of exchange as "exchange tokens" (FCA CP19/3). Bitcoin is a commonly cited example of an exchange token under this taxonomy.

[4] M. Bridge, Personal Property Law 3rd edn (Oxford, Oxford University Press, 2002) p.18 (emphasis added).

[5] A bona fide holder of a negotiable instrument takes free from any defect in title of predecessors.

[6] See Financial Markets Law Committee, "Analysis of the need for and nature of legislation relating to property interests in indirectly held investments securities, with a statement of principles for an investment securities statute", July 2004, pg 13, available at http://www.fmlc.org/uploads/2/6/5/8/26584807/3b.pdf.

[7] See Goodwin v Robarts (1875) LR 10 Exch 337, per Cockburn CJ holding that mercantile custom was to be adopted by common law as it evolved.

[8] S. Green & F. Snagg, "Intermediated Securities and Distributed Ledger Technology", in L. Gullifer and JH. Payne (eds.), Intermediation and Beyond (Oxford, Hart, 2019), p. 348.

[9] If they are negotiable instruments.

[10] Section 61(1) of the Sale of Goods Act 1979: ""goods" includes all personal chattels other than things in action and money, and in Scotland all corporeal moveables except money...". The category of "things in action" for these purposes is thought to include shares and other securities, debts, bills of exchange and other negotiable instruments. We therefore argue that cryptoassets are things in action.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions