In what has been heralded by many as a landmark legal statement the UK Jurisdiction Taskforce (UKJT) has provided much needed clarity on the legal status of cryptoassets and smart contracts under English law. The UKJT's legal statement (the Statement), made following a public consultation, considered a number of questions in relation to cryptoassets and smart contracts and gave the following opinions:
- Cryptoassets (which the UKJT defined very widely as including both systems using purely notional payment tokens i.e. bitcoins and those which make use of more traditional tangible objects such as shares or units in a fund) can, in principle, be treated as property; and
- Smart contracts can be recognised, interpreted and enforced in accordance with the well-established principles of contract law;
- The statutory "in writing" requirement for some contracts (such as for example the assignment of copyright) are capable of being satisfied by a smart contract.
In essence, the Statement addresses legal uncertainty by recognising cryptoassets as tradeable property and smart contracts as enforceable agreements. Greater clarity and certainty is expected to result in a rise in investment, providing investors' with the confidence to invest. UKJT's consultation paper earlier this year flagged "perceived legal uncertainty" as a key driver in this area.
The Chancellor of the High Court and Chair of the UK Jurisdiction Taskforce, Sir Geoffrey Vos observed that the aim is to provide market confidence and legal certainty in an "area that is critical to the successful development and use of cryptoassets and smart contracts in the global financial services industry and beyond".
Jenifer Swallow, Director- Lawtech Delivery Panel, stated that the global smart contract market anticipates reaching "$300m by 2023 and the World Economic Forum predicts 10% of global GDP will be stored on the blockchain by 2027. It is great to see the adaptability of our common law system to fast-changing technology, demonstrated in this landmark legal statement from the UKJT."
While recognising that it might not be possible to classify cryptoassets within the conventional categories of "things in possession" or "things in action" the UKJT was confident that the common law would construe the definition of property widely so as to adapt to new business practices and specifically pointed to a number of 20th century statutes that defined property much more widely than simply things in possession or action.
The Statement clarified that cryptocurrencies "have all the indicia of property" therefore are to be treated in principle as property. This gives rise to a number of important consequences including that as property cryptoassets can be owned, transferred and assigned and that security can be granted over them.
Cryptoassets demonstrate considerable traction, with the top 100 cryptoassets worth a collective quarter of a trillion dollars. The paper highlights that by making it clear that cryptoassets are property under the English law, this provides investors with a greater understanding of their legal rights when trading in cryptoassets, subsequently anticipating results of greater certainty and investment into the UK market.
The position of smart contract was clarified, providing that such contracts may in principle satisfy the legal requirements of a traditional contract namely that:
- Agreement has, objectively, been reached between the parties as to terms that are sufficiently certain;
- The parties intended (again, objectively) that they would be legally bound by their agreement; and
- Unless the contract is made by deed, each party must give something of benefit (there must be consideration).
The UKJT found that there was no reason in principle why a smart contract could not satisfy these conditions and that a party's contractual obligations may be defined by computer code or in circumstances where "...the code may merely implement an agreement whose meaning is to be found elsewhere".
Smart contracts can therefore be used to create a more secure, efficient way of implementing and automating performance of contracts between parties. This should result in a far more effective method of executing agreements as smart contracts automatically complete transactions and remove the need for third parties or a middleman.
Clarity on the legal standing of cryptoassets and smart contracts should instill businesses with the confidence in developing their transforming financial markets. The Statement therefore provides helpful guidance for parties investing in cryptoassets and entering into smart contracts and should enable better assessment of the legal and practical risks associated with those investments.
It should however be remembered that the UKJT's Statement, while welcome, is not binding and ultimately sets out a number of fairly broad statements for how cryptoassets and smart contracts should be treated at law. It remains to be seen how a Court will deal with many of the issues discussed in the Statement. Moreover, as the authors of the Statement expressly both recognise cryptoassets and smart contracts can take a variety of forms and therefore the application of those broad statements will be fact specific.
The Statement also recognises that in a number of areas (notably the question of what law should apply to questions relating to cryptoassets) the current law may not be fit for purpose and regulatory reform may be required and this is to be considered by the Law Commission.
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