Developments in the field of digital assets are moving at an ever greater rate, and the English legal system continues to adapt and demonstrate its recognition of the importance and status of digital assets. In a recent article, we wrote about how, in an English legal first, the High Court permitted service by non-fungible token (NFT), revealing its willingness to use innovative methods to bring crypto fraudsters to justice. On 28th July 2022, the Law Commission also published a consultation paper proposing changes to the law to ensure improved legal recognition and protection of digital assets, including crypto-tokens and crypto-assets. In another notable development, The Right Hon. Sir Geoffrey Vos, Master of the Rolls, delivered a keynote speech at the Bank of England's Digital Assets Symposium entitled 'The economic value of English law in relation to DLT and digital assets'. In this speech, he proposed six requirements for a robust legal foundation necessary for distributed ledger technology (DLT) and crypto assets.

In this article, we will review the recommendations of the Law Commission and those of Sir Geoffrey Vos to make the legal system better equipped to adjust to litigants' needs when it comes to digital assets.

What is the Law Commission trying to address?

The Law Commission is trying to better address the inconsistent way in which digital assets are treated within the law and is largely concerned with reforming the legal principles of private property. It is not concerned with regulatory reform; rather, it aims to provide a "legally certain environment" which is compatible with the growth of digital assets.

As the report states, "Property rights are vital to our social, economic and legal systems" and argues that the current legal framework in England and Wales does not neatly bring together the concepts of digital assets and personal property and that this weakens legal protections for users and holders of digital assets. The paper explains, "this is partly because of difficulties in translating property rights onto things that are information-based, easily shareable and open or available to all".

The report also makes it clear that the law is not naïve to digital assets and already recognises that they can be objects of property rights. The issue is that the law does not cater for the subtleties and nuances of this type of property; "This consultation paper argues that it is now appropriate for private law to acknowledge those idiosyncratic features so that it can provide a strong, principled and conceptually-sound foundation, grounded in personal property rights, from which to develop a coherent legal framework".

What is the Law Commission recommending?

The Law Commission is recommending the addition of 'data objects' as a new third category of personal property in addition to the existing concepts of things in possession (i.e. physical objects) and things in action (i.e. contractual rights). It acknowledges that neither of these legal concepts accommodates digital assets comfortably. To fall within the newly proposed definition of data objects as property, the Law Commission recommends that certain criteria should be met; specifically, it must:

  • be composed of data represented in an electronic medium – the Law Commission is ensuring that all current and future forms of digital assets can be catered for. As the report states, these can include computer code and electronic, digital or analogue signals.
  • exist independently of persons and of the legal system – in other words, they must exist within the blockchain or other technology framework on which they are based.
  • be rivalrous – this is not the same as being 'non-fungible' or unique rather, it means that data objects should not be capable of being used simultaneously by another person (i.e. 'double spend')

Master of the Rolls legal recommendations for digital ledger technology

In his speech at the Digital Assets Symposium, the Master of the Rolls, Sir Geoffrey Vos, recommended that a "legal system aspiring to provide the foundation for DLT and cryptoassets needs to provide":

  1. Legal certainty – As Sir Geoffrey explains, the Law Commission's consultation paper will go a long way to providing greater legal certainty in terms of private property rights for digital assets, as covered above.
  2. A dispute resolution process that takes account of the circumstances in which transactions are effected on-chain using digital payment mechanisms
  3. Procedural ability for a legal system to deal with disputes arising from digital transactions
  4. A private law backdrop allowing the issue and transfer of securities via DLT
  5. Industrial and government familiarity with smart contract use cases; and
  6. An appropriate regulatory environment.

Final words

Whilst the English Courts have swiftly adapted to the ever-increasingly complicated challenges concerning digital assets, the ongoing consultation by the Law Commission and the insightful recommendations by Sir Geoffrey Vos demonstrate the depth of thinking that is now going into modernising the legal system in England and Wales to ensure it keeps its reputation as the pre-eminent jurisdiction in the digital age. As these recommendations are realised, and further progress is made in this area, the English legal system will ultimately become increasingly adaptable and capable of responding to the evolution of digital assets.

Originally published 15 August 2022

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