The Law Commission's approach to digital assets as property: the devil is in the detail

Due to the way the Bill has been drafted, it risks going further than its stated aim. It reaches for a conclusion about how crypto-tokens and similar digital assets should be categorised under the common law and potentially prevents or inhibits the courts of England and Wales from determining that they may be properly characterised as "things in action" under a wide, inclusive and expansive interpretative approach to that class of personal property. A middle ground would be to amend the drafting of clause 1 as follows:

"A thing (including a thing that is digital in nature) is capable of being an the object of personal property rights even though it is neither –

a.  a thing in capable of possession, nor

b.  a thing in action right that may only be claimed or enforced by legal action or proceedings against another person or persons."

This would achieve the desired purpose of the Law Commission (i.e. to clarify that a thing may be the object of personal property rights, even though – to use the language of the consultation accompanying the Bill – it is not a thing in action "in the narrow sense"), while avoiding "forcing the hand" of the courts of England and Wales to interpret "things in action" narrowly so that digital assets can only be characterised as falling within the Bill's new "third category" of personal property.

By creating a third category of personal property for crypto-tokens and similar digital assets, the Bill (if enacted in the form proposed by the Law Commission) would represent a potentially decisive step in encouraging the common law development of title, perfection, priority, innocent acquirer and other proprietary rules for such digital assets. That is vitally important – it is those rules that support the proper functioning of the financial and other markets. For intangible assets today, there are existing rules of English law and equity for "things in action" which are certain, well-founded and produce predictable effects for participants in the UK's financial and other markets, which in turn underpins confidence in those markets.

However, as identified in (1) above, the current drafting of the Bill could have the unintended effect of forcing digital assets to fall within the Bill's new "third category" of personal property for which there are (currently) no similar rules of English law and equity. In addition, even when such rules do begin to take shape, they may develop in a way that does not align with the corresponding rules applicable to "things in action" (or sub-categories of "things in action"), which are familiar to participants in the UK's financial and other markets and benefit from a wealth of prior consideration and analysis by those participants (and their legal advisers). This means that there will be a (potentially material and unnecessary) period of legal uncertainty while the courts develop the relevant common law proprietary rules to support this new category of personal property as applying to crypto-tokens and similar digital assets.

One of the advantages of leaving the courts of England and Wales to develop a wide interpretative approach to the category of "things in action" to include crypto-tokens and similar digital assets is that, once the courts have done so, the industry would have immediate (much greater) certainty as to the likely rules that would apply to digital assets – they can look to the existing proprietary rules (or an incremental development of such rules) that apply today to "things in action" (or relevant sub-categories of "things in action"). Our suggested amendments to clause 1 of the Bill would also help to ensure this remains a possibility.

Building upon the pitfall we identified in (2) above, as the courts look to develop the common law applicable to any new, third category of personal property founded upon the provisions of the Bill, they are likely to find the Law Commission's earlier work and analysis, which culminated in the Bill, highly influential. In particular, in its final report, the Law Commission proposed a concept of factual "control" as the foundation to determine title and related issues affecting crypto-tokens and similar digital assets.

Although the premise of "control" as the foundation of legal ownership of a crypto-token or similar digital asset makes sense, the Law Commission goes on to take inspiration from concepts found in the law of possession as applicable to tangible assets. Some of these ideas would, in our view, create material legal uncertainty for the holding and transfer of crypto-tokens and similar digital assets. They may create significant "traps for the unwary" who deal in or with such digital assets, and be problematic for the digital assets industry and the viability of digital assets for use in the financial sector.

More fundamentally, the Law Commission's ideas essentially introduce relative legal title (i.e. different levels of "legal" title, in addition to any equitable title) into the world of digital assets and other "third category things". While such a concept of legal title is appropriate to deal with issues arising in relation to tangible assets, there is no sound policy basis for its inclusion and application to crypto-tokens and other intangible assets. Its development for such assets is, in our view, unnecessary, unhelpful and likely to introduce real risks and uncertainty to the use of digital assets in our financial and other markets.

As outlined above, the concept of a "thing in action" is flexible, dynamic and potentially open-ended. The Law Commission's short consultation, its final report and its earlier work all recognise that the exact scope of a "thing in action" is uncertain as a matter of the current common law. However, clause 1 of the Bill nonetheless uses the term "thing in action" without definition as a core element in defining (by exclusion) the potential scope of the new "third category" of personal property.

This inevitably introduces (on the face of the Bill) a material element of interpretative uncertainty into an instrument which is intended to remove any residual legal uncertainty as to the eligibility of crypto-tokens and similar digital assets to qualify as personal property under the laws of England and Wales. Again, our suggested amendments to clause 1 of the Bill seek to address this issue.

Finally, as outlined above, the likely intention and effect of clause 1 of the Bill is to require the courts of England and Wales to categorise crypto-tokens and similar digital assets as being outside the category of "things in action".

This raises retroactivity concerns: if a charge-taker has taken a charge over a borrower's "things in action", reasonably concluding that (as a matter of existing English law) "things in action" exhaustively cover all of the borrower's intangible personal property (including the borrower's crypto-tokens and other digital assets), then the Bill (if given retroactive effect) would effectively remove digital assets from the scope of the relevant charge. This result could fundamentally change the risk profile associated with the arrangements between the charge-taker and the borrower.

The courts, then, with regard to such potential "unfair" impacts, would be likely to apply the principle against retroactivity and interpret the Bill as only applying in relation to digital assets (or interests in relation to digital assets) that were "created" after the Bill came into force.

This result would have the opposite effect of the stated intention of the Bill: rather than introducing a single, uniform and clear taxonomy determining how crypto-tokens and other digital assets are to be characterised as a matter of the English law of personal property, it would create "tiers" of personal property rights, interests and duties in relation to digital assets. This would raise material legal uncertainty and potentially introduce a number of difficult practical issues for the application of proprietary rules in relation to digital assets.