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Freshfields TQ

Technology quotient - the ability of an individual, team or organization to harness the power of technology

| 4 minutes read
Reposted from Freshfields Risk & Compliance

Ownership of digital assets: cryptic proposals?

Are cryptoassets a type of property? This seems like a relatively straightforward question but for something that is very cutting edge, this question takes us back to some longstanding legal principles. The UK Jurisdiction Taskforce published a legal statement in November 2019 which effectively concluded that English law was flexible enough for cryptoassets to be treated as property. We’ve previously published posts on English Court cases which clarified that digital assets can be property in particular circumstances (see our posts here and here, for example).

This question is not one which the Law Commission’s recently published consultation paper seeks to consider under existing law. Instead, the Law Commission is considering changes to the English law definition of property and expanding it to ensure that digital assets can be a type of property. The consultation paper is a very detailed work and considers topics as diverse as information and property rights, digital files and digital records, domain names and carbon emissions trading schemes.

In this post, we consider the Law Commission’s proposal for a third type of property in the context of digital assets.

Current position

English law has traditionally recognised all objects of property rights as falling into one of two categories: a ‘chose (or thing) in action’ or a ‘chose in possession’. This position is long-standing – case law dating back to the 19th century provides that: ‘All personal things are either in possession or action. The law knows no tertium quid [“third thing”] between the two.’

Cryptoassets do not neatly fall into either category and the Law Commission consultation paper sets out a very helpful summary as to the reasons why this is the case, which we do not go into here.

However, the Law Commission is provisionally proposing law reform to remove uncertainty as to whether cryptoassets can be property. That proposed law reform sets out a third category of personal property, which would, according to the Law Commission, enable the law to take a principled, nuanced, and idiosyncratic approach to the legal treatment of new technology.

What is the ‘third category of personal property’?

The proposed third category of personal property is labelled ‘data objects’. This category is intended to be distinct from things in action and things in possession. It is defined by reference to the criteria that a thing must exhibit in order to fall into this third category of personal property.

The Law Commission’s paper sets out that the legal concept of property consists of three principal elements. Those elements are (i) the existence of a thing with particular characteristics; (ii) a person’s liberty to put the thing to various uses; and (iii) the law conferring on that person a legal right to exclude others from the thing. In considering a third category of property, the Law Commission was primarily focused on the first limb: the fact that a particular thing exhibits certain characteristics makes it suitable as an object of property rights.

The Law Commission proposes the following three criteria:

  • be composed of data represented in an electronic medium, e.g. electronic, digital or analogue signals, or in the form of computer code. The Law Commission considers that focusing on data with an informational quality that is represented in an electronic medium is also consistent with the traditional property law requirement that a thing must have some form of definable or identifiable existence;
  • have an independent existence from:
    • persons – this element is intended to include only those things that are properly identified as distinct objects, existing independently from any particular person; and
    • the legal system – this element aims to prevent things in action from satisfying the criteria for the third category of personal property, even if a particular right has become so readily assignable that it is treated, in effect, as if it were an independently existing object; and
  • be rivalrous - broadly, this means that the thing must be something that has a limited capacity for use. A resource is ‘rivalrous’ if the use of the resource by one person prejudices the ability of others to make equivalent use of it at the same time. The Law Commission uses the following example to demonstrate this criterion:
    • ‘rivalrous’ - ‘if Alice uses a Game Boy to play her Pokémon Red game, Bob cannot use the same Game Boy at the same time. Alice’s use of the Game Boy necessarily prejudices Bob’s ability to use it.’
    • ‘non-rivalrous’ – ‘the fact that Alice spends her lunchtime reading the book “Pokémon: The Electric Tale of Pikachu” does not necessarily preclude Bob from reading the same story. Of course, Bob’s copy of the book will be a different physical object to Alice’s copy, and the physical books themselves will be rivalrous objects. But the story itself — the narrative information recorded in both copies of the book — will be the same. That information is not rivalrous — Alice’s consumption of it does not prejudice Bob’s ability to consume it.

This limb is intended to prevent pure information from falling within the third category and, in the Law Commission’s view, upholds English law’s general reluctance to treat pure information as an object of property rights.

Causes of action and remedies

Although an ever-increasing number of cases concerning digital assets are being heard before the English Courts, these cases are typically interim hearings, often on an ex parte basis, meaning the treatment of digital assets has yet to be subject to any significant judicial scrutiny. Notwithstanding this, the Law Commission concludes that: (i) much of the current law of causes of action and remedies can be applied to data objects in the same way as it can with other types of property; and (ii) the courts should, therefore, apply existing legal principles as far as possible, while recognising the nuances or idiosyncrasies of data objects. In this regard, the Law Commission points to the example of English Courts recognising that certain types of cryptoassets and, more recently, non-fungible tokens have been recognised as property for the purposes of injunctive relief. Two possible areas for reform are identified. First, extending the tort of conversion to data objects to afford them the same protection as tangible property. Second, giving courts the discretion to make monetary awards denominated in crypto-tokens.

Conclusion and next steps

Although the consultation paper is a step in the right direction in order to create legal certainty in the use of new technologies, many of the proposed concepts and analogies made are far from clear-cut. The consultation closes on 4 November 2022.

If Alice uses a Game Boy to play her Pokémon Red game, Bob cannot use the same Game Boy at the same time. Alice’s use of the Game Boy necessarily prejudices Bob’s ability to use it.


financial services, fintech, regulatory framework