The Law Commission of England and Wales recently announced two updates regarding digital assets – a consultation on the introduction of a new category of personal property, and a call for evidence on private international law issues. These important updates continue the trend of the UK legal system adapting existing rules to cater for nascent technologies, and are addressed in more detail below.
Consultation on draft Bill to recognise a third form of personal property
The Law Commission is consulting (here) on a draft Property (Digital Assets etc) Bill 2024 (the Bill), which, if implemented, would confirm that crypto-tokens and certain other digital assets are capable of being recognised in law as a form of property. This follows on from its June 2023 consultation (see previous blog here), which recommended digital assets be treated as a new third category of personal property. The consultation will close on 22 March 2024.
Background
At present, the common law recognises two forms of personal property: ‘things in possession’ and ‘things in action’. Digital assets do not easily fit within either of these existing categories, and therefore some uncertainty has arisen as to whether digital assets are classed as ‘property’ as a matter of English law.
While numerous recent decisions confirmed that cryptoassets can be treated as property (following the landmark case of AA v Persons Unknown [2019] EWHC 3556 (Comm) in 2019), the Law Commission acknowledges that judicial decisions on this topic are “piecemeal and vulnerable to different judicial approaches in the future.”
The Law Commission therefore recommends the introduction of legislation to confirm that digital assets are capable of being property. To that end, the draft Bill expressly confirms “A thing (including a thing that is digital in nature) is capable of being an object of personal property rights even though it is neither (a) a thing in possession, nor (b) a thing in action.”
Key takeaways
While the Bill (if enacted) will provide welcome certainty that digital property can be considered a form of personal property under English law capable of attracting rights, it does not establish the boundaries of such a category or fixed criteria for determining if property falls within it. Therefore, the Courts will continue to determine whether a particular form of digital asset is capable of attracting property rights, by reference to traditional indicia including (as per National Provincial Bank v Ainsworth [1965] AC 1175) being definable, identifiable by third parties, capable of assumption by third parties, and having some degree of permanence or stability. Regard will also be had to whether the digital asset in question is excludible, rivalrous, separable and valuable.
The consultation paper notes that the concept of “rivalrousness”, as endorsed by the Court of Appeal in Tulip Trading v Van der Laan [2023] EWCA Civ 82 will be helpful in distinguishing between forms of digital assets which can and cannot attract property rights. “Rivalrousness” means the use by one person of that property prejudices the ability of others to use it. The consultation paper also lays out a number of examples of items it considers would not be capable of being considered property, on the basis of a lack of rivalrousness, namely pure information, digital files and records, email accounts and certain in-game assets, and domain names.
Ultimately, therefore, although it is helpful that (if enacted) the Bill would remove scope for any further debate as to whether crypto-assets and other similar digital assets are in principle capable of being property, the draft Bill will not provide certainty as to the boundaries of this new third category of property.
Call for evidence on private international law issues relating to digital assets and electronic trade documents
The Law Commission has also issued a call for evidence (here) seeking views on issues of jurisdiction and governing law arising in relation to disputes in relation to digital assets and electronic trade documents. Responses are invited by 16 May 2024.
Decentralised digital assets and territory-based rules
Digital assets pose a challenge for existing private international law rules in English law. This is because, in the absence of a specific choice by the parties involved, the principles which underpin the assessment of which courts have jurisdiction over a dispute and which laws should apply are typically based on territorial considerations. For example, the location of property, the parties, or an event.
Decentralised digital assets, on the other hand, are typically not linked to any specific location and may be simultaneously connected to multiple – and often unknown or changing – jurisdictions all over the world. This tension with existing territory-based rules can lead to significant uncertainties for parties who use, invest in, or suffer loss relating to, these types of assets.
The Law Commission’s work seeks to complement its existing work on emerging technologies and identifies two priorities:
- identifying which issues relating to digital assets can be accommodated by existing English law rules; and
- classifying the issues in this area according to the extent to which they are prevalent in practice (rather than just theoretical challenges), with a view to classifying all issues as either high, medium, or low priorities for the next stage of the Law Commission’s work.
Flexibility in the existing English law rules
The existing English law rules of private international law have developed flexibly over time to accommodate changes in society and technology. For example, the rules relating to the physical service of court documents now permit service by email, by social media and, more recently, by non-fungible token only (NFT) (see Osbourne v Persons Unknown Category A and others [2023] EWHC 39 (KB)).
The English courts are increasingly being asked to resolve issues raised by assets and events that are entirely digital, and differing approaches have emerged in some of the first instance decisions of the courts. The Law Commission will explore whether existing English law rules could be adapted or reformed, or whether entirely new rules should be considered.
What’s next?
The law in this area continues to develop at pace. The Law Commission’s call for evidence is just one of a number of initiatives underway, including many at an international level, that may impact the way in which digital assets are treated under English law and may impact the resolution of disputes concerning digital assets.
There are many important and complex issues for the Law Commission to consider as part of its current work – but also a wide range of possibilities in this area for the future development of the law – watch this space.