A new ‘thing’ on the block?
For once, I will be fleetingly positive about this country. I know it’s not de rigueur, and I won’t make a habit out of it. But it seems like we are starting to get the long-awaited clarity the country needs in the context of digital assets. Theoretically at least.
I say this following the publication on June 28 of the Law Commission’s recommendations for the reform of the law on digital assets, which is one step closer to realising the government’s well-trodden phrase of becoming a “global crypto hub” in the UK.
As recognised by the Commission, up until this point, the common law and the courts of England & Wales had already been doing relatively well in dealing with digital assets, appearing flexible enough to accommodate such assets as a type of property using existing concepts. This had enabled owners of cryptoassets to benefit from the various remedies the courts could award in respect of property, including enforcement of property rights.
However, there were still elements of uncertainty, often compounded by inconsistency of judicial interpretation, and therefore the Commission was asked by the government to ensure that the law was certain enough to cater for digital assets in a way, which preserved future technological advancements.
The Commission’s recommendations as published are:
- Recommendation 1: The creation, via legislation, of a new type of personal property, to better recognise and protect the unique features of digital assets;
- Recommendation 2: The establishment of a panel of industry and legal experts to provide non-binding guidance to courts on technical and legal issues relating to the control of digital assets; and
- Recommendations 3 and 4: Creation of a bespoke legal framework that better facilitates the entering into, operation and enforcement of collateral arrangements relating to certain tokens and cryptoassets as well as statutory law reform to clarify whether certain digital assets fall within existing regulations for financial collateral arrangements.
For lawyers, Recommendation 1 is quite exciting (a sad state of affairs, I appreciate) because the Law Commission’s proposal will mean there will soon no longer be just two types of ‘thing’ (or for the fancy amongst us, ‘chose’) enshrined in law: a ‘thing in possession’ (e.g. a car) or a ‘thing in action’ (e.g. a debt).
The Commission has proposed a “third category thing” (although I do hope they find a snappier description for it) but has not sought to define what can go into this third category, paving the way for its application to a multitude of ‘digital objects’, as well as non-digital assets such as carbon emissions allowances. Some guidance has been provided, however, indicating what could fall within this category: it should exist independently of persons and the legal system; and should be rivalrous, in that one person’s use of the thing prejudices the use of another person. (Rivalrous! Now we’re talking).
Recommendation 2 is also eminently sensible. A clear industry specific reference guide for courts will encourage a consistency in approach, which is presently lacking. While legal certainty will certainly be welcomed domestically; internationally, the Commission hopes that it could incentivise the use of this jurisdiction in transactions concerning digital assets.
The elephant in the room, however, is that the UK cannot be at the legal forefront of digital assets but lag behind from a regulatory perspective. It was either a happy or intended coincidence that the Financial Services Markets Act 2023 was passed in the same week as the Commission’s Recommendations, which enables the government to point towards regulatory progress. But there is still a long way to go, and the Commission’s recommendations are just that – recommendations.
That’s why my positivity is only fleeting. We’re hearing the right noises, but industry now needs action: the recommendations need to be implemented and the regulatory playbook finalised as quickly as possible. That way this country can capitalise on the uncertainty, complexity and plain hostility displayed in other jurisdictions and maybe then, we can finally achieve the government’s coveted and much repeated Global Crypto Hub moniker.
Charlotte Tregunna, Partner at Peters & Peters LLP