Insights / News
Insights / News
The Law Commission’s ‘Digital Assets: Consultation Paper’ is a masterful discussion of many key issues relating to digital assets. It comprises over 500 pages of legal analysis along with 47 questions for which the Law Commission has opened a period of consultation ending on 4 November 2022. It is also ideally timed – whilst the Law Commission’s proposals are only provisional (pending consultation), interest in, and disputes concerning, digital assets show no signs of abating. As practitioners continue to see an ever-increasing fallout from the so-called “crypto winter”, alongside gathering momentum on crypto-related fraud, margin call and mis-selling claims, much of the Law Commission’s analysis will prove to be of invaluable assistance in advising clients more confidently of their legal position.
To assist those who may not have days or even weeks to read and consider the Paper, in this article Justina and Joshua identify the seven key themes that can be distilled from its contents.
Please click here to view the full article, but a summary of these themes, and some of the key provisional proposals and conclusions, is provided below:
|Theme||Key provisional proposals and conclusions|
|A new category of personal property called ‘data objects’||There should be explicit recognition of a new, third category of personal property called “data objects” that is distinct from things in possession and things in action. Certain criteria that a thing must satisfy to fall within the new category are proposed. The Paper also uses the terminology of “crypto-token” and “cryptoasset”, notably in a different way to which those terms have been used elsewhere in the field of digital assets. The former is used to refer, loosely speaking, to the “on chain” component of a digital asset, and the latter to a composite of a crypto-token and any associated or linked property or other legal rights that are recognised in law as existing as a consequence of having legal rights in relation that crypto-token.|
|‘Control’ rather than ‘possession’||The factual concept of control rather than possession best describes the relationship between data objects and persons. Certain criteria for when a person has control over a data object are proposed. As the rest of the Paper makes clear, the concept of control provides the foundational concept for governing the original acquisition of property rights, transfers, custody or custody-like arrangements, collateral arrangements, causes of action and associated legal remedies for unlawful interference, and the location of a data object for conflict of laws purposes.|
|Transfer of crypto-tokens||Relevant to this theme (and others) is the concept of a “state change” to the ledger or record of a crypto-token system. The rules of derivative transfer can be applied to the transfer of crypto-tokens by a transfer operation that effects a state change, subject to the provisos that, in general, a transferor can confer no better title to a transferee than they are able to give and that the transfer must be legally valid in terms of the common law and equitable rules governing derivative transfers of title. There should be explicit clarification that the special defence of good faith purchaser for value without notice applies to crypto-token transactions at both common law and in equity. The law should be clarified by way of common law development, rather than legislation, to confirm that a transfer operation that effects a state change is a necessary (but not sufficient condition) for a legal transfer of a crypto-token.|
|Linking a crypto-token to something else||No law reform is necessary or desirable to clarify or specify the method of constituting a link between a crypto-token and a linked thing or the legal effects of such a link.|
|Custody and custody-like arrangements||Crypto-token custody arrangements can be characterised and structured as trusts and no law reform is required to clarify the legal position in relation to certainty of subject matter requirements for creating a valid trust over comingled, unallocated holdings of crypto-tokens. There should be law reform in relation to s.53(1)(c) of the Law of Property Act 1925, as well as new legislation allowing for a general pro rata shortfall allocation rule in respect of commingled unallocated holdings of crypto-tokens or crypto-token entitlements in a custodian insolvency. Extending bailment to crypto-tokens is not currently necessary.|
|Collateral arrangements||Crypto-tokens can be the subject of title transfer collateral arrangements, and non-possessory securities can be granted, without the need for specific reform. It is undesirable to make provision for data objects to be the subject of possessory securities. The FCARs should not be extended to encompass crypto-token collateral arrangements more formally. It would be beneficial to implement law reform to establish a legal framework that better facilitates the entering into, operation, rapid, priority enforcement and/or resolution of crypto-token collateral arrangements.|
|Causes of action and remedies||An action to enforce an obligation to pay non-monetary units such as crypto-tokens would and should be characterised as a claim for unliquidated damages unless and until crypto-tokens are generally considered to be money (or analogous thereto). However, there is an arguable case for law reform to provide courts with the discretion to award a remedy denominated in crypto-tokens in appropriate cases. Tracing rather than following provides the correct analysis of the process to be applied to locate and identify property following transfers of crypto-tokens. There are arguments in favour of extending the tort of conversion to data objects, subject to the introduction of a special defence of good faith purchase for value without notice.|
Justina Stewart’s practice encompasses the full range of commercial litigation, with a particular emphasis on banking and financial services, civil fraud, insolvency and international arbitration. She is ranked as a Leading Junior in Chambers UK Bar, Chambers Global, Legal 500 and Legal 500 Middle East. Legal directory quotes include “phenomenally bright”, “brilliant for banking litigation”, “great to use on difficult insolvency claims”, “a highly intelligent and tenacious litigator”, “far more financially literate than most barristers”, and “a phenomenal addition to any team when you have claims against banks” and with “outstanding legal acumen”. She has particular expertise in digital assets, being a senior member of a team working on law reform concerning digital assets and smart contracts, having been instructed as sole counsel in a significant crypto-fraud trial and having advised on insolvency and regulatory crypto-related matters. She is currently working on several significant crypto-related group actions. She is appointed to the Attorney General’s Panel of Junior Counsel to the Crown, is DIFC Part II registered and is a contributor to the forthcoming edition of Gough on Company Charges.
Joshua Cainer has a broad civil practice which covers commercial law, pensions law, public and regulatory law, employment law and private international law, as well as being a member of the Attorney General’s Junior Junior Scheme. Clients have acknowledged him as having a “deep understanding and knowledge of very technical areas in law” and have described his client care, drafting, advocacy and knowledge as “above and beyond his call”. Joshua has a keen interest in the field of law and emerging technologies and has previously written and spoken on a number of legal issues in relation to cryptoassets, including as a guest contributor to the Tech Disputes Network’s ‘Need To Know Basis’ podcast for an episode on cryptoassets and conflict of laws. He also has particular experience in this field, having been instructed as part of a team working on a wide-ranging advisory law reform project concerning digital assets and smart contracts.