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The Law Commission of England and Wales (the Commission) has now published its Digital Assets: Final Report. It covers many areas related to the crypto market in general, but also addresses the nuanced, complex areas of cryptoassets – as defined in the report – and their relationship with the legal framework currently in place.
First, the report concludes that the law on personal property rights in relation to cryptoassets is now sufficiently clear. However, he admits that there are still some areas that need to be addressed, due to the ever-evolving nature of cryptoassets.
Proposals
The reforms proposed in the report aim to adapt the specific characteristics of each type of property. Such proposals are also framed in such a way that “strengthen the overall strength of the digital asset ecosystem“.
The tone adopted by the Commission and the content of the report suggest that its view is that the Government should not revise the existing legislative framework. Rather, it should build on the developments already witnessed to achieve the government’s oft-stated goal of the UK becoming a global crypto hub.
The report adopts a comprehensive, three-pronged approach:
1. Prioritize the development of common law
The report makes a lot of praise for the hard work of the judiciary to establish various principles – with which the report agrees – within the existing legislative framework in respect of traditional financial principles and property rights. The report supports the steady approach adopted by the courts by showing that the laws of England and Wales are (to some extent) flexible enough when it comes to the significant challenge of adapting to the evolving characteristics of cryptocurrency disputes and litigation.
2. Aim for the reform of statutory law
The recommendations in the report are intended to support and build on existing developments in the common law and to confirm the common law principles already established. Nevertheless, the report recommends the establishment of a special legal framework that better and more clearly facilitates the conclusion, operation and enforcement of cryptotoken and cryptoasset collateral arrangements.
3. Support from industry-specific technical experts
As technologies become more advanced and complex, expertise will be needed to ensure that the law is able to accommodate the technology behind cryptoassets. The report suggests this is something the government cannot be blind to.
The third category of property
The report also proposes the establishment of a third category of property (things) to which personal property rights may apply. This approach is supported by senior judges and specialist judges, and the report suggests that there are no hard-and-fast definitional boundaries within the legislation, as it is better for the common law to determine what property these rights apply to. The report, however, suggests that this type of thing must meet certain criteria:
- It consists of data presented in an electronic medium, including in the form of computer code or electronic, digital or analog signals.
- It exists independently of both the person and the legal system.
- It is rivalrous – meaning that its consumption by one consumer prevents simultaneous consumption by other consumers, or that consumption by one party reduces the ability of another party to consume it.
Concepts of factual and legal control are also covered in detail. In short, factual control is the real-world implication of how an asset is controlled, which will often be based on the technologies behind the asset: how it is created, how it is distributed and how it is stored; to name just a few examples.
Legal control and its consequences differ when applied to factual control. As legal concepts are already established for control – such as legal transfers and intermediary holding arrangements, to name two examples – this is not subject to further definition in the report. And since a definition of this third type of property is not provided, the full recommendations for reform regarding the special defense of a bona fide purchaser for value without prior notice – which applies to crypto-tokens – are, in the Commission’s view, best developed through incremental development at the common-law level. rights.
The report also outlines various other nuanced legal areas and principles of crypto-asset activity that require consideration – and provides accompanying recommendations. It is therefore clear that the Commission is aware of the complexities associated with such assets.
While crypto-based assets and technologies have the potential to greatly benefit those who adopt them, the report makes clear that any (proposed) legal framework must take this into account and be sufficiently crafted and conceptualized to accommodate such complexities.
The main conclusion of the report is that the government should prioritize the establishment of a multidisciplinary project to formulate a tailor-made legislative framework that better and more clearly facilitates “conclusion, operation and implementation of (certain) crypto-tokens and (certain) crypto-asset collateral arrangements“.
In summary, the report recommends that:
- The fact that a “thing” is neither a thing in deed nor a thing in possession should not in itself prevent such a thing from attracting personal property rights.
- The Government should establish a multidisciplinary panel of experts to provide non-binding guidance on the complex and evolving issues relating to control.
- Legislative changes are needed to clarify under which arrangements cryptoassets and tokens can meet the definition of cash. Amendments are also needed to confirm whether the characterization of the asset, in itself, meets the definition of a financial instrument or whether such an arrangement will remain unchanged due to the nature of the asset based on crypto/distributed ledger technology.
- The government is prioritizing the establishment of an advisory project that would help establish a tailor-made legal framework.
Conclusion
Much praise is likely to be given to the Commission’s comprehensive approach to addressing the many involved aspects of digital assets that fall outside the existing legislative framework. Historically, much criticism has been leveled at the government and the authorities regarding their approach to reforms in this area.
It said there was a failure to grapple with – or even fully grasp – the practical issues associated with cryptoassets and their accompanying technologies. This report is very much a step in the right direction in addressing these issues.
However, it could be argued that this is something of a soft touch approach being presented. Although the report clearly states that there is a need to establish a separate legislative framework, in fact it says that power should rest with the judiciary when it comes to developing the all-important regulatory environment.
Therefore, it should be emphasized that the judiciary is limited in its ability to do so, given that it can only decide on cases that are before the court. This could potentially leave some of the concerns highlighted in the report unaddressed.
It is now up to the Government to consider the content and recommendations of the report. Time will tell exactly what measures the government will take and how closely it will follow the report’s recommendations.
Syed Rahman
Partner, Rahman Ravelli
Click here to learn more about Rahman Ravelli’s work in the crypto space.
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