Monday, February 10, 2025
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The Law Commission of England and Wales has published new proposals to reform the law relating to digital assets – including crypto-assets and NFTs.

Elliptic’s Mark Aruliah asks CMS London digital asset lawyer Matthew Nyman for his initial thoughts on the consultation and what it means for the UK crypto industry more generally.

Matthew Nyman

This consultation on digital assets by the Law Commission is a significant undertaking. It examines many of the fundamental questions that my colleagues and I wrestle with every day. The consultation – along with the Law Commission’s response due later – is likely to serve as a legal textbook for a long time to come. And in the last few years, we’ve only had a few pages of semi-official guidance and a handful of cursory court decisions to fall back on.

Ten years after the release of Bitcoin, we had no authoritative legal guidelines or precedent. In 2019, a legal statement from the UK Jurisdiction Task Force (UKJT) concluded that crypto-tokens – as the Law Commission now calls them – can be considered property.

He also began to explore a number of issues surrounding how these assets could be traded. Since then, several High Court decisions have recognized crypto-tokens as property, but those decisions do not have much precedential value and did not explore any other issue.

Progression

So this consultation will move the law far forward. I believe that if the legal profession plays its part, this consultation and the work that follows will make the UK a more attractive place for innovation in digital business. And this will be the case even if the reform proposals are not adopted by the Government.

The main proposal for reform is to recognize a third category of assets for what the consultation calls “digital objects” – including crypto-tokens. Although this is somewhat esoteric, it is very significant. For a long time there have been only two categories – ie. essentially physical things and legal rights – so the need for a third indicates a paradigm shift in economic activity brought about by digital assets.

It is also significant that the consultation identified many new aspects of commercial activities related to digital objects that can be incorporated into the law without reform. Because the digital assets sector is still relatively small and young, many of these common activities – such as custody and collateral – are not brought before the courts. But the consultation will now provide a common basis for lawyers and companies to mutually agree on many of these issues.

UK regulations implicitly assumed that crypto-tokens were property – because why else would people trade them – which is helpful. But it missed the fundamental gaps that the consultation addressed. Crypto exchanges and custodians must be registered with the Financial Conduct Authority (FCA), but how do we know when a crypto-token has been exchanged and who has the right to exchange it? And what does guardianship even mean for a thing that disappears and is re-created when it is passed on?

Addressing regulatory gaps

The consultation shows how these gaps can be filled, which in turn will hopefully facilitate better regulation in the future. While there are many regulatory issues that need to be addressed, the development of legislation is also necessary to give consumers and businesses the confidence to participate in digital innovation. This innovation and confidence is the ultimate benefit that consulting aims at.

The flip side of all this is that the consultation identifies areas of deep legal uncertainty and complexity that everyone involved in the digital assets industry must face. So you still need to use a lawyer! The consultation may also disappoint some idealists who hoped that crypto and web3 would create a parallel universe where “code is law”.

To paraphrase the Law Commission, this consultation categorically explains that the code is a fact. In other words, legally there is only one universe, and the law decides who owns which Bitcoin after the code has been run.

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