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Digital pounds, digital property: How the UK’s finance revolution is tokenising the future

Posted on 27 November 2024

The UK Parliament has taken a significant step towards integrating digital assets into the wider legal framework with the introduction of the Property (Digital Assets etc) Bill (Bill), following the Law Commission's publication of a further supplemental report and draft legislation aimed at clarifying the status of digital assets within the traditional categories of personal property earlier this year.

HM Treasury also confirmed on 14 November it will be running a pilot for the issuance of digital gilts, a modern alternative to traditional gilts (government bonds) which promise to facilitate faster settlement times and improved transparency in the issuance and trading of government debt. The Bill, which had its second reading in Grand Committee in the House of Lords on 6 November, aims to allow for the recognition of digital assets including cryptocurrencies, non-fungible tokens (NFTs) and potentially digital gilts, at law. The Bill and proposed introduction of digital gilts form part of a broader effort to modernise UK laws to account for and capitalise on opportunities relating to digital and blockchain-based assets.

Key features of the Bill

The UK Government factsheet published on 6 November sets out the key aims of the Bill:

  • Legal certainty: currently only two categories of personal property exist: "things in possession" (for example, money, artworks or jewellery) and "things in action" (for example, debts or shares). The Bill aims to allow for more flexibility in the definition of personal property meaning "things" which do not fit within these two categories, including but not specifically limited to certain digital assets, may also be recognised as personal property under the common law.
  • Enhanced protection: the Bill offers digital asset owners increased legal protection against fraud and scams, ensuring their digital holdings are safeguarded. Recognition of property rights in digital assets means claimants will have a better chance of recovering misappropriated digital assets and connected funds.
  • Economic impact: the UK Government hopes that the Bill will ensure the jurisdiction of English law remains an attractive jurisdiction to those wishing to deal with and litigate in respect of digital assets and other "third category" things. It also aims to reduce the costs and court time of litigation involving such assets.

Judicial assistance

Judges will be aided in resolving complex disputes involving digital assets, including in divorce settlements by the UK Jurisdiction Taskforce (UKJT), an expert group chaired by the Master of the Rolls that produces non-binding guidance on areas of legal uncertainty. This advice will help judges build on the pragmatic approach towards property rights in digital assets already adopted by UK courts in recent years in cases such as AA v Persons Unknown, Re Bitcoin [2019] EWHC 3556 (Comm) and Ion Science Ltd v Persons Unknown (unreported), 21 December 2020 (Commercial Court) and in the September 2024 High Court decision in D’Aloia v Persons Unknown and Ors [2024] EWHC 2342 (Ch), which reaffirmed the courts' position that cryptocurrencies are indeed property.

What are digital gilts?

Digital gilts are tokenised government bonds issued on a blockchain leveraging Distributed Ledger Technology (DLT). Whereas traditional bonds require multiple intermediaries to manage settlement, leveraging blockchain technology will allow for a real-time, immutable record of all gilt transactions mitigating settlement issues, enhancing transparency and reducing the risk of market manipulation. Reductions in counterparty risk also reduces the overall cost of borrowing for governments. A key application of blockchain technology in capital markets is in repurchase agreements (repos), contracts to sell securities, typically government bonds and repurchase them shortly afterwards at a slightly higher price.

The UK is not the first to introduce digital gilts with Slovenia and several Swiss cantons, as well as Thailand and the Philippines in Asia, having already done so.

Digital gilt roadmap

Industry trade body UK Finance, which in conjunction with accountancy firm EY published a digital gilt roadmap for the UK to coincide with the announcement of the digital gilts pilot, believes that with the digital gilt program “the UK can lay the groundwork for a robust and innovative digital capital market ecosystem, bolstering its position as a global leader in financial technology and digital finance.” The roadmap sets out two possible approaches: a slower phased introduction and a more immediate approach allowing both the trading of gilts and repos on the blockchain in a shorter timeframe.

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