The Law Commission of England and Wales (the "Commission") launched a consultation paper (the "Consultation") in July this year regarding the recognition and protection of digital assets. The Consultation, which remains open until 4 November 2022, recommends the introduction of a new category of personal property, in addition to the two existing categories currently recognised under English law.
Digital assets are used for myriad reasons, including for transactions (as a means of payment) and are also held as appreciating assets. Technologies such as cryptography, smart contracts and distributed ledgers have further revolutionised how digital assets can be used in the modern world.
The Consultation considers traditional principles of private property law in England and Wales and suggests the development of a comprehensive framework surrounding digital assets with the introduction of a distinct third category of personal property called data objects.
At present, English law recognises two categories of personal property: things in possession and things in action. Things in possession refer to "tangible, movable and visible" objects capable of possession e.g., a bag of gold. Things in action, or legal rights, are also considered a residual class of personal property, as this category tends to capture all personal property that is not a thing in possession; common examples being debts or shares in a company. Things in action do not have an independent existence and exist only insofar as they are recognised by a legal system. To date, English law has assumed that all objects of property rights fall within one of these two established categories, and digital assets do not fit neatly into either one.
The Consultation considers features that a thing must possess before it can be the legal object of property rights and applies these to digital assets, explaining how digital assets possess these characteristics. The starting point when considering whether an object attracts property rights (or not) is Lord Wilberforce's criteria that he sets out in his judgment in National Provincial Bank v Ainsworth [1965] AC 1175 in the context of differentiating between a personal right against an individual and a property right which can be asserted against the world at large. Lord Wilberforce suggested four characteristics before a right of interest can be admitted into the category of property. He stated it must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability.
The Ainsworth criteria is a helpful starting point but not conclusive in determining the existence of property rights, and the Consultation considers that a key feature of an object attracting property rights lies in how it is controlled rather than enjoyed. In many cases, control of digital assets is determined by control over cryptographic keys.
Critically, the Consultation lists out three criteria that an object must possess before it can fall within this new third category of personal property rights and be classified as a data object. The Consultation then applies the said criteria to different types of digital assets like domain names and crypto-tokens.
The Criteria
- The object must be composed of data represented in an electronic medium included in the form of computer code, electronic or digital or analogue settings – this criterion distinguishes digital assets from things in possession, which, being tangible objects, are incapable of being processed by a computer or have existence in the form of computer code. This criterion also acknowledges that an important aspect of data objects is that they have an informational quality and are represented in an electronic medium which is generally optimised for processing by computers.
- It must exist independently of persons and independently of the legal system – this criterion has two distinct aspects. Firstly, a thing must exist independently of persons which means it must be separable from its owner. Secondly, the thing must exist independently of the legal system, which excludes things in action like debt claims, which can only be asserted by taking legal action or proceedings.
- It must be rivalrous – this means that the thing in question must be something whose capacity for use is not unlimited. A resource is considered rivalrous if use of it by one person prejudices the ability of others to make equivalent use of it simultaneously. This excludes pure information from falling within the third category and upholds the law's reluctance to treat pure information as an object of property rights.
The Consultation considers two methods of implementation of the new category of personal property - common law and through statutory intervention. The common law has already shown itself to be flexible to embrace things that do not fit squarely within the existing categories of property. Recent trends in case law have shown that courts have been prepared to find crypto-tokens as the object of property rights for the purpose of proprietary injunctions such as freezing orders and as the subject matter of a trust.
While the common law has allowed limited piecemeal development of this idea, the Consultation makes the case for explicit recognition of this third category of personal property. This category would be a much more nuanced consideration of emergent objects of property rights and would reinforce the strength of the digital assets environment. Reliance on the common law to develop this area comes with its own set of limitations. Courts are generally reluctant to take a view that departs significantly from established precent. Furthermore, in any case, for the court to rule on this point, we would first need to see a suitable set of facts come before the court which are then argued in detail before a finding of a distinct new category of personal property. As the Consultation suggests, arguments in such cases tend to be highly fact-specific and complex, and litigious matters tend to throw up isolated issues rather than make headway for largescale legal form in a particular area.
Statutory intervention would be welcome in the area as it would provide the courts with legal certainty. However, reducing the proposed criteria to appropriate and futureproof statutory language would be a complex task as the area develops daily. The Commission does not recommend a preferred method of implementation but leaves the question to consultees to provide their views on what method they think would be most suitable to introduce the concept of data objects.
At this stage, there is strong support for development in this area from interested stakeholders and this would also be in line with international reform in digital asset technology more generally. It will be interesting to see the response to the Consultation once it is published. Reform in this area could go a long way in making England and Wales a global hub for digital assets like crypto-tokens and crypto-token systems and attracting leading talent in innovation, while ensuring that English law remains dynamic, competitive, flexible and responsive to market developments. In the same breath, failure to seize the opportunity and act at the right time could risk the jurisdiction missing out on a massive opportunity and losing its status at the forefront of financial services in the long-term.