UK Law Commission releases final recommendations on Digital Assets
On 28 June 2023, the UK Law Commission published its final report on Digital Assets (the "Report") after an extensive and detailed consultation on private law matters relating to digital assets under English law.
At a high level, the Report concludes that the existing common law in England and Wales has demonstrated enough resilience and adaptability to acknowledge digital assets as objects that can be subject to personal property rights. As a result, the UK Law Commission has made only a handful of recommendations for legal reform to address remaining uncertainties. A condensed overview of the Final Report can be found here.
The 'big ticket' conclusion of the Report is that a third category of property should be recognised for digital assets that are neither things in possession nor things in action. This third category is so-called "digital objects".
This suggestion was foreshadowed by the UK Law Commission's 500 plus page preliminary report issued in July 2022 which invited views as to whether this would best be achieved through common law development or statutory reform. The Report concludes that consultees primarily believed that a dual approach (i.e. legislative reform affirming the position increasingly accepted at common law) was best.
The Report recommends statutory confirmation that a 'thing' will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession. The Report suggests that ongoing common law development should define what falls into that category (i.e. things that do not fit neatly into either of the two already existing types of personal property). The characteristics of crypto tokens and the issues that arise when trying to fit the nascent asset class into the existing definitions of personal property are considered at length in the report.
The Report suggests that the Government also establish and appoint a diverse panel of industry-specific technical experts, legal practitioners, academics, and judges to provide non-binding guidance on the complex issues pertaining to digital assets, ensuring it includes individuals knowledgeable about crypto-token markets, rather than solely focusing on traditional finance or intermediated securities markets.
The Report also recommends statutory amendment to the UK Financial Collateral Arrangements (No 2) Regulations (the "FCARs") to clarify rules and definitions pertaining to the custody of crypto-tokens, and the tokenisation of financial instruments or credit claims.
Finally, the Report recommends that, as a matter of priority, the Government set up a multi-disciplinary project to forumalate and put in place a "bespoke statutory legal framework" that clearly facilitates the entering into, operation and enforcement of crypto-token collateral arrangements.
With the recent adoption of the Financial Services and Markets Act 2023, the UK Law Commissions recommendations, if adopted, will further support its push to become a global crypto-asset technology hub. Given the broad influence of the English common law, the recommendations also merit serious consideration as other jurisdictions grapple with complex legal questions raised by blockchain technology and crypto assets.