Law Commission Proposes Fundamental Law Reforms for Crypto-Tokens and Other Digital Assets

Whilst there was doubt that cryptoassets could be regarded as property under English Law, the UK Jurisdiction Taskforce of LawtechUK published a Legal Statement in 2019 that argued that they should. To put matters beyond doubt, the Law Commission has built on that work and today published a consultation paper setting out law reform proposals for digital assets, including crypto-tokens and NFTs.

Digital assets, which include crypto-tokens — sometimes referred to as cryptocurrencies — and non-fungible tokens (NFTs), play an increasingly important role in modern society.

The emerging technologies are used for an increasing variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities.

The Government asked the Law Commission to review the law on digital assets, to ensure that it can accommodate them as they continue to evolve and expand.

The Commission’s proposals aim to deliver wider recognition and legal protections for digital assets, allowing a more diverse range of people, groups and companies to interact online and benefit from them.

While the law of England and Wales has gone some way to accommodate the rise of new technologies, the Commission argues that there are several key areas that require law reform, to recognise and protect the rights of users and maximise the potential of digital assets.

In its new consultation paper, which seeks views from legal experts, technologists and users, the Law Commission examines how existing personal property law does — and should — apply to digital assets.

Because they are not tangible, digital assets have many different features from traditional physical assets. Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions.

The consultation paper argues the law must therefore go further to acknowledge these unique features, which in turn would provide a strong legal foundation for the digital assets industry and for users. Through these reforms, the legal system would help to create an environment that is more conducive to digital assets and their markets.

The Commission’s proposals are designed to ensure that the law remains dynamic, highly competitive, and flexible, so that it can support transactions and other arrangements involving the technology.

The reforms also aim to help to achieve the Government’s stated goal of the jurisdiction of England and Wales becoming a global hub for digital assets, and in particular, for crypto-tokens and crypto-token systems.

Commenting on the new proposals, Professor Sarah Green, the Law Commissioner for Commercial and Common Law, said:

“Digital assets such as NFTs and other crypto-tokens have evolved and proliferated at great speed, so it’s vital that our laws are adaptable enough to be able to accommodate them.

“Our proposals aim to create a strong legal framework that offers greater consistency and protection for users and promotes an environment that is able to encourage further technological innovation.

“It’s important that we focus on developing the right legal foundations to support these emerging technologies, rather than rushing to impose structures that could stifle their development. By clarifying the law, England and Wales could reap the potential rewards and position itself as a global hub for digital assets.”

Proposals set out by the Law Commission in its consultation paper include:

• Explicitly recognising a distinct category of personal property under the law which is better able to accommodate the unique features of digital assets. The distinct category is provisionally called “data objects”.
• Options for how this distinct category of personal property could be developed and implemented under current law.
• Clarifying the law around ownership and control of digital assets.
• Clarifying the law around transfers and transactions involving digital assets.

Responding to the consultation

The Law Commission is seeking responses to its consultation by Friday 4 November 2022. Responses to the consultation may be submitted online from Thursday 28 July via the link here - Digital Assets project page. Alternatively, comments may be sent by email to digitalassets@lawcommission.gov.uk.