Law commission

Law Commission Consultations on Digital Assets and Electronic Business Documents – Law Society Response

Call for Testimonials on Digital Assets

The problem

Digital assets are becoming increasingly important. They also pose a legal problem.

Although the law in England and Wales is flexible enough to adapt to digital assets, some aspects now need reform to ensure that the law and technological advances are aligned.

The Law Commission seeks to find the ways in which digital assets are used, processed and traded by market participants. It also seeks opinions on the potential consequences of owning digital assets.

Our point of view

Definition of digital assets

We recommend adopting a specific definition of digital assets.

The current definition is too broad, likely to lead to confusion and may lead to unintended consequences. This may also include social media accounts or online banking accounts.

We believe that the law provides certainty as to the legal status of a number of these elements. This is not the case for cryptoassets. Questions raised in the call for evidence should be limited to crypto-assets.

Possession

We agree that digital assets do not fall into the category of “things in possession”.

We support the creation of a new third category of ownership allowing for a clearly defined legal position (and therefore rights) with respect to these digital assets.

The current law regarding possession is both convoluted and nuanced in its application. We advocate a bold approach focused on expected results.

We recommend that the Law Commission consider expanding the legal framework to allow the possession of digital assets.

Crypto-assets should be classified as fungible and non-fungible assets:

  • fungible assets may be able to continue with the current legal framework.
  • non-fungible assets are identifiable, transferable and have a functionality similar to possession

We need to create a third form of ownership that is neither possessory nor title-based but applies a control analysis.

Ownership and transfer

A distinction must be made between ownership and possession. Ownership is reflected in chained records. Ownership can be transferred off-chain.

We consider the transfer of a digital asset to be more analogous to the transfer of a thing in action, such as money in the bank, rather than a thing in possession.

A chain transfer does not create a new property. We believe it creates metadata that, under certain circumstances, records changes in ownership of an asset – and is therefore a modification or derivative of an existing asset rather than a new asset.

This view of transfer creating “new ownership” upon transfer is complex and non-intuitive and therefore not helpful in the application of legal analysis.

Classification for the purpose of the sale of goods

Digital assets are not analogous to goods under the Sale of Goods Act 1979.

We also believe that there should be defined legal rights and protections in place for buyers of digital assets.

Sureties, sureties and conversion sureties and sureties

We see no reason why digital assets should not be subject to interests and legal claims of possession.

Next steps

The consultation closed on Friday 4 November 2022.

Read the consultation on the Law Commission website

Electronic Trade Documents: Consultation Paper

Proposals

The Law Commission has announced a consultation on proposals to allow legal recognition of electronic versions of documents (such as bills of lading and bills of exchange).

The consultation is accompanied by a draft bill that would implement the proposals.

The proposals highlight three criteria that electronic trade documents should meet in order to be possessed in the eyes of the law and therefore used for global trade as an alternative to paper versions:

  • the document is a commercial document of the type listed in our bill
  • the electronic document is subject to exclusive control
  • the electronic document must be fully assigned upon transfer

Our point of view

We commend the simplicity of the draft bill in seeking to allow electronic trade documents to have the same effect as paper trade documents.

We suggest that the following key benefits of electronic business documents be actively detailed, in addition to specific changes to the legal framework through the Bill:

Faster transmission

Electronic trade documents will reduce the time it takes to send paper documents to the respective parties. It will overcome delays due to the difficulty of obtaining wet ink signatures due to the physical unavailability of signers.

Increased precision

As business documentation information becomes electronic, there is less need to manually review and extract error-prone key information from paper documents, which would now be in a native, data-friendly form.

Reduced risk of fraud and counterfeiting

Technology will allow greater checks to prevent tampering (which is always a risk with paper documents).

Easier storage and retrieval

Digital documents can be stored and located more easily than their paper counterparts.

Next steps

The consultation closed on July 30, 2021.

Read the consultation on the Law Commission website

Download the report and the bill (PDF)

Download the report summary (PDF)

Download the Welsh summary of the report (PDF)