Law commission

Law Commission launches consultation on digital assets – Osborne Clarke

UK Companies Involved in Crypto-Token Transactions Have Opportunity to Shape Future Crypto-Asset Regulation

The UK Law Commission has released (July 28, 2022) a Digital Assets Consultation Paper and Summary, following an earlier public consultation and subsequent legal statement from the UK Jurisdiction Taskforce in 2019 which examined the legal status of crypto-assets.

The document recognizes the growing importance of digital assets and its draft proposals include a third category of personal property, “data objects”, which it illustrates with reference to crypto-tokens.

The characterization of digital assets is important, as it will determine the legal rights available to them. Therefore, the paper also examines what legislative reform (if any) is needed for crypto-tokens and crypto-token markets. The consultation remains open until Friday, November 4, 2022.

Data objects

The Law Commission is of the opinion that “digital assets cannot be properly classified into either of the existing categories of “things in possession” or “things in action”‘” and a new third category of data objects would allow a “a more nuanced consideration of new, emerging and idiosyncratic things“. The document proposes the following criteria for a new category of data objects:

  • They must be composed of data represented on an electronic medium, including in the form of computer code, electronic signals, digital or analog.
  • They must be able to exist independently of anyone who may claim to own them and of any legal system that may be invoked to enforce rights in them (which would exclude intellectual property rights and other legal property rights).
  • They must be rivals, i.e. the asset in question”must be something whose capacity to use is not unlimited: people must therefore compete for it“.

The document goes on to say that crypto-tokens are generally able to meet these criteria and can therefore be considered data objects. It also notes that most existing laws that provide rights and remedies for other types of property may apply to data objects.

Transfer of ownership

The Law Commission tentatively concludes that “existing legal rules on… transfers of ownership [i.e. ownership] can apply to crypto-tokens in crypto-token systems.“In particular, it identifies that”control” of a crypto-token plays a “important (but not decisive) role” to assess the legal effect of its transfer.

Overall, he concludes that crypto tokens are new and flexible enough not to fit neatly into existing methods of transferring ownership. He proposes that a token-based registry could be established by law for “determine the probative value of the crypto-registration and any transfer formalities.

The paper explores the ways in which crypto-tokens can be used to represent something external or related to something outside the crypto-token system, for example intellectual property rights or a physical asset (as with tokens not fungible). The Law Commission is of the view that the legal consequences and strength of such a link are “likely to depend on several factors [such as] market practice, the evolution of common law and any contractual arrangement related to this fileOverall, he finds that the law is already flexible enough to allow for this type of arrangement.

Terms of custody

The Law Commission proposes potential targeted legal reforms on crypto token custody agreements. It proposes an exclusion of crypto-tokens from legal formalities which requires that certain transactions be recorded in writing and signed; instead, crypto token transfers could take effect by being recorded on electronic ledgers supported by distributed ledger technology and/or smart contracts.

His view is that crypto token transactions that are not recorded on a professionally maintained ledger – where the crypto tokens are either transferred or held in trust by a crypto-custodian – should remain subject to these formalities. And he concludes that the “registrations and authentication process [of crypto-token networks]… are able to complete these formalities“.

However, he advises against a reform leading to “default rule…that direct custody arrangements [of crypto-tokens] take effect as trusts“.

Guarantee agreements

The Law Commission identifies that cryptographic tokens cannot be possessed, so they cannot be used for certain security provisions. He concludes that this is unlikely to be a problem in practice and that allowing these security features could cause problems.

It also considers that extending existing regulations on collateral agreements to cover crypto-assets would be inappropriate and that crafting bespoke legislation would require disproportionate effort; therefore, it does not propose any legislative reform in this regard.

Commentary by Osborne Clarke

The findings draw attention to how current legislation is sufficient to cover digital assets, such as crypto tokens, and how reform would provide greater flexibility and certainty, including to a person’s rights. in digital objects.

Individuals and companies involved in crypto-token transactions have the opportunity to shape the future regulation of crypto-assets. We encourage participation and would be happy to discuss any of these questions and support any proposed response to the consultation. Alternatively, responses to the consultation can be submitted online or comments can be sent by email.