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Developments in the field of digital assets are moving at an increasingly rapid pace, and the English legal system continues to adapt and demonstrate its recognition of the importance and status of digital assets. In a recent article, we wrote about how, in an English legal first, the High Court authorized Non-Fungible Token Service (NFT), revealing its willingness to use innovative methods to bring crypto fraudsters to justice. . 28e In July 2022, the Law Commission also released a consultation paper proposing changes to the law to provide improved legal recognition and protection for digital assets, including crypto-tokens and crypto-assets. In another notable development, the Rt. Hon. Sir Geoffrey Vos, Master of the Rolls, delivered a keynote address at the Bank of England’s Digital Assets Symposium titled “The Economic Value of English Law in Relation to DLT and Digital Assets”. In this speech, he proposed six requirements for a strong legal basis needed for distributed ledger technology (DLT) and crypto assets.
In this article, we will review the recommendations of the Law Commission and those of Sir Geoffrey Vos for the justice system to be better equipped to adapt to the needs of litigants in relation to digital assets.
What is the Law Commission trying to answer?
The Law Commission is trying to better address the inconsistent way digital assets are treated under the law and is widely concerned about reforming the legal principles of private property. It is not affected by regulatory reform; rather, it aims to provide a “legally secure environment” compatible with the growth of digital assets.
As the report indicates, “Property rights are vital to our social, economic and legal systems” and argues that the current legal framework in England and Wales does not neatly bring together the concepts of digital assets and personal property and that this weakens the legal protections for users and holders of digital assets. The newspaper explains:this is partly due to the difficulties of translating property rights into information-based, easily shareable and open or accessible to all”.
The report also clarifies that the law is not naïve to digital assets and already recognizes that they can be the subject of property rights. The problem is that the law does not take into account the intricacies and nuances of this type of property; “This consultation paper argues that it is now appropriate for private law to recognize these idiosyncratic features so that it can provide a sound, principled and conceptually sound foundation, grounded in personal property rights, from which develop a coherent legal framework”.
What does the Law Commission recommend?
The Law Commission recommends the addition of “data objects” as a new third category of personal property in addition to the existing concepts of things in possession (i.e. physical objects) and things in action (i.e. i.e. contractual rights). He acknowledges that none of these legal concepts fit comfortably with digital assets. To fall under the proposed new definition of data objects as property, the Law Commission recommends that certain criteria be met; more specifically, it must:
- be comprised of data represented in an electronic medium – the Law Commission ensures that all current and future forms of digital assets can be accommodated. As the report indicates, these can be computer codes and electronic, digital or analog signals.
- exist independently of people and the legal system – in other words, they must exist within the blockchain or other technological framework on which they are based.
- being rivals – this is not the same as being “non-fungible” or unique, it means that the data objects must not be able to be used by another person simultaneously (i.e. “double spend “)
Master of the Rolls Legal Recommendations for Digital Ledger Technology
In his speech at the Digital Assets Symposium, the Master of the Rolls, Sir Geoffrey Vos, recommended that a “the legal system aspiring to provide the basics of DLT and crypto-assets must provide”:
- Legal certainty – As Sir Geoffrey explains, the Law Commission’s consultation paper will go a long way towards providing greater legal certainty in terms of private property rights to digital assets, as outlined above.
- A dispute resolution process that takes into account the circumstances in which transactions are conducted on-chain using digital payment mechanisms
- Procedural capacity of a legal system to deal with disputes arising from digital transactions
- A private law context allowing the issuance and transfer of securities via DLT
- Industry and government familiarity with smart contract use cases; and
- A suitable regulatory environment.
As the English courts have quickly adapted to the increasingly complicated challenges surrounding digital assets, the ongoing consultation by the Law Commission and the insightful recommendations of Sir Geoffrey Vos demonstrate the depth of the thinking that is currently being carried out to modernize the legal system in England and Wales to ensure it retains its reputation as the pre-eminent court in the digital age. As these recommendations are implemented and further progress is made in this area, the English legal system will ultimately become increasingly adaptable and able to respond to evolving digital assets.
Originally published August 15, 2022
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