Author: Syedur Rahman
14 November 2022
3 min read
Syed Rahman of Rahman Ravelli considers the issues raised in the Law Commission’s digital assets review.
The Law Commission published its consultation paper on digital assets in an effort to address the rise in the use of assets such as smart contracts, cryptocurrencies and non-fungible tokens (Non-Fungible Token'>NFT’s).
The Commission noted that the current legislative framework in place in England and Wales is flexible when it comes to meeting the novel requirements of these new types of assets. But the Commission’s consultation paper argued that the framework needs to go further to acknowledge these assets’ unique features which, in turn, could then provide a strong legal foundation for the digital asset industry and its users.
Professor Sarah Green, the commissioner for commercial and common law at the Law Commission of England and Wales, commented in an article for The Times, “However, such commerce [crypto] is global by nature. Domestic clarity can be the only goal, so the Commission is also working on a project to provide an effective set of rules for establishing which jurisdiction’s law applies to cross-border disputes, and which courts should hear them.” The Commission is clearly aware of the issues at hand and what reforms are required to address them.
While its consultation paper, which was published in July, sets out to address a number of issues, there are a few key themes running through it. One of these is the transfer of crypto tokens. The concept of a “state change” to the ledger or record of a crypto token is relevant here. The Commission suggests that the law should be clarified by way of common law developments, rather than legislation, to confirm that a transfer operation that affects a state change is a necessary (but not sufficient condition) for a legal transfer of a crypto-token.
Another point of interest is that the Commission suggests there should be confirmation that an action to enforce an obligation to pay non-monetary units - such as NFT’s - would and should be characterised as a claim for unliquidated damage, unless and until crypto tokens are generally considered to be money. It, therefore, seems to suggest that there is no limit on the courts of England and Wales when making orders for the payment of NFT’s or other asset tokens as a form of damages.
A review of the way in which one ‘owns’ a data object is also considered within the report. The relationship between a data object and a person is better described by the factual concept of control rather than ownership. The new property right proposed would be distinct from the two existing personal property rights that exist in English law, which apply to ‘things in possession’ and ‘things in action’. It could be argued that this new right could provide the courts with wider-reaching powers. Given that the current framework of the established legal concept of ownership would not necessarily be applicable, a slew of common law could make this far reaching.
The Law Commission also proposes a new definition of digital assets to be ‘data objects’. It proposes that data objects would sit independently from the legal framework currently in place. The Law Commission said the reason for this is that the courts have considered that the concept of things in possession does not extend to things in electronic or digital form. It added that “some digital assets do not sit comfortably with the traditional meaning of a thing in action”. This new definition seeks to bridge the gap and considers that the law should recognise control over those data objects.
It is easy to fall down the proverbial rabbit hole when considering the way in which these reforms have been proposed. A litany of comments followed the initial publishing. However, a wider eye must be given to the paper in general, given that its aim, according to the Commission, is to “ensure the law remains dynamic, highly competitive, and flexible, so that it can support transactions and other arrangements involving digital assets”.
The reforms also aim to help achieve the UK government’s stated goal of making the jurisdiction of England and Wales a global hub for digital assets, particularly crypto tokens and crypto token systems.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, international arbitration, civil recovery, cryptocurrency and high-stakes commercial disputes.