When King Henry II composed the first major treatise of English property law in 1187, he lacked the foresight to mention anything related to the ownership of digital assets.
Thankfully, earlier this week, nearly a millennium after Henry’s myopic blunder, the Law Commission of England and Wales published a proposal to reform the law relating to digital assets.
This proposal has the potential to be a milestone development for trade digitalisation and the legal standing of digital assets in general, which have both been plagued by an ambiguous legal existence since their rise to prominence over the course of the decade.
Digital assets, which include crypto-tokens and non-fungible tokens (NFTs), play an increasingly important role in modern society and can be used for a growing variety of purposes, including trade finance.
The law commissioner for commercial and common law, Professor Sarah Green 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.”
To help understand the changes that the commission is proposing, let’s take a look at the issues that exist for digital assets under the current English property law.
Current English property law
The law of England and Wales has traditionally recognised just two categories of personal property:
- Things in possession: defined as any tangible, movable, and visible asset that is capable of being possessed, such as a potato or King Henry II’s crown.
- Things in action: defined as property that can only be claimed or enforced through legal actions or proceedings, such as debts, the right to sue for breach of contract, or shares in a company.
Digital assets, however, cannot be categorised into either of these as they are neither tangible nor are they only claimable or enforceable by legal action or proceeding.
This, as well as a few other quirks derived through English common law precedents, have fostered the uncertain legal environment that digital assets, as well as efforts to digitalise international trade documents, have been forced to contend with.
The Law Commission’s recommendations, if implemented, may be able to put an end to this.
The Law Commission’s recommendations
The Law Commission’s proposal is centred around the introduction of a third category of personal property, referred to as “data objects”.
To fall within this proposed third category property must:
- Be composed of data represented in an electronic medium: for example, in the form of computer code, electronic, digital, or analogue signals.
- Exist independently of persons and exist independently of the legal system: for example, something that is inextricably inseparable from a person (such as thoughts or unsevered limbs) does not qualify. Likewise, something that exists only through the application of legal rules (like intellectual property protections) does not qualify.
- Be rivalrous: this would be the case if one person using the property necessarily impacts the ability of others to make equivalent use of it at the same time. For example, if Henry is wearing his crown, that impedes John’s ability to wear that same crown–thus the crown is rivalrous.
This third category of personal property should adequately allow the set of digital assets that adhere to these conditions to exist as personal property under the English law system.
Changes of this nature, however, will take time to be implemented in practice.
The Law Commission and the five stages of English law reform
The Law Commission is a non-political, independent body, set up by Parliament in 1965 to keep all the laws of England and Wales under review, and to recommend reform where needed.
In September 2021, the government asked the commission to carry out a review of the current digital assets law, formally launching stage one of this five-stage process.
After this initiation stage, the project proceeded to the pre-consultation stage where the commission studied the area of law to identify its defects and looked to other areas of law to see how they address similar problems.
The publication of the current proposal, which is officially referred to as a consultation paper, marks the beginning of the third stage in the process.
In the third stage, where the rests Digital Assets project currently, the commission circulates its consultation paper and actively encourages feedback from interested members of the public.
The commission is soliciting responses to the consultation (which can be submitted here) until 4 November 2022.
After this 4 November deadline, the project will move into the policy development stage (stage 4) where the commission will analyse the responses to the consultation and may produce further issues papers and consult on the draft bill.
Lastly, the project will move into the reporting stage (stage 5) where the commission submits a report and final recommendations, along with a draft bill, to the Lord Chancellor and relevant secretary of state.
After this, the bill still needs to pass through the standard channels to officially become law.
In short, this recommended reform is unlikely to have any practical legal benefit until well into 2023, if not later.
Regardless, it marks a tremendous step forward for trade digitalisation efforts.
Professor Sarah Green spoke to TFG and added, “Our proposals aim to provide greater certainty around digital assets, offering more consistency and greater protections for those who use them.
“Were our proposals to become law, we would expect them to provide a strong foundation, which could play a positive role in the development of these technologies.
“Establishing a robust legal framework will help to create an environment that is more conducive to the digital assets industry.”