Law Commission consultation on digital assets – Law Society response
Digital assets are becoming more and more important. They also present a legal problem.
Although the law in England and Wales is flexible enough to accommodate digital assets, certain aspects now need reform to ensure the law and advancing technology are aligned.
The Law Commission seeks to find the ways in which digital assets are being used, treated and dealt with by market participants. It also seeks views on the potential consequences of digital assets being possessable.
Definition of digital assets
We recommend adopting a specific definition of digital assets.
The current definition is too broad, risks confusion and may result in unintended consequences. It also may include social media accounts or online bank accounts.
Our view is that the law provides certainty on the legal status of a number of these items. That is not the case in respect of cryptoassets. Questions raised in the call for evidence should be restricted to cryptoassets.
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 property allowing for a clearly defined legal position (and therefore rights) in respect of such digital assets.
The current law regarding possession is both convoluted and nuanced in its application. We advocate for a bold approach with a focus on intended outcomes.
We recommend the Law Commission considers extending the legal framework to allow digital assets to be possessable.
Cryptoassets should be categorised into fungible and non-fungible assets:
- fungible assets may be able to continue with current legal framework.
- non-fungible assets are identifiable, transferable and have possession-like functionality
- We need to create a third form of ownership that is neither possessory not title based but applies an analysis of control.
Ownership and transfer
There is a need to distinguish between ownership and possession. Ownership is reflected in on-chain records. Possession can be transferred off-chain.
We regard the transfer of a digital asset to be more analogous to the transfer of a thing in action, such as bank money – rather than a thing in possession.
An on-chain transfer does not create new property. We believe it creates metadata that, in certain circumstances, records changes to ownership of property – and is therefore a modification or derivative of existing property rather than new property.
This view of the transfer creating 'new property' during a transfer is complex and non-intuitive and therefore not helpful to the application of the legal analysis.
Classification for the purposes 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 purchasers of digital assets.
Bailments, security and conversion and security interests
We see no reason why digital assets should not be subject to possessory legal interests and claims.
The consultation closed on Friday 4 November 2022.