Digital assets: already a new kind of 'thing'

Thomas Jefferson would surely approve. In the tradition of the founding fathers of the US, the Law Commission's magisterial final report on digital assets does not seek to define new rights and responsibilities - it merely identifies ways to safeguard those already self-evident. It's a welcome contrast to a global tide of action from legislators, regulators and others who see crypto as a monster which needs tying down - if not outright slaying - by new definitions and rules. 

Indeed in 270-odd pages, the Law Commission proposes only one, modest, addition to the legislative canon: a statutory measure preventing the courts from denying property rights to a crypto gizmo simply because it doesn't seem to belong to the two widely understood categories of property 'things'. According to the commission, such a 'minimalist statutory confirmation' would allow the common law to develop along with the technology. This would secure the UK's position as the world's 'crypto hub' - or at least as the jurisdiction of choice when things go wrong. 

This law, the commissioners state, would not amount to the creation of a new category of 'thing' - because it already exists, in common law.

Back to basics. The Law Commission refers to an 1885 judgment in Colonial Bank v Whinney, in which Lord Justice Fry ruled regarding the disposal of shares in a joint stock company that all kinds of property are either choses in possession or choses in action. 'The law knows no tertium quid (third kind) between the two,‘ the judge declaimed. 

‘That statement is no longer correct (to the extent that it ever was)', the commission responds. It cites the Court of Appeal's ruling this year in Tulip Trading (part of a cobweb of litigation in the English courts involving Dr Craig Wright, the self-styled inventor of bitcoin), as providing a 'high degree of certainty' that the courts will treat crypto-tokens as things to which personal property rights can apply. 

In exhaustive detail, the commission explains why crypto-tokens, which include currencies and non-fungible tokens, are neither things in possession nor things in action. Traditionally, they would have been excluded from the 'possession' category merely by virtue of being intangible. This is no longer an absolute barrier: the Electronic Trade Documents Bill, currently at report stage in the House of Commons, will confer possessability on digital versions of specific categories of documents, most particularly bills of lading. But the commission - on whose draft bill the legislation is based - points out that the new measure applies only to documents which already enjoy a special status in law. Crypto-tokens do not fall into that category. And even in the case of trade documents, possession is not defined in legislation; it is a common law concept. 

So if digital assets are not things in possession, surely, under Fry's dictum, they must be 'things in action'? Not so, says the commission, cautioning against any temptation to treat action as a residual category. By definition, a thing in action is a right that is enforceable by an action. The point of crypto assets is that they are supposed to work without any legal underpinning: they are enforced by the laws of mathematics. Treating them as things in action, the commission says, would create new legal uncertainty - and risk diluting or confusing the category's defining features in common law. 

Hence the need for the third category, 'better suited to encompassing new assets (including new digital assets) which will become increasingly important to the modern world'. Commendably, the Law Commission does not attempt to define a third category thing, arguing again that the common law is the best vehicle to determine which objects can fit within it. These might include export quotas or different types of carbon emissions allowance, as well as crypto-tokens, it suggests. 

It is now up to the government, or perhaps the next one, to decide whether to take the recommendation forward. But minimalist approaches seem to be out of fashion, these days.

So far, according to the commission, the England and Wales jurisdiction's common law approach has held up well in comparison to the sometimes contradictory state-by-state statutory reform seen in the US, or 'sudden or unexpected reversals of direction, attitude or policy', in Asian attempts to get a grip on crypto. As for the legal environment in civil-law European jurisdictions, this ‘is largely characterised by complex, comprehensive codification of rules’ which rapidly go out of date. 

Legislation ‘is more likely than the common law to create boundary issues in its application’, the commission asserts. ‘We conclude that there is significant risk that legislative intervention in this area (other than the targeted, confirmatory legislation we recommend) could undermine existing legal certainty and could reopen settled points of law.’

But it remains to be seen whether parliament can be entrusted to pass minimalist targeted legislation without turning it into a Christmas tree of reactions to whatever crypto scandal happens to be in the news.