• In 2020, the UK Government asked the Law Commission to review the legal status of digital assets in England and Wales, with the aim of making the UK an attractive jurisdiction for crypto development and investment. The Law Commission’s final Report has now been published.
• The Report acknowledges that general statutory reform may create limitations and become outdated, concluding that English common law is creative and flexible enough to sufficiently address most digital asset-related issues. The Law Commission has therefore proposed a tripartite approach to reform, recommending changes through common law development, targeted statutory law reform and industry-specific guidance.
• With respect to specific, targeted statutory reform. It is recommended that the UK Government establishes multidisciplinary working groups to develop and implement a tailored statutory legal framework that more effectively and transparently supports the initiation, operation, and enforcement of specific crypto-token and crypto-asset collateral arrangements.
• The Report further suggests that that UK Government should create or designate a panel of industry-specific technical experts, legal practitioners, academics and judges to offer non-binding guidance on complex and evolving issues related to digital assets.
• The publication of the Report represents a component of the broader, ongoing global conversation surrounding the legal status of digital assets. Its comprehensive and well-considered analysis is likely to influence not only the UK Government’s next steps but also the approaches of other jurisdictions.

Background

Last year, the UK Government unveiled plans to transform Britain into a ‘global hub’ for crypto-asset technology and investment. Recognising the importance of attracting further development and investment in this sector, the UK Government has been committed to ensuring that England and Wales are seen as having a clear and consistent legal framework for digital assets.

In March 2020, the UK Government asked the Law Commission to review the legal status of digital assets in England and Wales and consider whether any law reform is necessary for their accommodation. The Law Commission subsequently issued a call for evidence in April 2021, asking for input from key stakeholders and market participants on the usage, treatment, and handling of digital assets, as well as opinions on the potential implications of digital assets being “possessable”. Subsequently, in July 2022 the Law Commission released a consultation paper outlining provisional suggestions for legal changes. The Law Commission has now published its definitive report, which contains its final recommendations and conclusions regarding law reform in this area.

Key Recommendations

The main conclusion of the Report revolves around the Law Commission’s belief that the common law system in England and Wales is generally flexible enough to accommodate digital assets. The Law Commission aims to avoid creating a new legal framework for digital assets, which it views as presenting a potential hindrance to attracting technological development. Instead, the Law Commission intends to make limited recommendations for reform, ensuring the recommendations are as direct and implementable as possible.

Approach

The Report adopts a tripartite approach to its recommendations for reform, as follows:

1. Common law developments. Since the common law of England and Wales is sufficiently flexible and has had success in the digital asset and crypto-token markets already, any law reform should be, where possible, through further common law development.
2. Targeted statutory law reforms. The Law Commission recommends statutory law reform to be targeted only at supporting the existing common law position, or where common law development is not realistically possible.
3. Industry guidance. The Law Commission recommends that the UK Government creates or nominates a panel of industry experts to assist with law reform (both at common law and in statute) around digital assets.

Recommendations

The Report’s four main recommendations for law reform in relation to digital assets are set out below.

• Recommendation 1: New Category of Personal Property.

The Report’s first recommendation proposes that the law should explicitly recognises that ‘a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession’. Over the last decade, English courts have treated digital assets, such as cryptocurrency and NFTs, as ‘property’. Nonetheless, the Law Commission recommends specific legislative changes to establish a new category of personal property that includes digital assets, ensuring consistent legal recognition and protection.

• Recommendation 2: Industry Panel.

The Report’s second recommendation involves establishing or nominating a panel consisting of industry specific technical experts, legal practitioners, academics, and judges. This panel would provide non-binding guidance on the complex and ever-changing factual and legal issues relating to digital assets, with a particular focus on the subject of control over an asset.

• Recommendation 3: FCAR Amendments.

The Report’s third recommendation suggests amending the Financial Collateral Arrangements (No 2) Regulations 2003 (“FCAR”) to clarify points such as the extent to which different digital assets can fulfil the ‘cash’ definition. The Law Commission has identified specific concerns related to collateral arrangements under English law, especially when seeking to apply the FCAR to certain digital assets.

• Recommendation 4: Bespoke Collateral Regime.

The Report’s fourth recommendation is that the UK Government should introduce a bespoke collateral regime for crypto-tokens and crypto-assets. Although it is acknowledged in the Report that this would be a complex task, requiring substantial effort, it also emphasises developing a statutory legal framework that better facilitates the initiation, operation and enforcement of digital asset arrangements should be prioritised.

What Next?

The UK Government will now consider the recommendations and conclusions presented by the Law Commission in the Report, though no specific timelines for this yet. The Law Commission has agreed with the UK Government to undertake an additional project titled ‘Digital assets: which law, which court’ addressing private international law questions associated with digital assets, such as questions around choice of law and jurisdiction. The Law Commission are also working on a scoping paper that examines the characterisation and legal accommodation of decentralised autonomous organisations (e.g. structures established for investments by multiple participants in crypto-tokens) in England and Wales.

The Report is part of a global conversation around the legal status of digital assets. Organisations developing, utilising and otherwise seeking to commercialise this asset class should take note of these global developments. To take one example, the Law Commission itself is an observer on the UNIDROIT working group which prepared draft Principles on Digital Assets and Private Law, recently adopted by the International Institute for the Unification of Private Law (UNIDROIT), and it is likely that the extensive analysis undertaken by the Law Commission in the Report will inform the work of organisations in other jurisdictions.