UK confirms legal status of cryptoassets and smart contracts
The UK Jurisdiction Taskforce (UKJT) - part of the LawTech Delivery Panel - has issued a legal statement on the status of cryptoassets and smart contracts under the law of England and Wales, providing legal certainty for the first time
The consultation process
The UKJT conducted a consultation process prior to the issue of the statement to address issues of perceived legal uncertainties with respect to these new technologies. Linklaters led on the drafting of that consultation paper and this summer assisted in running a public event seeking input from market participants.
The legal statement
Linklaters also provided input on the legal statement itself which has resolved the uncertainties around how cryptoassets and smart contracts might be treated under English law. Providing legal certainty on the status of cryptoassets and smart contracts for the first time, the landmark statement recognises the asset class as property and smart contracts as enforceable under English and Welsh law. The influential statement is a critical step in the future application of private law to transactions involving cryptoassets.
FAQs on the legal statement
Below, we consider at a very high level the key takeaways from the legal statement, and we will follow up in due course with our more detailed analysis.
1. What were the main conclusions of the legal statement?
The legal statement provides confirmation that, under English law:
- cryptoassets are capable of being owned; and
- smart contracts can be, or be part of, binding legal contracts.
The legal statement demonstrates the flexibility and adaptability of English law, in particular in relation to new developments, technologies and structures of modern commerce.
2. If a cryptoasset can be owned, what exactly is the asset?
The asset is the set of arrangements that gives rise to the ability to update or spend (i.e. render inert or retire) certain data, to the exclusion of another party.
The legal statement notes that the asset is not any of the public or private keys, or the distributed ledger data itself. None of those constitute property but rather they are mere information. Instead, the asset is something that arises from their combination with the relevant system rules (including the embedded cryptography): the exclusive ability to update or spend transaction data.
3. Does control of a private key confer ownership of a cryptoasset?
Sometimes, but not always.
The legal statement describes the owner of a cryptoasset as “a person who has acquired control of a private key by some lawful means” (paragraph 43). It also confirms, however, that it is possible (although in certain circumstances perhaps unwise) for the original owner of a cryptoasset to transfer ownership of that cryptoasset “off-chain” (for example, through a symbolic transfer of the private key to a third party).
4. How can a cryptoasset be transferred?
By way of an “on-chain” or an “off-chain” transfer:
- an “on-chain” transfer is what is typically understood by a “transfer” of a cryptoasset, resulting in the relevant records on the ledger being updated;
- an “off-chain” transfer relates to any other transfer. The legal statement notes that an off-chain transfer is vulnerable to a supervening on-chain transfer (paragraph 48).
5. What exactly is transferred in an on-chain transfer?
The legal statement makes clear that an “on-chain” transfer is not strictly a transfer: the asset “spent” by the transferor is a different asset to that received by the transferee. This is because the property of the transferor is consumed or destroyed (the spent cryptoasset cannot be spent again) and an entirely new cryptoasset is created that can in turn be spent by the transferee (see paragraph 45).
6. Who owns a cryptoasset in the event of unlawful spending (for example, following a hack)?
The legal statement does not address this question directly.
A person may have created or acquired control of a private key quite lawfully whilst unlawfully causing the cryptoasset to be spent in someone’s favour (such as a hacker) on-chain. Given the legal statement confirms (paragraph 45) an “on-chain” transfer creates a new asset, such a person would, in our view, likely be regarded in law as the owner of the new asset. That person’s ownership interest would, however, remain subject to certain remedies available to the victim of the unlawful spending.
7. What are the implications for permissioned DLT applications?
That depends on the specific features of the permissioned system: subject to those features, the conclusions in the legal statement may or may not apply (as is recognised in the legal statement in paragraph 33).
That said, the legal statement is helpful in that it provides guidance for those permissioned DLT systems that do intend to establish a native digital asset capable of being owned as to the features that system must have in order to achieve that end.
8. The legal statement concludes that cryptoassets are not negotiable. Isn’t this a significant drawback?
No: although the legal statement concludes cryptoassets are not negotiable in the strict legal sense, the legal nature of on-chain transfers is such as to render cryptoassets equivalent to negotiable instruments (paragraph 124).
9. Can a trust or bailment be created over a cryptoasset?
The legal statement concludes that it is possible to declare a trust over an ownership interest in a cryptoasset (paragraph 133).
However, as the legal statement concludes that as a cryptoasset is not a physical thing, it cannot be subject to a possessory relationship, such as a bailment, a lien or a pledge.
10. How can security be taken over a cryptoasset?
By way of charge or mortgage, but not pledge or lien.
11. What are the implications for non-native cryptoassets?
The legal statement notes that cryptoassets may represent or be linked to rights, assets, services or other things (paragraph 68) (non-native cryptoassets). Such linkages will need to be examined to determine if they create separate legal or property rights. We expect any such rights to attach to (and be distinct from) ownership of the cryptoasset.
Read our press release for more details and for access to the full publication and the consultation paper.