Law Commission continues to clarify English law treatment of digital assets, including as to legal status, forum and applicable law

The Law Commission of England and Wales has recently published two papers on digital assets. One proposes statutory drafting to clarify that something can be an object of property rights even if it does not fall within the two traditional categories of property. The proposed drafting is strikingly simple and should support further development of the common law. The other is a call for evidence focused on when the English courts can accept jurisdiction to hear a digital asset dispute, and which country’s laws they should apply to resolve it. This paper includes extensive analysis as to the application of existing private international law rules and invites feedback on potential areas for intervention. 

Two new papers from the Law Commission

The Law Commission of England and Wales has published:

  • a short consultation on draft legislation to confirm the existence of a “third” category of property; and
  • a long call for evidence (and summary) on the private international law treatment of digital assets and electronic trade documents.
A “third category” of property

The draft legislation seeks to implement one of the two recommendations for targeted statutory intervention from the Law Commission’s final report on digital assets. The sole operative provision states simply:

“A thing (including a thing that is digital or electronic in nature) is capable of being the object of personal property rights even though it is neither— 

(a) a thing in possession, nor
(b) a thing in action.”

The simplicity is highly welcome. 

We view this as merely confirming the position under English common law. It will, however, remove any residual uncertainty and support further development of the common law on a principled basis. 

Importantly, the draft statute is framed in permissive terms and does not seek to define any boundaries. What types of digital (or other) assets qualify as objects of property, and under what category, will be for the courts to decide, applying common law principles. We strongly support this approach.

The courts will also be able to develop the rules that apply to objects of property that fall outside the two historic categories. This includes rules on transfers and security interests. We expect that judges will feel more empowered to depart from rules applicable to existing categories as a result of the statutory confirmation. Equally, we expect them to draw analogies with other categories of property where appropriate. We also expect the Law Commission’s final report on digital assets to be highly influential in the development of the law in relation to digital assets.

Development of private international law

Private international law is the body of domestic rules that determines which country’s courts should have jurisdiction to hear a claim and which country’s laws should be applied to resolve it. In a nutshell, the Law Commission is trying to figure out the extent to which existing rules accommodate transactions involving digital assets and electronic trade documents, where new rules or clarifications are needed, and what any such rules or clarifications should be. 

English private international law is complex and derives from multiple sources. Over the years it has managed to accommodate significant developments in the modern world, such as the growth of cross-border financial markets and online commerce. However, the recent emergence of “decentralised” arrangements has posed certain novel challenges. For example:

  • In relation to applicable law, the existing rules often point to connecting factors such as the location of an asset, event or person. It can be difficult to pin down any potential location of an asset comprised of data elements stored on an indefinite number of devices or servers across an international network. There are also challenges associated with identifying the law that determines whether there is a valid legal contract among a cross-border network of participants that engage with one another through smart contract code. 
  • For an English court to accept jurisdiction, it typically needs to identify a gateway that connects the circumstances to the territory of England and Wales. Gateways relating to the location of the digital assets, the place where contractual obligations concerning such assets were assumed or the law governing those obligations raise complexities similar to those arising in relation to applicable law.

On the other hand, centrally administered instances of distributed ledger technologies generally raise far fewer novelties and can often be accommodated within the existing law. This was recently demonstrated by Euroclear's launch of its Digital Financial Market Infrastructure, which was founded on clear analysis as to which laws would be applied in relation to particular aspects of the arrangements. The Law Commission helpfully acknowledges this and is not proposing to change existing rules in areas where there is already sufficient legal certainty.

In its call for evidence, the Law Commission seeks to explain and analyse the existing law and identify if and how it should intervene where uncertainties exist. The Law Commission is rightly focused on matters of practical consequence. The paper notes that some areas of theoretical uncertainty may be of little significance in practice, for example where it is unlikely the participants intend to create legally enforceable arrangements in any case.

This is a hot topic across the globe. Last year, UNIDROIT published its principles on the private law treatment of digital assets and launched a joint project with the Hague Conference on Private International Law to build on the private international law aspects. The Law Commission is monitoring these international developments closely. In the meantime, national courts continue to grapple with these issues in practice (as we have seen most recently in a landmark decision of the Singapore High Court).  

What happens next?

The Law Commission has invited comments on the draft legislation by 22 March 2024. The proposal is, however, the product of an extensive consultation process on digital assets and closely follows the conclusion of the Law Commission’s final report. We do not expect significant changes in approach at this stage. 

By contrast, the private international law project is in its early stages. The call for evidence includes a vast amount of analysis that will require careful consideration and no doubt provoke much debate. Stakeholders have until 16 May 2024 to respond.