The Law Commission’s consultation

For nearly two years, the Law Commission has been considering if and how to reform English law to recognise and protect digital assets. The result is an epic 549 page Consultation Paper and, for those of a less strong constitution, an accompanying 20 page Summary document, both published on 28 July 2022. Linklaters was one of the few law firms that were consulted in the course of the paper being produced.

The Law Commission suggests that, while English law has demonstrated a degree of flexibility in accommodating the use of digital assets, now is the time to develop a coherent legal framework capable of dealing with all manner of digital assets.

The proposal is grand, and for IP and technology lawyers exciting: the Law Commission proposes a brand-new asset class that carries with it far-reaching opportunities for IP exploitation.

The Law Commission says that under English law, two categories of property rights are currently recognised:

• Things in possession – rights in “any object which the law considers capable of possession” (e.g., a bag of gold).
• Things in action – rights asserted “through legal action or proceedings” (e.g., debts, shares in companies, rights to sue).

The Law Commission concludes that digital assets do not fit neatly into either category. Its proposal is to recognise a new class of digital assets which satisfy the following criteria:

1. they are composed of data represented in an electronic medium, including in the form of computer code, electronic, digital, or analogue signals;
2. they exist independently of persons and exist independently of the legal system; and
3. they are rivalrous (i.e., if one person uses them, by definition another person cannot).

Categorising things as property can be significant, for example, in terms of enforcement of rights against third parties, priority treatment in insolvency, transmissibility of rights, and grabbing back assets you seem to have lost.

Scope of Digital Assets

The paper analyses different types of assets and opines on whether they satisfy the three criteria above. The analysis is helpful not just in the context of digital assets, but in support of many of the things we’ve known for some time, but now with the benefit of added learned analysis. It notes that:

• information is not, in and of itself, an asset, however there are legal means by which to specify how individuals may behave in respect of specific information, including (1) the law of confidentiality; (2) the law of intellectual property; (3) the tort of misuse of private information; and (4) data protection rules and regulations;
• there are no property rights in the informational contents of emails, though they may be protectable by IP rights;
• email accounts are not digital assets - they depend on service agreements with service providers and do not exist independently of the legal system;
• domain names are not digital assets - they depend on service agreements with service providers and do not exist independently of the legal system;
• media files are not digital assets - they are not rivalrous;
• crypto tokens (including NFTs) satisfy the three criteria and so should be treated as digital assets.

NFTs as digital assets…

NFTs (non-fungible tokens) are distributed ledger-based tokens that certify the uniqueness of an underlying digital asset. Much has been written about how NFTs can be protected by IP rights, such as trade marks, copyright and how certain related technologies may be patentable. However the bigger IP story is about how brands are going to use NFTs to fractionalise (i.e., break down into pieces and exploit) the IP rights they own.

Imagine a music production company that owns rights to all the Beatles’ IP rights. They could license the minting of 1000 pairs of John Lennon branded sunglasses. Those thousand pairs of sunglasses satisfy the three limbs required for a digital asset as described above (they are composed of data; exist independently; and are rivalrous). Avatars could wear those sunglasses in the metaverse. More importantly the music production company might decide to put on a concert, performed by a John Lennon avatar only for members of the public wearing those sunglasses. Ownership of those sunglasses therefore becomes valuable and can be traded between individuals. The NFT might be programmed so that on each transfer a portion of the sale price goes back to the production company. Imagine the same marketing strategy applied a hundred times over to other virtual assets (or modified versions of the same assets) which carry with them the benefits of exclusive access to user communities, to events or the rights to use certain IP rights.

The future for digital assets

Digital assets continue to grow in importance and challenge many aspects of conventional legal systems, including the laws of personal property. The Law Commission paper notes that while English law is in many ways sufficiently resilient, flexible and iterative to accommodate digital assets, legal reform is necessary to acknowledge the nuanced features of digital assets and to reinforce the strength of the digital assets environment. Change is coming and anyone with an interest in creating or exploiting IP now needs to take account of the new opportunities that will be presented in the context of dealing with IP in a digital asset world.

The Law Commission is seeking consultation responses by Friday 4 November 2022.