Law body considers which law governs digital asset disputes

The body has also tabled draft new legislation which, if implemented, would see the introduction of an entirely new category of personal property rights in England and Wales.

The initiatives represent the latest strands of the Law Commission’s analysis of legal issues arising in the context of emerging technologies, such as smart contracts and digital assets.

The latest new project, it said, is designed to help it “gain a better understanding of the most challenging and prevalent issues that digitisation, the internet, and distributed ledger technologies pose for private international law”.

“Private international law is engaged when the parties to a private law dispute are based in different countries, or where the facts and issues giving rise to the claim cross national boundaries,” the Law Commission said. “In these circumstances, questions arise as to which country’s courts the parties should litigate the dispute in, which country’s private law should be applied to resolve the claim, and how any resulting judgment can be enforced in other countries. Private international law is the body of domestic law that supplies the rules used to determine these questions.”

“Those who invest in or use emerging technologies desire certainty as to how these questions will be answered. Litigation is an expensive and time-consuming process, which can be further complicated by uncertainty as to whether the court chosen by one or both of the parties will accept jurisdiction to hear the claim. Parties who organise their affairs according to the laws of one country may find during litigation that their legitimate expectations that such law will apply are frustrated by a rule of private international law,” it said.

Forensic accounting expert Hinesh Shah of Pinsent Masons said: “Distributed ledger technology systems can transcend multiple jurisdictions with the ‘borderlessness’ nature making it difficult – and potentially inconsistent – to identify a single governing law for transactions. This is currently causing real issues when disputes on specific transactions arise, signalling the need to identify possible solutions to these complex international law issues.”

“The concept of ‘lex situs’ – that property rights are determined based on the law of the place in which they property object is situated – in many jurisdictions traditionally plays a crucial role in determining the applicable law for property rights. When it comes to tangible immovable objects, applying this rule is relatively straightforward: real estate in England follows English law, while real estate in Scotland adheres to Scots law, and so on. However, challenges arise when dealing with moveable objects such as digital objects, especially decentralised crypto-tokens as these tokens exist in a unique state of being ‘nowhere and everywhere, at the same time’ – referred to as ‘omniterritorial’ phenomena,” he said.

“In the context of private international law, this poses significant challenges and the Law Commission is wisely seeking input from stakeholders on how to address these complexities, including whether distinct approaches should be taken for certain property transactions, such as security interests over digital assets and electronic trade documents,” Shah said.

The Law Commission’s call for evidence in respect of the project closes on 16 May.

The Law Commission has separately opened a consultation on draft legislation that it said is designed to “confirm that crypto-tokens, and potentially other assets such as voluntary carbon credits, are capable of being recognised by the law as property”. The proposals reflect recommendations the Law Commission made last year in its final report from its study into how well common law accommodates various legal issues related to digital assets, which the UK government had asked it to undertake.

In that study, the Law Commission found that personal property law in England and Wales has proven sufficiently flexible to deal with these emerging technologies, but that some legal uncertainty and complexity remained. It said that digital assets like cryptocurrencies and non-fungible tokens (NFTs) do not fit within the two categories of personal property that currently exist in English law. It proposed retaining the two existing categories, which comprise ‘things in possession’ – such as tangible assets – and ‘things in action’ – like shares in a company – and adding a third separate category that can better recognise, accommodate and protect the unique features of certain digital assets.

The legislative provisions that the Law Commission have proposed are brief and would simply give “statutory confirmation” to the existence of a third category of personal property. It has proposed that this category be defined plainly as a thing that is capable of being an object of personal property rights even though it is neither a thing in possession nor a thing in action. It said it would be left to the courts to refine the scope of the concept.

The Law Commission said: “There are centuries of case law considering the factors that make a thing an appropriate object of personal property rights, which the courts can continue to apply in this context so that the third category does not become inappropriately broad. We consider this to be the most effective and least interventionist recommendation that we can make to facilitate the law’s development on this point.”

The Law Commission’s proposals on creating a third category of personal property are open to consultation until Friday 22 March.