Law Commission clarifies new digital asset property law intentions

The Law Commission of England and Wales has been engaged in a long-term project in which it has explored the extent to which the law currently enables personal property rights to attach to digital assets – and the case for extending the law if it does not.

The body previously established that digital assets like cryptocurrencies and non-fungible tokens (NFTs) do not always unequivocally fit within the two categories of personal property that currently exist in English law. Last summer, following a study, 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.

Earlier this year, the Law Commission put forward brief legislative proposals that sought simply to give “statutory confirmation” to the existence of a third category of personal property. Now the body has published a supplemental report in which it has put forward amendments to the draft legislation it previously proposed and provided further explanations behind the reasons for it.

Under the revised proposals, a new Property (Digital Assets etc) Act would be implemented to “make provision about the types of things that are capable of being objects of personal property rights”. The Act would simply provide that “a thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither a thing in possession, nor a thing in action” – leaving it to the courts of England and Wales to further define what ‘things’ would qualify for this third new category of property over time.

For its part, however, the Law Commission said that it does not think “pure information” falls, or will ever fall, within the third category. ‘Pure information’, it said, is “the intangible, abstract thing that is information, distinct from the means by or on which that information is recorded”. It considered information in and of itself does not satisfy the existing criteria for being appropriate objects of property rights since it is “neither rivalrous nor independent”.

The concept of rivalrousness, the Law Commission explained, describes a resource thats use by one person necessarily prejudices the ability of others to make equivalent use of it at the same time. The concept of ‘independence’ in this context refers to whether the third category ‘thing’ exists independently of any rights that might exist in relation to it and can be used and enjoyed independently of whether any rights or claims in relation to it are enforceable by action before a court.

For the same reasons, certain digital assets, such as digital files and records, email accounts and certain in-game assets, as well as domain names, are also unlikely, in most cases, to be objects of property rights under the proposed new third new category of ‘things’, the Law Commission said.

Crypto-tokens and other assets such as voluntary carbon credits could, the Law Commission said, fall within the “third-thing category” should its proposed legislative reforms be implemented by parliament. However, it stressed that it will be for the courts to shape how the common law develops.

“In an increasingly online and digital world, we expect that other intangible things and assets whose parameters are difficult to predict and define in the abstract are bound to develop,” the Law Commission said. “There will inevitably be things – already in existence or yet to be developed – that are or will be difficult to categorise. Courts will also have to determine whether new things can (and should) be capable of being objects of personal property rights.”

“Our approach and the draft Bill are technology neutral, in that they do not focus on any single or class of (digital) asset, or any protocol, system, network or technological feature. This will allow the law to interrogate the particular features of the asset in question when considering its proprietary status. It avoids drawing arbitrary boundaries or creating rigid definitional lines. It emphasises the success, and trusts in the continued ability, of the common law to develop sensitively and flexibly in the face of rapidly developing technology. It maintains the common law’s position at the heart of the law of personal property, reflecting the fact that statute does not seek to define things in action or things in possession. It distinguishes the law of England and Wales as a flexible and open system that is alive to the particular characteristics and design features of specific technology,” it said.

Earlier this year, the UK Jurisdiction Taskforce (UKJT) said that digital assets fall within the definition of property under the UK Insolvency Act 1986, meaning property rights can attach to digital assets in insolvency situations. However, while it said existing principles of UK insolvency law apply to the recovery of digital assets, it acknowledged that insolvency practitioners may face challenges in applying the principles in practice.

In its latest supplemental report, the Law Commission said there are other limitations currently as to how digital assets are treated under UK law – including that they are not yet treated as money or amount to foreign currency for the purposes of UK insolvency law

“Taken together, the Law Commission’s supplemental report and draft legislation, and the UKJT’s April 2024 statement, reinforce the view that English and Welsh law requires minor tweaks and adjustments rather than fundamental reform to deal with the novel issues presented by digital assets,” said Malcolm Dowden of Pinsent Masons.

“English and Welsh courts have shown themselves willing and able to impose freezing orders on accounts and wallets that contain or include cryptocurrencies or other digital assets. Additional tools, including crypto wallet freezing orders and cryptoasset forfeiture orders have been made available under the Economic Crime and Corporate Transparency Act 2023 in relation to proceeds of crime and terrorist financing,” he said.

“However, digital assets are based on rapidly developing technologies and often operate through business structures, such as decentralised autonomous organisations (DAOs) – the subject of another Law Commission project – that do not fit readily into existing legal categories, and as such the Law Commission, Law Society and UKJT have all now acknowledged that the law might yet need to develop in order to keep up with the pace of development.”

The Law Commission said it has recommended to government that it “create a panel of industry experts who can provide guidance on technical and legal issues relating to digital assets” to ensure courts can “respond sensitively to the complexity of emerging technology and apply the law to new fact patterns involving that technology”.