'Digital assets proposals could spark meaningful change for courts'

In the past three years we have witnessed noteworthy developments in the English and Welsh courts in their treatment of digital assets.

Judges have been ground-breaking; they have considered whether crypto assets can attract personal property rights like commonplace assets do (in short, they can), or how a claimant could serve a court order via unique means on categories of persons unknown who are connected with the theft of digital assets (in short, via a non-fungible token airdropped to a target wallet).

Our common law appears to be doing what it was always designed to do some centuries ago: to provide our judges with adequate room to manoeuvre to address novel issues with novel solutions, with one eye on legal precedent and another on the evolving subject matters before them.

As one would have hoped, longstanding legal concepts in the law of property (which includes an extensive range of asset classes) and equitable relief have been reasonably well-adapted.

Nevertheless, there has been growing pressure for government assistance and intervention in the field of digital assets.

Against that backdrop, the Law Commission has produced the present report, which is now resting with the UK government to consider.

Looking ahead

Not only will their response be critical for lawyers and investors in the digital asset space, but it will undoubtedly also have a bearing on the government’s stated ambition of the UK being a centre of excellence for crypto-based businesses and investors, or indeed any commercial venture based around digital assets. 

So, what does the Law Commission’s proposed way forwards look like, and is there adequate reason to feel buoyant? 

Their recommendations include:

• targeted (and limited) statutory reform;
• ongoing development of the common law; and
• the establishment of an expert panel of industry-specific technical experts, legal practitioners, academics, and judges to provide non-binding guidance.

The proposed statutory reform is largely limited to codifying whether certain kinds of digital assets are capable of being 'third category things', or a kind of property to which personal proprietary rights can relate.

If so, owners of digital assets will enjoy the same sort of rights and protections as do the owners of, say, shares or cars.

That is much needed clarification and codification of the developing common law position, but the question is whether the UK government will prioritise reform in this space.

Some may argue that only suggesting limited statutory reform (which provides certainty) and continuing to place heavy reliance on the judiciary is a cop-out.

On balance, the Law Commission’s report is a good thing.

However, if it’s not broken, don’t fix it – the common law has proven itself to be flexible and can be immediately reactive. It makes sense to continue to rely upon it as the digital asset ecosystem continues to evolve at pace.

The formation of an expert panel is a ground-breaking and unique proposal. There are clear benefits to having industry experts aid judges who are constantly grappling with new technologies.

The Law Commission proposes that the panel be tasked with providing non-binding guidance on the complex and evolving issues relating to the meaning of ‘control’ of digital assets (and whether this is effectively the same thing as ‘ownership’). The principle is sound.

However, at present, it is not clear how this panel of experts will be assembled, who will feature in it, and what their mandate will be.

These matters will need to be considered very carefully, given that potential panellists may have vested interests, and given wide-ranging views exist within the industry as to the definition of digital assets and how they should be treated.

While the panel’s guidance would, supposedly, be non-binding, in practice the courts usually find this sort of guidance to be highly persuasive given the space is still evolving, and bearing in mind the weight afforded to the conclusions of previous working groups and task-forces. 

On balance, the Law Commission’s report is a good thing. Its recommendations, if enacted, should make asset recovery and the enforcement of legal rights to digital assets easier, or at least comfort those seeking the equivalent of an itinerary for where the space is likely to develop.

It should be heralded as more than just a blueprint for how we should bring digital assets closer to the law, but as a precursor for meaningful change that will undoubtedly influence the attitudes and behaviour of market participants.

Amy Harvey is a partner and Alexander Unal is an associate at law firm Ontier