Update: What Does The Law Commission’s Consultation On Recognition And Protection Of Digital Assets Aim To Achieve? – Fin Tech


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Developments in the field of digital assets are moving at an
ever greater rate, and the English legal system continues to adapt
and demonstrate its recognition of the importance and status of
digital assets. In a recent article, we wrote about how, in an
English legal first, the High Court permitted service by
non-fungible token (NFT), revealing its willingness to use
innovative methods to bring crypto fraudsters to justice. On
28th July 2022, the Law Commission also published a
consultation paper proposing changes to the law to ensure improved
legal recognition and protection of digital assets, including
crypto-tokens and crypto-assets. In another notable development,
The Right Hon. Sir Geoffrey Vos, Master of the Rolls, delivered a
keynote speech at the Bank of England’s Digital Assets
Symposium entitled ‘The economic value of English law in
relation to DLT and digital assets’. In this speech, he
proposed six requirements for a robust legal foundation necessary
for distributed ledger technology (DLT) and crypto assets.

In this article, we will review the recommendations of the Law
Commission and those of Sir Geoffrey Vos to make the legal system
better equipped to adjust to litigants’ needs when it comes to
digital assets.

What is the Law Commission trying to address?

The Law Commission is trying to better address the inconsistent
way in which digital assets are treated within the law and is
largely concerned with reforming the legal principles of private
property. It is not concerned with regulatory reform; rather, it
aims to provide a “legally certain environment” which is
compatible with the growth of digital assets.

As the report states, “Property rights are vital to our
social, economic and legal systems”
and argues that the
current legal framework in England and Wales does not neatly bring
together the concepts of digital assets and personal property and
that this weakens legal protections for users and holders of
digital assets. The paper explains, “this is partly
because of difficulties in translating property rights onto things
that are information-based, easily shareable and open or available
to all”.

The report also makes it clear that the law is not naïve to
digital assets and already recognises that they can be objects of
property rights. The issue is that the law does not cater for the
subtleties and nuances of this type of property; “This
consultation paper argues that it is now appropriate for private
law to acknowledge those idiosyncratic features so that it can
provide a strong, principled and conceptually-sound foundation,
grounded in personal property rights, from which to develop a
coherent legal framework”.

What is the Law Commission recommending?

The Law Commission is recommending the addition of ‘data
objects’ as a new third category of personal property in
addition to the existing concepts of things in possession (i.e.
physical objects) and things in action (i.e. contractual rights).
It acknowledges that neither of these legal concepts accommodates
digital assets comfortably. To fall within the newly proposed
definition of data objects as property, the Law Commission
recommends that certain criteria should be met; specifically, it
must:

  • be composed of data represented in an electronic medium –
    the Law Commission is ensuring that all current and future forms of
    digital assets can be catered for. As the report states, these can
    include computer code and electronic, digital or analogue
    signals.

  • exist independently of persons and of the legal system –
    in other words, they must exist within the blockchain or other
    technology framework on which they are based.

  • be rivalrous – this is not the same as being
    ‘non-fungible’ or unique rather, it means that data objects
    should not be capable of being used simultaneously by another
    person (i.e. ‘double spend’)

Master of the Rolls legal recommendations for digital ledger
technology

In his speech at the Digital Assets Symposium, the Master of the
Rolls, Sir Geoffrey Vos, recommended that a “legal system
aspiring to provide the foundation for DLT and cryptoassets needs
to provide”
:

  1. Legal certainty – As Sir Geoffrey explains, the Law
    Commission’s consultation paper will go a long way to providing
    greater legal certainty in terms of private property rights for
    digital assets, as covered above.

  2. A dispute resolution process that takes account of the
    circumstances in which transactions are effected on-chain using
    digital payment mechanisms

  3. Procedural ability for a legal system to deal with disputes
    arising from digital transactions

  4. A private law backdrop allowing the issue and transfer of
    securities via DLT

  5. Industrial and government familiarity with smart contract use
    cases; and

  6. An appropriate regulatory environment.

Final words

Whilst the English Courts have swiftly adapted to the
ever-increasingly complicated challenges concerning digital assets,
the ongoing consultation by the Law Commission and the insightful
recommendations by Sir Geoffrey Vos demonstrate the depth of
thinking that is now going into modernising the legal system in
England and Wales to ensure it keeps its reputation as the
pre-eminent jurisdiction in the digital age. As these
recommendations are realised, and further progress is made in this
area, the English legal system will ultimately become increasingly
adaptable and capable of responding to the evolution of digital
assets.

Originally published 15 August 2022

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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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