Digital Objects: A New Class of Personal Property in English Law

Following the Law Commission consultation paper published in August 2022, which I later summarised for the SCL, the Commission has now published its report on the consultation process and a related summary. I'm yet to dig into the report fully, but here's a quick run-down on the summary. Professor Sarah Green and her team are to be commended on their consultation paper, the manner in which they conducted the consultation process and the report itself. Theirs is a colossal and momentous achievement that will no doubt form the basis of considerable legal evolution in the years to come.

The Commission has found that English law has recognised "certain digital assets as things to which personal property rights can relate" as a distinct legal category, but that certain complex areas of legal uncertainty remain that law reform could reduce. For instance, there are "difficult boundary issues" in distinguishing between digital 'assets' such as crypto-tokens; private, permissioned blockchain systems; voluntary carbon credits; in-game digital assets; and digital files. These assets may be based on very different technologies and whether they can or should attract personal property rights may depend on particular sets of facts.

Overall, the Commission recommends that this uncertainty would be best met through the evolution of case law and some targeted legislation, with support from a panel of industry-specific technical experts, legal practitioners, academics and judges.

More specifically (but by no means exhaustively), the Commission concludes that, under the law of England & Wales ("English law"): 

1. a 'thing' should not be deprived of legal status as an object of personal property rights merely because it is neither 'a thing in action' nor 'a thing in possession' (the main traditional forms of personal property);
2. personal property rights should relate to a thing that is rivalrous (i.e. where the use or consumption of the thing by one person (or specific group) necessarily prejudices the use or consumption of that thing by others);
3. factual control (plus intention) can found a legal proprietary interest in a digital object, and in certain circumstances such an interest can be separate from (but less than) a superior legal title;
4. it is possible (with the requisite intention) to effect a legal transfer of a crypto-token either off-chain (by a change of control) or on-chain (by a transfer operation that effects a state change);
5. a special defence of 'good faith purchaser for value without notice' can be recognised and developed in common law (i.e. via the courts) in relation to crypto-tokens and other 'third category things';
6. crypto-token intermediated holding arrangements can be characterised and structured as trusts, with rights of co-ownership by way of an 'equitable tenancy in common' (rather than necessarily joint and several interests);
7. recognising a control-based legal proprietary interest could provide the basis for an alternative legal structure for custodial intermediated holding arrangements in addition to trusts, whereby certain holding intermediaries acquire a control-based proprietary interest in crypto-token entitlements that is subject to superior legal title retained by users;
8. the courts could develop principles of tortious liability for wrongful interference with 'third category things' by analogy with the tort of conversion;
9. The Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs) should be amended to confirm and clarify their applicability to crypto-tokens, cryptoassets (including central bank digital currencies (CBDCs) and fiat currency-linked stablecoins) and/ or mere record/register tokens, including where a financial instrument or a credit claim is tokenised and effectively linked or stapled to a crypto-token; 
10. UK company law should be reviewed to assess the merits of reforms to confirm the validity and/or use of crypto-token networks for the issuance/transfer of equities and other registered corporate securities, including the extent to which applicable laws might support the use of public permissionless ledgers for such purposes; and
11. the UK government should establish a multi-disciplinary project to create a bespoke statutory legal framework to facilitate the certain crypto-token and cryptoasset collateral arrangements.

Again, the consultation and report represent a colossal and momentous achievement by the Professor Sarah Green and her team, who should be commended for their efforts. I'm sure their work will form the basis of a great deal of legal evolution in the coming years.