Law Commission targets smart contracts and digital assets

Green: Compelling case for reviewing the law

The Law Commission has launched new projects to ensure that English law can accommodate smart contracts and digital assets.

It will look for any gaps in the law that could hinder growth in the use of smart contracts, while ensuring that the law is capable of accommodating digital assets, such as electronic documents and cryptoassets.

The project on smart contracts was announced by the Law Commission as part of its 13th programme of law reform in December 2017, but was paused pending the outcome of the government-backed LawTech Delivery Panel’s work in the same area.

This came last November, when the panel’s UK jurisdiction taskforce declared that cryptoassets should be treated in law as property and smart contracts could create legal relationships just as well as more traditional ones.

With contract law having developed with natural language in mind, the Law Commission said smart contracts gave rise to a range of questions.

These included the circumstances in which a contract written in code could be legally binding, how smart contracts should be interpreted by a court and the legal consequences of the code not performing as intended.

“These questions need to be answered so that English law maintains its reputation for sophistication, coherence, and efficacy, and so that businesses can be confident in their use of smart contracts,” the law reform body said.

It is currently seeking initial views from business and from the technology sector, with a view to publishing a call for evidence in late 2020.

The Law Commission said outdated legislation was “preventing businesses from achieving an optimal electronic environment” with the rapid move towards the digitisation of trade and transactions.

For example, the intangibility of a simple digitised document means it cannot, on current understanding, be “possessed” and therefore cannot constitute a document of title under the Bills of Exchange Act 1882.

“This can cause considerable commercial difficulties, particularly in the context of international trade finance.”

The government has asked the Law Commission to identify reforms that ensure the law accommodates both cryptoassets and other digital assets “in a way which allows the possibilities of this technology to flourish”.

In the first instance, it will consider the issue of possession, particularly with regard to documents of title, documentary intangibles and negotiable instruments, and look to publish a consultation paper in the first half of 2021.

Law Commissioner Sarah Green said: “Smart contracts, digitised assets and electronic documents promise to revolutionise the way we do business, digitising existing processes and in some cases introducing entirely new concepts. There are, however, lingering uncertainties about whether and how English law can accommodate these.

“We believe there is a compelling case for reviewing the law in these areas to ensure that the jurisdiction of England and Wales remains a competitive choice for those who want to use and to develop emerging technology.”

We reported yesterday on a new guide that explains the role smart contracts, cryptoassets and blockchain might play in future legal practice. It was produced by the Tech London Advocates’ blockchain legal and regulatory group and the Law Society.

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