The Law Commission has called for new legislation to create a “third category of thing”, which is neither “a thing in action nor a thing in possession” but could include certain digital assets, such as crypto-tokens.
The commission also urged the government to create a panel of industry experts – including lawyers, judges and academics – to provide guidance on the “complex and evolving issues” relating to digital assets.
The body launched new projects in September 2020 to ensure that English law could accommodate smart contracts and digital assets.
For its Final report on digital assets, the Law Commission carried out what it described as the “first-ever rigorous common law analysis” of the issue, “showing how the law in England and Wales can respond to this kind of emerging technology”.
The report followed a consultation last year, which drew on conclusions in the Lawtech Delivery Panel’s UK Jurisdiction Taskforce legal statement on crypto-assets and smart contracts, published in November 2019.
The commission said some consultees, “including senior and specialist judges”, said new legislation was needed to express the existing common law position that there could be a “third category of thing”, which was neither “a thing in action nor a thing in possession”.
“They said that this would confirm the existing position at common law, facilitate the law’s continued development on the point and lay to rest any lingering authority suggesting that there can be no ‘third’ category of this nature.
“We recommend such legislation and conclude that it will confirm and support the existing common law position.”
However, the commission said it was “not necessary or appropriate to define in statute the hard boundaries of such a category and that the common law was a “better vehicle” for determining them.
Third category things “might not necessarily always be digital things and could include things like milk quotas or certain carbon emissions allowances”.
The Law Commission made a second recommendation for statutory law reform, this time to develop a new regime for collateral arrangements involving digital assets, particularly crypto-tokens and crypto-assets.
The issue did not “merely involve legal questions” but extended to policy-based judgments beyond the scope of the report, so the government should “as a matter of priority” set up a multi-disciplinary project to put a place a “bespoke statutory legal framework” that facilitated the operation and enforcement of certain crypto-token and crypto-asset collateral arrangements.
The organisation also recommended that the government set up a panel of “industry-specific technical experts, legal practitioners, academics and judges” to provide non-binding guidance on the “complex and evolving issues relating to control (and other issues involving digital objects more broadly)”.
The panel would need to include those with expertise in the crypto-token markets, and not just those with expertise in traditional finance markets or intermediated securities markets.
The commission said its recommendations aimed to create a “clear and consistent framework for digital assets” which would support the government’s goal of attracting development to “cement the position of England and Wales as a global hub for crypto-tokens and crypto-assets”.
Professor Sarah Green, Law Commissioner for commercial and common law, said: “The use and importance of digital assets has grown significantly in the law few years. The flexibility of the common law means that the legal system in England and Wales is well placed to adapt to this rapid growth.
“Our recommendations for reform and development of the law therefore seek to solidify the legal foundation for digital assets. We also aim to ensure that the private law in England and Wales remains a dynamic, globally competitive and flexible tool that enables further technological innovation.”
Justice minister Mike Freer added: “We must ensure our law remains equipped to meet the complexities of these technologies well into the future, and we will carefully consider these findings as we look to further strengthen the future of our globally renowned legal system.”