Brockhurst: Emerging consensus
A coalition of 11 law firms has called on the Law Commission to confirm a provisional conclusion on the approach courts should take on jurisdiction and crypto-assets.
They said a “clear recommendation” from the commission on jurisdiction, which is determined by the law of situs, would be “of considerable benefit to the crypto-assets industry in the UK, for example by attracting overseas talent”.
“In our experience, important figures in the crypto-assets industry are sometimes put off moving to the UK due to the absence of a clear situs rule.
“Amidst the uncertainty, HMRC has produced its own guidance on situs, which prejudices crypto-assets vis-à-vis every other asset class (by denying crypto-asset holders the benefits of the foreign income and gains relief regime in most circumstances and giving them immediate inheritance tax exposure).
“We appreciate the Law Commission is concerned only with reaching the most viable position under private international law, but to the extent the signatories can speak for industry, we believe the provisional conclusion for a lex situs rule for international jurisdiction would immeasurably improve the attractiveness of the UK to individuals and businesses (subject to aligning the applicable law position to this).”
The coalition was responding to a Law Commission consultation on digital assets and electronic trade documents in private international law, launched in June – its focus was on the former aspect.
It is made up of 11 law firms: Bird & Bird, Burges Salmon, Charles Russell Speechlys, CMS, Forsters, Mishcon de Reya, Mourant, Simmons & Simmons, Quastels, Penningtons Manches Cooper, and Withers.
They are also joined by trade association Crypto UK, crypto tax specialist Knightbridge Tax, and the Society of Trust and Estate Practitioners (STEP).
The signatories, all of whom have “significant practical experience” in dealing with crypto-assets, said their primary concern lay in the law of situs, arguing that it was “central to the treatment of crypto-assets and intrinsically tied” to private international law.
They stressed that clarity on situs was “essential for certainty in areas such as tax, succession and cross-border disputes”.
The Law Commission said in the consultation paper that it had provisionally concluded that the “most appropriate court” to hear a cross-border property claim aimed at recovery of a crypto-token was “the court of the place where the crypto-token can most effectively be dealt with at the relevant point in time.” The relevant time was when proceedings were issued.
It also provisionally concluded that where it was necessary or desirable to “localise” tortious damage by reference to the victim, the damage was sustained “where the victim physically was at the time of the damage”.
Neither conclusion represented “law reform” but was rather “an interpretation of the gateways” consistent with the general principles underpinning the existing rules of international jurisdiction.
The coalition said: “Because enforcement and recoverability of crypto-assets depend on factual control, we support the provisional conclusion to link questions of international jurisdiction to the place of control.”
It went on: “We have heard one or two commentators question whether there is any case law precedent for determining location with reference to where the asset is controlled; however, this rather misses the point, which is that the test should be determined by where the asset can be effectively dealt with, which in the case of crypto-assets requires the court to ascertain the location of practical or effective control (rather than legal control), which points to only one jurisdiction: Where the controllers of the private keys [the unique strings of characters that act as secure passwords for crypto-assets] reside.”
The coalition praised the commission for “positioning England and Wales as a global leader in addressing the legal challenges of omni-territorial assets such as crypto-assets, which do not have a clear territorial nexus”.
James Brockhurst, partner at law firm Forsters and member of the STEP digital assets special interest group steering committee, described the common law situs of crypto-assets was “one of the most interesting but unanswered questions of current times”.
“The broad coalition of parties that have signed this response shows there is an emerging consensus on the situs question and the courts are increasingly in alignment with our view.
“We believe our position is backed by the principles of private international law and we eagerly await the Law Commission’s final recommendations.”