Defining digital assets in law
By Nick Dyson
The Law Commission has been consulting on law reform proposals to ensure the law of England and Wales effectively recognises and protects digital assets.
The legal system is playing catch-up. While digital assets have proliferated – including digital files, domain names, email accounts, in-game digital assets, carbon credits and crypto-tokens – the law has lagged behind. Resolving legal issues and questions concerning these assets is difficult when the law does not have structures into which they fit easily.
To fix that problem, the Law Commission is now proposing that the law of England and Wales should recognise a new category of personal property. Currently, personal property falls into two distinct categories – things in possession and things in action. But the Law Commission thinks neither accommodates digital assets comfortably, even if digital assets display some of the characteristics of other objects of property rights.
Data objects defined
The proposal is for this third category of personal property to be called “data objects”. These are different to pure information, which the Law Commission considers should not attract property rights), and requires a digital asset to satisfy certain criteria:
- it is composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
- it exists independently of persons and exists independently of the legal system; and
- it is rivalrous – that is if it is consumed by one user, it cannot simultaneously be consumed by another user.
The example given by the Law Commission so far of a digital asset that satisifies these criteria is a crypto-token, but there will be more in time. Similarly, the Law Commission has suggested both common law and limited statutory reform could provide a means to develop and implement its proposals, but has not identify either as its preferred option.
The deadline for responses to the consultation was 4 November 2022, with the Law Commission expected to publish final recommendations for reform in 2023. Several published responses – particularly from the legal and finance professions – appear to generally welcome the Law Commission’s objective of creating a facilitative and legally certain environment in which digital assets can flourish. But there are differing views on how best to achieve this goal, especially around the role of statutory reform.
More broadly, the Law Commission is continuing its review of emerging technologies, having previously consulted on both smart contracts and electronic trade documents. Its latest consultation, on decentralised autonomous organisations, should lead to harmonised proposals and cross stakeholder engagement. However it is critical that other associated reviews and consultations – including the Department for Digital, Culture, Media & Sport inquiry into non-fungible tokens – are aligned to achieve the Law Commission’s objective most effectively.
The international dimension
It will also be important to pay attention to international developments as several jurisdictions are already vying with each other to become the best legal forum for dealing with digital assets.
The European Union, for example, has agreed a regulatory framework for crypto-assets, the UNIDROIT Digital Assets and Private Law Working Group is developing a set of international principles, and in America the American Law Institute and the Uniform Law Commission's Uniform Commercial Code and Emerging Technologies Committee is in the process of recommending changes to the United States Uniform Commercial Code.
The good news is that jurisdictions’ increased focus on digital assets and engagement with stakeholders should bring greater certainty in the long term. Still, these parallel developments have the potential to create additional confusion and burdens in the short to medium term as stakeholders get to grips with potentially conflicting reforms and ongoing reviews.
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