James Evison , partner and digital asset expert at law firm Stevens & Bolton, has written in the past for this publication about the fraud risks associated with cryptocurrencies. He looks at how the regulatory landscape is evolving in the UK and discusses the Law Commission’s recent lengthy consultation into the status of digital assets, and the draft Property Bill which resulted from this. Evison argues that whilst the lack of hard boundaries in the Bill will helpfully enable yet-to-be-developed technology to be integrated under its reach, he also wants to highlight that the Bill’s lack of concrete definitions means that it will not mark the end of wider legal wrestling with these complex questions. In this article, he writes alongside Miranda Joseph , senior knowledge lawyer at Stevens & Bolton.
James Evison
Miranda Joseph
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On 11 September 2024, the Property Bill , was introduced to Parliament. If the Bill is passed it will mean that for the first time ever, digital assets can be considered personal property under English statutory law. It marks a monumental step forward in adapting the English legal system to the realities of the digital age.
Why was the legislation needed?
The term “digital assets” includes an enormous range of “things” . From cryptocurrencies such as bitcoin, to virtual real estate and The Sandbox which allow users to buy, sell, and develop virtual land parcels), to CryptoKitties ), digital art, and virtual fashion ). The possibilities are endless, and by virtue of their evolving nature, the concept of a “digital asset” extends to “things” that are even beyond our current contemplation.
English common law, with its inherent pragmatism and flexibility, has recognised that a digital asset is capable of being an object of personal property rights, since at least the interim judgment in AA v Persons Unknown in 2019. Most recently, on 12 September 2024, judgment was handed down in a fully-contested trial in the case of D’Aloia v Persons Unknown, Bitkub & Ors which continued to develop this premise. The High Court held that USD Tether constitutes property for the purposes of English law as follows:
“USDT attract property rights under English law. It is neither a in action nor a in possession, but rather a distinct form of property not premised on an underlying legal right. It can be the subject of tracing and can constitute trust property in the same way as other property…”
“…Accordingly, in my view USDT, while neither a chose in possession nor a chose in action, is capable of attracting property rights for the purposes of English law. Those rights attach to the USDT itself, rather than the right to control it, for example the right to use the private key.”
As Mr Justice Farnhill recognised , until now, that digital assets did not fit neatly into the following traditional legal categories of personal property:
Things in possession. This covers objects that are capable of possession for instance a car, jewellery, or other tangible item; and
Things in action. This covers personal property that can only be claimed or enforced through legal action or proceedings, for instance debts, shares in a company, or rights to sue.
These two categories were developed long before digital assets were in contemplation and trying to shoehorn these new concepts into the old property categories is problematic. If wider society treats digital assets as personal property but the law lacks clarity, this could prevent these new technologies from flourishing and open the door to injustice. Owners of digital assets could be deprived of legal rights and remedies that would otherwise be open to them.
The Law Commission therefore commenced a lengthy consultation process in 2022, changing the draft Bill wording along the way, and culminating in its introduction to the House of Lords this September.
Key features
The Bill confirms the existence of a distinct third category of personal property. It is admirably succinct as follows:
“Objects of personal property rights
A thing is not prevented from being the object of personal property rights merely because it is neither –
a thing in possession, nor
a thing in action.”
The intention is to create a statutory foundation for digital assets, which is not restricted by the principles applied to the two traditional categories of property and which allows the common law to develop and evolve with the new technology.
The Bill is therefore deliberately agnostic about the characteristics of a third category of things. It does not impose hard boundaries and anticipates that there will be other things yet to be developed which may fall into the third category of personal property.
It also incorporates the potential for other non-digital assets to be included .
The wider policy aim, which thankfully survived this year’s change in government, is to demonstrate that England and Wales is a friendly jurisdiction which supports technological development. On introduction of the Bill to Parliament, Justice Minister Heidi Alexander said: “It is essential that the law keeps pace with evolving technologies and this legislation will mean that the sector can maintain its position as a global leader in crypto assets and bring clarity to complex property cases.”
Potential limitations
Although the Bill aims to provide foundational clarity, there are still many issues concerning the treatment of digital assets left unresolved which courts and lawmakers will need to grapple with.
There remains some, arguably necessary, ambiguity regarding the classification and treatment of various digital assets, leaving the courts to decide on a case-by-case basis. The Law Commission’s rationale is that these matters should be left to develop by common law, as has been the case historically, to allow for a “highly nuanced and flexible approach which is not possible to achieve in statute.”
There are also uncertainties around governing law and jurisdiction, not least given that many digital assets and platforms on which they are traded are decentralised. Again, the English common law has and will continue to step in to plug gaps, but there are also growing calls for legislative change to assist with determination of the governing law of a digital asset and jurisdiction in proprietary disputes .
There will still be issues of enforcement, particularly when dealing with cross-border transactions, since other jurisdictions may not recognise a third category of assets in the same way, or indeed at all.
There may even be unforeseen issues with the Bill when it comes into force given the rapidly developing digital landscape.
What does it mean for disputes?
By providing a clear, legal framework which incorporates digital assets as a form of personal property, owners of digital assets can rely on the legal protections afforded by English property law, such as having an enforceable action in the event of fraud or theft involving their digital assets . Their digital assets can be included as part of an estate . They will also be afforded the remedies that may be available for other proprietary claims, such as injunctions, orders for delivery up, or asset tracing.
It remains to be seen whether legislation will keep pace with the technological advancements in the digital realm. However, there is no doubt that the Bill is a crucial development in adapting the legal landscape. It will be prudent for businesses to consider the implications of the legislation carefully, and review and update their policies as necessary.
Footnotes
1 https://decentraland.org/
2 https://www.sandbox.game/en/
3 https://www.gucci.com/us/en/st/stories/article/sneaker-garage?srsltid=AfmBOorDqh3QrvmES70Kvmv9rYGtTKrUR_JsHkIcbhafH2TWS2A9omYK
4 EWHC 3556 , 4 WLR 35 at –
5 EWHC 2342
6 Ibid, paras. 5 and 173.
7 Ibid
8 https://www.gov.uk/government/news/new-bill-introduced-in-parliament-to-clarify-cryptos-legal-status
9 https://bills.parliament.uk/publications/56208/documents/5089
10 https://fmlc.org/wp-content/uploads/2024/06/Report_Digital-Assets-Governing-Law-and-Jurisdiction.pdf