Proposals for legal reform relating to digital assets including the suggestion that they are recognised as a new distinct form of property called ‘data objects’ have been made by the Law Commission of England and Wales.
In a whopping 549-page consultation document, which seeks views from legal experts, technologists and users, the Law Commission examines how existing personal property law does — and should — apply to digital assets.
Digital assets, which include crypto-currencies and non-fungible tokens (NFTs), play an increasingly important role in modern society, the Law Commission points out, noting that the emerging technologies are used for a growing variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities.
The consultation document comes after the Ministry of Justice and Department for Digital, Culture, Media and Sport (DCMS) in March 2020 asked Law Commission to review the law on digital assets, to ensure that it can accommodate them as they ‘continue to evolve and expand’.
Its resulting proposals aim to deliver wider recognition and legal protections for digital assets, allowing a ‘more diverse range of people, groups and companies to interact online and benefit from them’, the Law Commission states.
‘Unique qualities’ of digital assets
In its proposals the Law Commission argues that there are several important areas that require legal reform ‘to recognise and protect the rights of users and maximise the potential’ of digital assets.
‘Because they are not tangible, digital assets have many different features to traditional physical assets,’ the Law Commission explains. ‘Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions.’
The consultation paper argues the law must ‘go further to acknowledge’ these unique features, which in turn would provide a strong legal foundation for the digital assets industry and for users. Through these reforms, the legal system would help to create an environment that is more conducive to digital assets and their markets.
The reforms also aim to help to achieve the UK government’s stated goal of the country becoming a global hub for digital assets, in particular for crypto-tokens and crypto-token systems.
Among the proposals include explicitly recognising a distinct category of personal property under the law that is better able to accommodate the unique features of digital assets. The distinct category is provisionally called ‘data objects’. The consultation document’s introduction explains that the Law Commission distinguishes data objects from ‘pure information’, which it considers ought not attract property rights.
‘Having suggested that the law should explicitly recognise a distinct third category of personal property, we describe the criteria that we consider a thing must exhibit before it properly can fall within that third category and thereby constitute a data object,’ the introduction goes on to explain. ‘We apply [in the consultation document] these criteria to different types of digital asset including digital files, domain names, email accounts, in-game digital assets, carbon credits and crypto-tokens’.
Consultation runs until November
“Digital assets such as NFTs and other crypto-tokens have evolved and proliferated at great speed, so it’s vital that our laws are adaptable enough to be able to accommodate them. Our proposals aim to create a strong legal framework that offers greater consistency and protection for users and promotes an environment that is able to encourage further technological innovation,” said Law Commissioner for Commercial and Common Law Professor Sarah Green.
“It’s important that we focus on developing the right legal foundations to support these emerging technologies, rather than rushing to impose structures that could stifle their development. By clarifying the law, England and Wales could reap the potential rewards and position itself as a global hub for digital assets,” she added.
Publication of the ‘Digital Assets: Consultation Paper’, which was informed by responses to a ‘Digital Assets: Call for Evidence’ issued in April 2021, comes shortly after the UK’s financial services and markets bill was introduced to Parliament featuring a section on ‘digital settlement assets’. The wide-ranging bill will enable certain types of so-called stablecoins to be regulated as a form of payment in the UK.
In a speech in April the Financial Conduct Authority’s chief data, information and intelligence officer, Jessica Rusu, referred to the “rapidly unfolding landscape” of crypto-assets and their underlying distributed-ledger technology (DLT), saying that its research showed that more than two million people in the UK are invested in crypto-assets.
The Law Commission’s deadline for responses is 4 November 2022.