There is no settled definition of digital assets, which can be interpreted broadly to include social media accounts, e-mails, websites and cryptoassets. You can read a helpful introduction here.
This note focuses specifically on cryptoassets and what ‘ownership’ means in the context of this sub-category of digital assets. In particular, this article will consider the ownership of cryptocurrencies and non-fungible tokens (NFTs). This note is intended to provide an overview of some of the key concepts and discussion points relating to ownership of cryptoassets.
A form of property
Ownership is fundamentally a form of property right. If you own something then, broadly, you are entitled to deal with it how you choose, to the exclusion of all others. The concept of ‘property’ in this sense does not refer to specific things themselves, but instead to a collective understanding about how those things should be dealt with and held.
In light of the above, if the concept of ownership is to apply to cryptoassets, they must first be regarded as a form of property by the law. There have already been a number of judgments in which the courts of England and Wales have been content to reach the conclusion that cryptoassets are a form of property (if only for limited purposes).
The courts’ approach to this issue is understandable, given that many cryptoassets appear to display the key characteristics of property. In particular, they are capable of being defined, are identifiable by third parties, and they display a degree of stability or permanence.
Although the question of whether cryptoassets are a form of property is abstract, the answer has many important implications for the real world. For example, whether something is considered to be property will impact on inheritance issues, the protection one might have under the law if it is stolen or otherwise the target of fraudulent activities, and its tax treatment.
A third category of personal property?
One of the issues considered in several of the relevant court cases is what type of property cryptoassets are. Is owning a cryptoasset similar to owning something tangible like gold, which you can physically take possession of, or is it analogous to a balance in a bank account? Alternatively, are cryptoassets an entirely different type of property altogether?
There is still considerable debate concerning this issue and it is one of the central questions the Law Commission is seeking to address as part of its consultation on digital assets.
The Law Commission’s consultation paper published on 28 July 2022 contains a provisional proposal for the explicit recognition of a third category of personal property; ‘data objects’. In order to fall within this category a thing must:
(i) be composed of data represented in an electronic medium, including in the form of computer code or electronic, digital or analogue signals;
(ii) exist independently of persons and exist independently of the legal system; and
(iii) be rivalrous (a resource is rivalrous if use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time).
The above criteria have been produced with cryptoassets in mind. Indeed, one of the key roles of the criteria is that they distinguish cryptoassets (and other data objects) from pure information, which cannot be property.
Does control equate to ownership?
In a practical sense, ‘owning’ cryptocurrency can be equated to the ability to move it on the blockchain. This requires a pair of cryptographic keys, one public and one private, which is used to initiate a transaction. If that transaction is verified and accepted by the network, it is included in a new ‘block’, and thereafter becomes part of the blockchain.
Therefore, it is control of the private cryptographic key (a long alphanumeric code) which gives an individual control over cryptocurrency. This is what allows someone to ‘spend’ cryptocurrency and make other transactions.
Further, it is private keys that are stored in digital wallets, not the digital coins or tokens themselves, which remain on the blockchain.
The link between the ability to transfer cryptocurrency and ownership was recognised by the UK Jurisdiction Taskforce’s legal statement on cryptoassets, issued in November 2019:
“…a person who has acquired knowledge and control of a private key by some lawful means would generally be treated as the owner of the associated cryptoasset…”
The statement also acknowledged some important circumstances in which there should arguably be a departure from this general position, including where:
- a custodian or intermediary holds the private keys on behalf of a client
- a person has obtained the private keys through some unlawful means, such as hacking
- there has been an ‘off-chain’ transfer, and the transferor still knows the private key (and can still therefore exert control over the cryptocurrency.
Some of the above circumstances have clear analogies to the traditional/physical world and registers of ownership. However, there are other novel scenarios that arise because of the innovation in this field which may not be adequately catered for without further development or reform of the law.
In its consultation paper, the Law Commission considers that the broad concept of control is unlikely to be sufficiently nuanced to be comprehensively applied to the various and complex legal arrangements that can apply to cryptoassets. Instead, the Commission considers that the concept of control might be best regarded as an important element of such legal arrangements, rather than the determinative feature concerning issues of ownership, etc.
Non-fungible tokens (NFTs)
One of the key distinctions between NFTs and cryptocurrencies is that they are unique and are therefore not interchangeable (hence the ‘non-fungible’ moniker). However, NFTs operate in a very similar way to cryptocurrencies, in the sense that they are stored on a blockchain, and control is facilitated by the use of private keys.
That said, there are a number of additional issues that arise when considering the ownership of NFTs. These additional issues principally arise from the fact that NFTs are used for a wide-range of different purposes.
These include:
- providing a digital certificate of ownership in relation to digital art or media
- constituting collectibles or digital memorabilia
- acting as a digital receipt for a physical good or service
- representing and providing access to in-game items in computer games
What ownership means depends on the context and what has been agreed (if anything) between the parties to any transaction.
In the context of digital art, NFTs provide a means for ‘ownership’ to be exchanged in a decentralised manner, whilst purporting to provide a digital certificate of authenticity.
The purchaser of an NFT may acquire the copyright in the underlying work, or they may not. If they do not, then they will generally not be able to exploit the underlying artwork, for example by printing and selling physical copies, or licensing its use.
In the case of NFT collectibles, such as those that relate to video-clips of famous sporting events, the purchaser will generally not acquire the copyright of the related video-clip. In this sense, NFTs are analogous to baseball cards or football stickers. However, rather than holding a physical card or sticker, the owner of an NFT has control over a digital token, which relates to a video-clip hosted on a server (which in many cases can be viewed by anyone with an internet connection).
Finally, in the context of computer games, NFTs are attached to rare or desirable in-game items which can be purchased by, and traded between, players. How this operates in practice depends on the specific game in question. The general concept is that ownership of the NFT allows the player to use the item in the game for as long as they have access to it.