On 28 July 2022, the Law Commission published its consultation paper on digital assets.
This is not its first foray into addressing the issues caused by emerging technology interacting with a commercial and criminal legal system which, though more flexible than many, is still primarily based on tangible concepts of goods and services.
In November 2021 the Law Commission concluded that the current legal framework in England and Wales was able to facilitate and support the use of smart legal contracts; and earlier this year it reported on electronic trade documents.
However the current consultation exercise has a much wider remit in relation to digital assets generally (with a particular emphasis on cryptoassets), as the Law Commission has been asked by the Government to put forward proposals for law reform to facilitate the development of digital assets and emerging technology.
New category of personal property
The Commission starts by acknowledging that to date, there has been little by way of formal legal change in this area. It goes on to explore a number of proposals for law reform.
In fact, as the report itself notes, the number of reforms suggested is relatively limited as the general view is that the flexibility of the common law of England and Wales is sufficient to accommodate digital assets.
However, there are some suggestions which are of general interest and importance. In particular, the idea of establishing a new category of personal property has generated a lot of attention.
Recognition of a third category of personal property
The Commission’s main proposal is the formal recognition of a third category of personal property, distinct from the existing categories of things in possession and things in action.
The Commission labels this category ‘data objects.’
The Commission’s view is that recognition of a third category of personal property to accommodate specific types of digital assets (this is not intended to embrace everything stored or traded digitally) will act as a useful legal development and “allow for a more nuanced consideration of new, emergent and idiosyncratic things”.
Establishment of certain criteria to apply to the new category of personal property
It is not intended that the new third category of property be extended to everything stored or traded digitally.
The paper proposes specific criteria to be used to determine which items fall within the new third category of personal property.
These focus on principles and characteristics of the relevant item and at their core state that, in order to fall within the new category, a “thing” must be:
- composed of data represented in an electronic medium;
- exist independently of persons and the legal system; and
- be “rivalrous”.
Whilst the first two criteria are relatively self-explanatory, the term “rivalrous” is not commonly used.
The term is described generically by the Law Commission rather than defined specifically. The core idea is that something is rivalrous if use or consumption by one person (or group of people) inhibits use or consumption by another person (or group of people).
The Consultation paper also discusses different categories of digital asset including digital files and records, email accounts and in-game digital assets, domain names and crypto-tokens (including a detailed analysis of the legal position in relation to cryptoassets), and the extent to which those different type of assets might fall within the new category of personal property proposed.
Application of the factual concept of 'control' to data objects
English law generally recognises the idea – most relevant in relation to tangible assets - that there can be a separation between ownership of an asset, and the holding (or 'possession') of that asset.
The Commission notes that when it comes to considering this principle in the context of digital assets, it would preferable to focus on the factual concept of 'control' (as distinct, albeit similar, to possession).
This idea of 'control' as a specific legal concept is offered both as a general observation in terms of categorising legally how people interact with data objects, but also as a tool going forward to help structure the legal mechanisms and arrangements that apply to crypto-tokens, such as the processes for transfers of title and custody arrangements.
Another major area of the report examines whether existing causes of action and remedies can be pursued in disputes involving digital assets. (This discussion takes place against the assumption that the Commission’s recommendations relating to a new category of 'data objects' as property have been implemented.)
The Commission’s report includes the following conclusions in this area:
Breach of contract
The Commission concludes that individuals should be able to pursue an action for breach of contract, where the subject matter of the contract is a digital asset, in the same way they could for a contract concerning any other object since the question of whether there has been a breach of a contract term will remain the same.
The paper also considers existing vitiating factors which may render a contract void including mistake, misrepresentation, duress and undue influence. The Commission again concludes that there is no reason why such factors should not apply to contracts concerning digital assets.
Following and tracing in relation to crypto-tokens
Following and tracing are not in themselves remedies but rather are evidential rules which a claimant may rely on to show what has happened to an asset in which they have a proprietary interest.
Following is the process by which an asset is followed as it changes hands (meaning the asset itself does not change), and tracing is the process by which a new asset is derived from or obtained as a substitute for the original asset.
The Commission concludes that since the data structure and parameters of a crypto-token change during the transfer process, tracing (as opposed to following) is better suited to enable a claimant to locate and identify a digital asset which has been misappropriated.
Equally however, the Commission does acknowledge that a transfer of a crypto-asset may involve mixing, so there is an open question as to whether there is a need for reform in this area so as to better accommodate crypto-tokens.
Under English law a common remedy where an individual’s tangible personal property is interfered with by another is the tort of conversion. Often the remedy will be damages but orders can also be sought for delivery up of the relevant physical items. To date this remedy has been unavailable for non-tangible assets (including digital assets), but without reaching any definitive conclusion the Commission floats the idea of extending this principle to data objects.
Breach of trust
The Commission concludes that data objects that attract property rights may be held on trust, meaning that breach of trust as an equitable cause of action should be available.
The paper concludes that the principles governing the award of equitable remedies are sufficiently flexible to apply to digital assets.
The Commission concludes that recent case law seems to suggest proprietary restitution should be available as a cause of action where a claimant retains legal title to a digital asset.
As the question in a claim for unjust enrichment is whether one party has been enriched at the expense of another by receipt of property, in circumstances which are unjust, the Commission argues that the type of property should not have a bearing on the availability of this cause of action.
The Commission concludes that unjust enrichment as a cause of action should apply to digital assets as it would to any other object attracting property rights.
The notes above highlight some of the key issues of general application within the paper, but in terms of a general overview of its contents and recommendations this barely scratches the surface of the 549 page document.
The consultation period ends on 4 November 2022, and it will be interesting to see how many responses are received, and how wide their coverage is. Trying to respond substantively on all aspects of the consultation paper would be a huge undertaking.
Once this deadline has passed, the Commission will analyse any submitted responses and undertake further stakeholder engagement, as appropriate. This will enable the Commission to finalise its recommendations for reform to the government, which will then be published in a final report. There is no firm timetable set for this but given the size of the exercise we suspect that will be at least six months away.