English Law Commission launches major crypto-token paper

Proposals to reform the law relating to digital assets, including cryptocurrencies and non-fungible tokens (“NFTs”) have been published by the Law Commission of England & Wales in a consultation paper launched today.

In its 500 page paper the Commission notes that these emerging technologies are used for an increasing 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.

Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions. The Commission argues that 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. 

Its proposals are designed to ensure that the law remains dynamic, highly competitive and flexible, so that it can support transactions and other arrangements involving the technology.

The reforms also aim to help to achieve the Government’s stated goal of the jurisdiction of England & Wales becoming a global hub for digital assets, and in particular, for crypto-tokens and crypto-token systems.  

Proposals in the paper include:

• explicitly recognising a distinct category of personal property under the law, provisionally called “data objects”, which is better able to accommodate the unique features of digital assets;
• options for how this distinct category could be developed and implemented under current law;
• clarifying the law around ownership and control of digital assets;
• clarifying the law around transfers and transactions involving digital assets.

Control, rather than possession, is proposed is the most appropriate concept to apply to data objects. The Commission believes the common law is capable of developing rules to deal with disputes between people having factual control of a crypto-token, and statutory reform would not be appropriate. However legislation should provide an innocent acquisition rule in respect of transfers.

Where crypto-tokens are held on behalf of or for the account of someone else, the Commission believes these arrangements could be characterised and structured as trusts under the law of England & Wales, even where assets are commingled with others. Legislation should provide for a general pro rata shortfall allocation rule in the event of custodian insolvency in this situation.

The Commission also believes that crypto-tokens can be the subject of title transfer collateral arrangements without the need for specific law reform to provide for this. It is not desirable to make provision for data objects to be the subject of possessory securities such as pledge. 

Further, existing legal remedies including breach of contract, vitiating factors, following and tracing, equitable wrongs, proprietary restitutionary claims at law, and unjust enrichment, can be applied to data objects without the need for statutory reform, as can existing principles relating to injunctive relief and existing methods of enforcement of judgments. There is an "arguable case" for reform to provide courts with the discretion to award a remedy denominated in certain crypto-tokens in appropriate cases.

Professor Sarah Green, the Law Commissioner for commercial and common law, commented: “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.

“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.”

Access the paper here. Comments are invited by 4 November 2022.