Shearman & Sterling LLP | FinReg | Law Commission Publishes Final Report on Digital Assets
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  • Law Commission Publishes Final Report on Digital Assets

    The Law Commission, a U.K. body which makes suggestions for legislative reform, has published a final report in response to its July 2022 consultation on potential digital asset law reforms.

    The report found that minimal law reforms were required. It proposes that:
    • The common law should be the primary forum for law reform in this area, given its inherent flexibility and existing ability to accommodate digital assets. According to the Law Commission, the UK's flexible common law system stands up well to the complex codified digital asset laws adopted by many European jurisdictions and the EU's Markets in Crypto-Assets Regulation.
    • Statute should be implemented in a targeted way where necessary to support the existing common law position or where it is not possible for the common law to develop appropriately. This would include legislation clarifying that digital assets are capable of attracting personal property rights as a third category of "thing", which is separate from a thing in possession (i.e., physical asset) or a thing in action (i.e., intangible asset). In case law to date for example AA v Persons Unknown [2019] EWHC 3556 (Comm) and at least 23 other cases, the English courts have had no trouble in identifying, or accepting, various kinds of crypto-assets as constituting property, despite the fact they are neither things in possession nor things in action. However, coverage for asset classes is somewhat patchy, leading to some legal uncertainties. The Law Commission would also propose to include a bespoke statutory framework to support the operation and enforcement of certain crypto-token and crypto-asset collateral arrangements. This follows the approach in certain other jurisdictions, which have legislated on the topic - Japan, for example, has arguably brought crypto-tokens within the sphere of property law via amendments to its Payment Services Act, while Liechtenstein has enshrined tokens as a new form of legal object. A number of other jurisdictions, including Hong Kong, Singapore and New Zealand, have developed case law finding that digital assets can attract property rights but have not so far confirmed this in legislation.

    The Law Commission also recommends that expert industry guidance, developed by a Government-appointed panel of industry experts, should be developed to support the common law and statute.