UK Law Commission Consults on Law Reforms for Digital Assets

Following the Call for Evidence on digital assets in 2021, the U.K. Law Commission has issued a consultation on proposals to reform the law of England and Wales to recognize and protect the rights of users of digital assets. The Law Commission believes that the law of England and Wales is sufficiently resilient, flexible and iterative to adapt to digital assets, including cryptoassets and stablecoins. However, the law Commission considers that law reforms are needed to ensure that digital assets gain from consistent legal recognition and protection. Responses to the consultation may be submitted until November 4, 2022.

Among others, the Law Commission proposes:

1. The explicit recognition of a new category of personal property, which they call "data objects," including the conditions that must be met for an asset to fall within scope.
2. The law could be implemented either through common law reform or limited statutory intervention—views are sought on which would be the preferred method.
3. The concept of control as best describing the relationship between persons and data objects, rather than the concept of possession.
4. Provisionally concluding that "crypto-tokens" satisfy the proposed criteria and that they are appropriate objects of property rights, the rules of derivative transfer of title can be applied to such transfers.
5. An explicit clarification that the special defence of good-faith purchaser for value without notice should apply to crypto-token transactions.
6. Reforms to statutory law to clarify the scope and application of the Law of Property Act 1925, including the exclusion of certain qualifying transfers of equitable entitlements to crypto-tokens represented by entries recorded in electronic ledgers from the formalities, such as the need for an instrument to be in writing and signed, required for dispositions of equitable interests or trust.
7. That reform is needed to clarify the apportionment of shortfall losses arising out of commingled crypto-token holdings held on trust by an insolvent custodian.

The Law Commission also considers whether a bespoke statutory framework should be developed for collateral arrangements for crypto-token dealings and suggests that there is an arguable case for providing courts with the discretion to award a remedy denominated in certain crypto-tokens.

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