UK: Crypto assets & personal property laws

• United Kingdom

• Financial services and markets regulation
• Financial services disputes and investigations
• Technology
• Financial services

22-11-2022

Part 1: Discussion on the definition challenges with  crypto assets

Why should I read this?

The Law Commission are currently reviewing how crypto assets can be brought under UK personal property laws to ultimately make recommendations for change to the regulator. Recognising the importance of getting the rules surrounding digital assets right, we responded to the Law Commission’s consultation. And in this ‘crypto assets and personal property law’ series we discuss the key challenges we recognise with reforming this area of the law.

In the first of our discussions, we identify one of the key challenges incorporating crypto assets into personal property laws, which is to ensure any definitions adequately accommodate the nature and evolution of the technology.

Key issues with defining crypto assets

When looking to define crypto assets so that they are incorporated into personal property laws, regulators need to be mindful of the following: 

1. A new third category of personal property is needed

The two current definitions for personal property do not fully encapsulate crypto assets but instead it straddles the two. We therefore agree with the Law Commission’s proposal that for crypto-assets to be covered, a third category of personal property is needed to provide clarity.

2. Future proof versus being too broad

Getting the definition right is a balancing act. There is need to future proof  to keep up with the pace of change with this new technology. The difficulty in putting a definition on crypto assets now is that it may confine what is covered as the technology evolves. Any definition runs the risk of new forms of crypto-assets falling outside the definition. The flip side of this is that if you make the definition so broad, it runs the polar risk of things falling into it that the regulators would never have intended for it to do so.

Due to this balancing act, the definition needs to be flexible. In our consultation response we recommended the use of ‘data objects’ as opposed to ‘digital assets’ for the name of the third category. This way it is sufficiently broad so as to limit the risk of crypto-assets outgrowing the definition.

3. Owner/item relationship

To fall within the Law Commission’s proposed third category of personal property the ‘thing’ in question must exist independently of persons and independently of the legal system.

4. Explicitly recognised as a third category of personal property

We believe that the law should explicitly recognise a distinct third category of personal property. Without statutory reform, we could be waiting years for a court  decision to confirm what digital objects fall within personal property. However, any statutory definition has to be clear to avoid ambiguous terms that are likely to lead to satellite litigation.

5. Crypto tokens are not ‘goods’

We need to be careful not to shoehorn crypto tokens into existing legislation that was never designed to accommodate for such products. For example, it is not appropriate to treat crypto tokens as comparable to ‘goods’, as currently defined in the Sale of Goods Act 1979 (SGA) and other related statutes, including the Supply of Goods and Services Act 1982 and the Consumer Rights Act 2015.

Goods have a particular definition in the SGA that excludes ‘money’ which crypto tokens are more akin to. Therefore crypto tokens should not be viewed as goods nor should the SGA be redefined. Any attempt to do so would need to be considered against the standards required.

What else do you need to know?

Reforming personal property laws to accommodate for digital objects would provide legal certainty and lay a strong foundation for the development and adoption of digital assets. As things currently stand, there is a grey area surrounding protection for crypto assets, which is being played out in the courts. We therefore support any reform that will explicitly codify digital objects through statute.

Next steps will be for the Law Commission to analyse the responses to the consultation which may produce further issue papers. At the end of a project, the Law Commission will usually submit a report to the Lord Chancellor or relevant Secretary of State, giving their final recommendations and, where necessary, will include a draft Bill.

Further reading

Digital assets: global regulation- Publications - Eversheds Sutherland (eversheds-sutherland.com)

Developing Crypto Caselaw – Exchanges as constructive- Publications - Eversheds Sutherland (eversheds-sutherland.com)

Written with Clare Johnston in our Knowledge team