UK: Crypto assets & personal property laws

• United Kingdom

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

03-01-2023

Part 2: Discussion on the challenges with control and ownership

Why should I read this?

Control and ownership raise some unique issues for crypto assets. This is due to their pseudo-anonymous nature, not being visible tangible assets or anchored.  In the second of our discussions, we look at  the challenges faced when dealing with evidencing and transferring ownership and consider whether legal reform is needed.

What are the challenges with establishing ownership of digital assets?

In their review, the Law Commission proposed that crypto-tokens transferred by a transfer operation that effects a state change should provide an “innocent purchaser” defence to a party who unknowingly buys a stolen crypto-token for good value.  We do not agree with this approach as there is a fundamental issue given the ease with which stolen crypto-assets can be transacted.  We do not necessarily see why an innocent third parties’ claim should trump the claim of the original owner’s.  The problem in this area goes to difference between control and ownership when dealing with crypto-tokens.

Having control of a crypto-token is not necessarily evidence of ownership, which can be a challenge to verify. Control can be evidenced through the ability to access, for example, a wallet, and with the ability to deal with the assets within that wallet. Control does not necessarily evidence ownership of the asset. Evidencing ownership is complex due to the pseudo-anonymous nature of the blockchain. Any reforms to the rules in this area need to make it easier to identify the true owner; otherwise they will be left trying to show ownership through other means like evidencing the flow of funds into a wallet or the source of the original funds.

A further difficulty with the proposed “innocent purchaser” defence is how to show good value given with crypto tokens’ volatility.  For example, the fair value could be 20 times the price paid.

What could support establishing ownership of crypto assets?

Given the nature of crypto-assets, we believe that a higher than normal level of due diligence is required to confirm ownership (title), and therefore that the transaction is legitimate. This will help to limit situations of an innocent purchaser being sold an asset from a fraudster who has control of the wallet. Of course, this would not be an ironclad position but the data should align.  In addition, there are several other ways to support establishing ownership of crypto-assets and they include:

1. Register

One possible solution for establishing ownership is with a register. However there are not many registries for personal property that record title and even less that can be called a ‘definitive’ record. And even if it could, we would suggest it is still open to manipulation or simply going wrong. The Land Registry is the closest thing but even that has limits.

2. Panel of experts

The Law Commission provisionally concluded that it would be beneficial for a panel of industry, legal and technical experts to provide non-binding guidance on the complex and evolving issues relating to control and other issues involving data objects more broadly.

We are not convinced that non-binding guidance is going to help and believe that legislation to define and provide the rules is the better way forward, even if this is just a base line.

3. Legislation

We believe that the concept of control as it applies to data objects should be codified in statute. Having a basic definition of ‘control’ will give courts a much needed framework by which they could give further interpretation in complex cases.

The Sale of Goods Act 1979 or the Consumer Rights Act 2015 (the Acts) are a good starting point for any guidance. Contained within the Acts are a whole matrix around when title passes, when possession passes, and defences. Something similar could be applied to digital objects but we do not consider it appropriate to ‘shoehorn’ digital assets into those Acts.

Any legislation would need to consider what steps will be in place to pin an identity to a crypto token, as we have already established, control alone is not evidence of ownership. By way of example – if an ex-director has access to a company’s wallet. Even though they are no longer an employee, what would happen if they are the only person with the private key to the wallet? In such a circumstance, the company would have to show the flow of funds into the wallet and show it owned the funds originally and also that it had the source of funds. The problem with such a scenario is that this is cumbersome and what would be easier is if every wallet was linked to an individual or corporate entity like a bank account.

Reform personal property law?

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.

Further reading

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

UK: Crypto assets & personal property laws- Publications - Eversheds Sutherland (eversheds-sutherland.com)

Written with Clare Johnston in our Knowledge team