Following an extensive and detailed consultation that set the benchmark globally for in-depth analysis of private law issues relating to digital assets, the Law Commission has published its final report on digital assets. The report is an outstanding contribution to thought leadership, both under English law and globally, on the private law treatment of digital assets. The report makes certain recommendations to Government on the need for limited and targeted statutory reform. It confirms that English law remains a dynamic tool for market innovation and is highly suitable for the development of the digital asset market. Linklaters welcomes the fact the conclusions were highly aligned with our consultation responses.

The Law Commission’s final report on digital assets

The Law Commission of England and Wales has now published its final report on digital assets. The report provides a detailed summary of the existing law in respect of a wide range of legal questions relating to digital assets, as well as proposing some limited recommendations for law reform and other measures.

This report follows an extensive consultation, to which we provided an in-depth response. The key conclusions of our response are summarised here. We very much welcome the fact that many of the Law Commission’s final conclusions are closely aligned with our feedback.

Existing legal certainty

Much of the report is focused on analysing the existing private law treatment of digital assets and highlighting that there is already a high degree of legal certainty on the fundamentals. The considerable analysis that has gone into this is of great benefit to the market. 

In some areas, the Law Commission’s analysis has developed from that tentatively presented in its consultation paper, as was to be expected given the purpose of the consultation. Notably, the report’s conclusions that (i) factual control plus intention can found a proprietary interest in a digital object that may fall short of legal title; (ii) it is possible (with requisite intention) to effect a legal transfer of a cryptoasset off chain by a change of control; and (iii) a special defence of good faith purchaser for value without notice applicable to certain cryptoassets can be recognised and developed by the courts, are very helpful developments. These also reflect the position in Points 6, 7 and 8 of our response summary.

Areas for statutory intervention 

Consistent with our conclusions, the report finds that generally any areas of residual legal uncertainty are highly nuanced and complex and, as such, best left to development under the common law. It does, however, make some recommendations for targeted statutory intervention.

The first is to confirm that a thing will not be deprived of legal status as an object of personal property merely because it is neither a thing in action nor a thing in possession. This is designed to remove any doubt that some assets (such as certain digital assets) are objects of property that fall into neither of these traditional categories. The Law Commission acknowledges repeatedly that this will merely confirm the position at common law, as we note in Points 1 and 2 of our response summary. Crucially, the Law Commission is not seeking to define the boundaries of any third category of property. We are fully supportive of this approach, given the potential challenges we highlight in Point 3.

The second area proposed for statutory intervention is in relation to collateral. The report recommends amendments to the existing Financial Collateral Arrangements (No.2) Regulations (FCARs), including to clarify that certain digital cash and digital securities models will fall within scope. Tangentially related to this, the report also recommends that UK companies legislation should be reviewed to support the issue and transfer of digital equity securities (as opposed to debt or other contractual securities which do not face the same barriers, as discussed in our FAQs on the UKJT Legal Statement on Digital Securities). 

In relation to cryptoassets more broadly, the report recommends establishing an industry led group to formulate a bespoke statutory framework to facilitate collateral arrangements. As touched on in Point 9 of our response summary, we are supportive of this, albeit that we thought on balance an extension of the FCARs might be preferable to the development of a bespoke regime. 

Further development of the common law

The report generally aims to provide a foundation from which the common law can develop incrementally in line with technological and market advancements. To support the judiciary with this task, the Law Commission recommends that the Government creates or nominates a panel of industry experts to provide non-binding guidance, particularly in relation to issues relating to the concept of control. We agree that there would be great value in this. 

Next steps 

The specific recommendations for implementation outlined in the report are for the Government to consider and take forward, and the timelines for that remain unclear. However, much of the impact of the Law Commission’s work will be felt immediately, through the open publication of detailed analysis explaining the certainty and flexibility of the existing law.

The benefit of the Law Commission’s extensive analysis will likely also inform legal analysis and developments in other jurisdictions and in international fora. In some cases (such as in other common law systems) it will likely also be the subject of favourable judicial comment, as has already been the case in the US for example with regard to the Law Commission’s earlier consultation.