A Law Commission report has recently been published regarding Digital Assets and Crypto Assets recommending that a third legal category is created for these assets to fall into. To understand the need for this third category, it is important to know the current position.
At present, there are only 2 legal forms of property:
- Real Property, such as a house or a flat.
- Personal Property, such as a right to income or a physical asset such as a painting.
The Law Commission concluded that specific legislation is needed to ensure that something such as a Crypto Asset will not be deprived legal status merely due to the fact that it does not fit into either of these 2 legal forms of property.
According to the report, the proposed third category of property will have criteria as follows:
“a thing should be capable of falling within our proposed third category of thing to which personal property rights can relate if:
- it is composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
- it exists independently of persons and exists independently of the legal system; and
- it is rivalrous
A thing is rivalrous if the use or consumption of the thing by one person (or a specific group of persons) necessarily prejudices the use or consumption of that thing by one or more other persons.”
The Law Commission report states that there may be other assets which are not digital that will also fit into this third category of property, such as carbon emission allowances. This is something that is bound to have much more prevalence in the future and therefore requires consideration as to how the ownership of such an asset is dealt with legally.
Having a defined third category of property would be instrumental in helping to provide further clarity and certainty for those with Crypto Assets. It is vital to understand how these assets are dealt with from a legal perspective. For instance, how will these be inherited in your estate and how should I deal with this asset in my Will?
Another issue which needs further attention is the issue of jurisdiction. Many digital assets may be “located” in another jurisdiction, which is different to the owner of the asset. For example, you may have bitcoin stored in an online wallet which could be held on a server in the US but you live in the UK. Further clarity is needed on this in order to deal with potential disputes over jurisdiction and explore whether there may be conflicts in cross-jurisdictional legislation.
It is clear that so much more certainty is needed over Crypto Assets and it is reassuring to see that this is on the agenda for the UK government to now consider whether to implement the Law Commission’s recommendations.