New recommendations for reform & development of the law on digital assets by the Law Commission

The Law Commission has published its long awaited final report on digital assets. The Law Commission was asked by the UK Government to review current law and consider reform relating to digital assets in March 2020. Almost a year after the Law Commission launched its detailed public consultation, it published its final report on 28 June 2023. What does the report tell us?

The report provides an extensive summary on the existing law relating to digital assets and interestingly makes very few recommendations for law reform, noting that the common law of England and Wales is, in general, sufficiently flexible, and already able, to accommodate digital assets. Much of the report highlights that there is already a good degree of certainty in the legal framework surrounding digital assets and suggests that law reform, where possible, should be through further common law development.

The report proposes four recommendations as follows:-

1.         Common law

The report recognises that digital assets are neither a thing in action (e.g. a debt) nor a thing in possession (e.g. a car), but are instead a "third" category which the common law has already recognised as being capable of being things to which personal property rights can relate, without the need for statutory intervention. The report concludes that the law in this respect is now relatively certain and the areas of legal uncertainty that remain are highly nuanced and complex.

The report recognises that some digital assets are not easy to place within traditional categories of things to which personal property rights relate and have therefore recommended that legislation be enacted which confirms and supports the existing common law position. Statutory confirmation is required to eliminate any uncertainty that a thing will not be deprived of legal status as an object of personal property rights merely by reason of the fact that it is neither a thing in action nor a thing in possession.

The Commission concludes that it is not necessary or appropriate to define in statute the hard boundaries of such a "third" category.

2.         Expert panel

The report acknowledges that technological advances over the coming years are likely to lead to complex and diverse products and services that English law will be required to accommodate. It concludes that common law development is better able to keep up with these advances than statutory law reform, and that expert guidance would facilitate this.

The Commission therefore recommends that to assist in applying the law, an expert advisory panel should be formed and consulted to "provide non-binding guidance on the complex and evolving issues relating to control (and other issues involving digital assets more broadly)".

3.         Financial collateral arrangements

The report sets out proposals for reform and amendments that will need to be made to current English financial services law to accommodate digital assets that do not constitute financial securities.

4.         Digital asset collateral arrangements

The report acknowledges that the development of a new regime for collateral arrangements involving digital assets is an area where the common law cannot give sufficient legal certainty.

The Commission therefore recommends that the UK Government sets up a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of crypto-token and crypto-asset collateral arrangements.

The Law Commission's report is a further step towards certainty in the legal framework for digital assets and the Government will now take time to consider whether it intends to take the recommendations forward.

The Law Commissioner for Commercial and Common Law, Professor Sarah Green, commented "Our recommendations for reform and development of the law, therefore, seek to solidify the legal foundation for digital assets. We also aim to ensure that the private law in England and Wales remains a dynamic, globally competitive and flexible tool that enables further technological innovation".

For further details, please see a summary of the report here and the full report here.