Crypto assets to be classified as property in the UK

The Jurisdiction Taskforce of the Lawtech Delivery Panel in the United Kingdom has published a document providing guidance on the legal standing of some of the most pertinent terms in the crypto asset markets. The paper, ‘Legal Statement on the Status of Cryptoassets and Smart Contracts,’ is designed to minimize legal ambiguity and uncertainty surrounding digital assets.

Brief background

The Legal Statement on the Status of Cryptoassets and Smart Contracts was published by the UK Jurisdiction Taskforce on November 19, 2019. The report contains feedback from stakeholders across the blockchain industry.

The UK Jurisdiction Taskforce published a consultation paper inviting members of the public to participate in its process in May 2019. In addition to the consultation paper, which received over 140 written responses from varying parties, the Taskforce held a well-attended public consultation held in London on June 4, 2019, where interested parties gave input.

The Taskforce and consultation paper are centered around the premise that the common law system, which England and Wales conform to, is robust and sophisticated enough to cater to the fast-changing nature of the blockchain industry.

Because “the well-developed common law system of England and Wales was able to adapt to deal with such fast-changing technologies and was well-positioned to provide a sound legal foundation for their development,” the Taskforce is able to extrapolate past circumstances involving legally solid scenarios to those witnessed within the scope of blockchain technology to provide the market with statutory guidance.

The paper is being lauded as a step in the right direction for the blockchain industry, both domestically and globally. Additionally, some are interpreting it as a de-facto endorsement or belief in the future of the sector.

This sentiment is echoed by Sir Geoffrey Vos, a High Court Chancellor, at the beginning of the paper. Vos states: “In legal terms, cryptoassets and smart contracts undoubtedly represent the future. I hope that the Legal Statement will go a long way towards providing much-needed market confidence, legal certainty, and predictability in areas that are of great importance to the technological and legal communities and the global financial services industry.”

However, it is important to note that the Taskforce reiterated that the paper is not to be taken as the legal basis for issues related to the monetary policy of digital assets or the nature of blockchain-based assets as money.

Defining crypto assets

The Legal Statement on the Status of Cryptoassets and Smart Contracts refers to any blockchain-based asset as a crypto asset. Due to the fast-changing and complex nature of the blockchain industry, the Taskforce employs the term to represent the myriad types of assets present in the market.

Additionally, for the reasons listed above, the Taskforce also decided to refrain from providing a singular definition of crypto assets. The reasoning is that a sentence or paragraph dedicated to defining the term would be a waste of resources due to the complex and dynamic nature of the technology. According to the Legal Statement, crypto assets “implement commercial applications using cryptographic techniques. Most applications involve dealings in assets of some kind, which must be represented digitally within the system.”

Instead, the Taskforce describes the characteristics that make a crypto asset. To begin with, the paper recognizes that the ecosystem in which a digital asset is deployed also influences the rules under which the asset operates. Simply, a bitcoin is bound and defined in accordance with the rules of the Bitcoin blockchain, and so on.

Secondly, a crypto asset is “typically represented by a pair of data parameters, one public (in that it is disclosed to all participants in the system or to the world at large) and one private.” This finding is important because it recognizes a private key as a legally binding signature. While private keys are unique and cryptographically secure, their legal standing has been in question since the beginning.

Speaking to Brave New Coin, the Head of Blockchain and Crypto Assets (United Kingdom), Financial Institutions at Eversheds Sutherland, a firm which contributed to the paper, James Burnie, reiterated this position saying, “Perhaps the most welcome aspect of the report is as regards the recognition that a private key can be a signature. This reflects the reality of modern-day interactions, where it is not practical to, for example, suggest that documents need a wet ink signature to be validly signed. Indeed, given the weaknesses of the traditional signature in terms of fraudulent copying, a private key that is only under one individual’s control could be better in terms of providing evidence of an actual agreement. The implications of this finding could be broad, as it implies, for example, that an email signature could also in itself be deemed a valid signature.”

Finally, the paper recognizes that crypto assets have all the indicia of property and are to be treated as such.

On smart contracts

According to English law, a contract is present when two or more parties agree, so long as the agreement involves the exchange of something beneficial and the parties plan to create a relationship with legal standing.

As such, the Taskforce found that smart contracts meet these requirements and have legal standing saying, “A smart contract is capable of satisfying those requirements just as well as a more traditional or natural language contract, and a smart contract is therefore capable of having contractual force.”

The report’s recognition of the validity of smart contracts is being well received, given the significant number of projects that are employing the technological innovation. The UK joins other jurisdictions, those enjoying favorable standing within the blockchain sector, which have taken similar stances. Burnie notes, “This follows a similar pragmatic approach taken in other jurisdictions, such as Singapore.”

While the report has been largely well-received, there are also some misgivings. For instance, many have taken issue with the fact that the paper says that digital assets cannot be physically held. Burnie explains, “Whilst true, this is not the full picture for crypto assets linked to underlying physical assets, as those underlying can be held physically, and it would have been helpful if the report had recognized this.”

This is important because it means that crypto assets that represent physical assets cannot be the subject of a bailment.