The UK Law Commission's Digital assets as personal property: Short consultation on draft clauses states
Digital assets are fundamental to modern society and the contemporary economy. They are used for an expanding variety of purposes — including as valuable things in themselves, as a means of payment, or to represent or be linked to other things or rights — and in growing volumes.
1.2 In our recent work on digital assets, we considered how principles of private law, specifically personal property law, apply to digital assets. Personal property rights are important for many reasons. They are important in cases of bankruptcy or insolvency, in cases where objects of property rights are interfered with or unlawfully taken, and for the legal rules concerning succession on death. They are also important for the proper characterisation of numerous modern and complex legal relationships, including custody relationships, collateral arrangements and structures involving trusts. Property rights are powerful because, in principle, they are recognised against the whole world, whereas other — personal — rights (such as contractual rights) are recognised only against someone who has assumed a relevant legal duty.
1.3 We published our final report on digital assets in June 2023. We concluded that certain types of digital assets are capable of being things to which personal property rights can relate, even though they do not easily fit within the traditional categories of personal property, and are better regarded as belonging to a separate category. We recommended legislation to confirm the existence of a “third category” of personal property rights, capable of accommodating certain digital assets including crypto- tokens. ...
1.5 The draft clauses that accompany these notes implement the recommendation about personal property set out in our June 2023 report. This short, limited consultation exercise is designed to test whether the draft clauses successfully implement the recommendation we made in our report. We also ask about potential impact, and are keen to receive views on costs and benefits, and any potential unintended consequences, in order to inform the Government’s decision on whether to proceed to implementation. We do not ask further questions on the underlying policy, which has already been the subject of consultation. ...
AIMS OF THE DRAFT BILL
1.8 The intended effect of the draft Bill is to confirm that crypto-tokens, and potentially other assets such as voluntary carbon credits, are capable of being recognised by the law as property. This will enable courts to determine a number of issues, including, for example, in the following situations. (1) If digital assets are the subject of a legal dispute and there is a danger of their holder dissipating them before that dispute can be resolved, a court can, if these assets are classed as property, order a proprietary freezing injunction over them to prevent this. These remedies exist for things already recognised as property; as yet, it is an open question whether they are available in relation to digital assets. (2) If someone’s digital assets are taken from them or destroyed, the remedies available to them are significantly stronger if those assets are regarded as being their property than if the law does not recognise any property interest in them. Currently, there is a considerable and growing market in such assets and most investors (commercial and private) presume that, when they buy them, they acquire property rights in the same way as they do when they buy, say, a watch or a laptop. As the law currently stands, it is not necessarily the case that they do.
1.9 The common law has answered some questions in relation to some kinds of digital assets, but the result is, inevitably, both piecemeal and vulnerable to different judicial approaches in the future. The draft Bill would definitively lay to rest any lingering doubt about the existence of a third category of property accommodating the unique nature of digital assets, setting the future direction of the law in favour of commercial certainty and confidence.
1.10 Members of the judiciary themselves suggested to the Law Commission that the recommended legislation would be a useful tool in developing the law in this area. ...
Legal background
2.1 “Property” can be divided into real property (interests in land) and personal property (interests in other things). The law of England and Wales traditionally recognised two distinct categories of personal property rights: rights relating to “things in possession” (tangible things), and rights relating to “things in action” (legal rights or claims enforceable by action). A 19th century case, Colonial Bank v Whinney, is often used as authority for the proposition that these two categories of personal property are exhaustive so that anything that is an object of personal property rights must fall within one of these two.
2.2 Court decisions over the last ten years show that the common law of England and Wales has moved toward the recognition of a “third” category of things to which personal property rights can relate but which do not fall easily within either of the two traditionally recognised categories. Initially, this development was in response to emergent forms of intangible things such as milk quotas;5 more recently, it has been in response to crypto-tokens.
2.3 A strong majority of our consultees agreed that either a third category of things to which personal property rights can relate has already developed in England and Wales at common law, or that, to the extent it has not, one should be recognised as existing. Some consultees, including senior and specialist judges, said to us that the explicit recognition of such a category would confirm the existing law, facilitate the law’s future development and lay to rest any lingering doubt about the existence of such a category.
2.4 In this chapter, we briefly explain the legal background to, and reasons for, our recommendation. In the next chapter, we introduce the draft Bill and explain what it does – and what it does not do.
Property
2.5 Colloquially, the term “property” is used interchangeably to describe both a thing, and a claim or entitlement to that thing. However, in a stricter legal sense, the term describes a relationship between a person and a thing, and not the thing itself. For example, in the phrase “that phone is my property”, the object (the thing) is the mobile phone. The property rights are the rights that a person has in relation to that mobile phone.
2.6 Even in legal writing such as academic papers, cases and statutes, the term property is sometimes used in its broader, more colloquial sense or as a shorthand term, and we also use it in this way from time to time. However, the draft Bill refers to an “object of property rights”.
Third category / third thing
2.7 In our report, and in this paper, we use the term “third category” to describe a category of thing distinct from both things in possession and things in action. In adopting this terminology, we acknowledge the argument that other distinct categories of things to which personal property rights can relate might already exist at law (including patents and statutorily created intellectual property rights). We adopt the term “third category” as shorthand: in part, as a direct reference to Lord Justice Fry’s influential judgment in Colonial Bank v Whinney and the longstanding practice among lawyers and judges of referring to the things in possession/things in action dichotomy; and in part as a convenient and readily understandable term, which almost all consultees were comfortable with. We deliberately do not, however, use the term in the draft legislation.
THINGS IN ACTION AND THINGS IN POSSESSION
2.8 By way of background, it may be helpful to expand briefly on the two categories of personal property traditionally recognised by the law of England and Wales: (1) Things in possession are, broadly, any object that the law considers capable of possession. This category includes assets which are tangible, moveable and visible, such as a bag of gold. Possession of a thing gives its possessor a property right which is enforceable against the world. Rights in things in possession can be asserted by use and enjoyment as well as by the exclusion of others from them. Things in possession exist regardless of whether anyone lays claim to them, and regardless of whether any legal system recognises or is available to enforce such claims. (2) Things in action are, traditionally, any personal property that can only be claimed or enforced through legal action or proceedings. Common examples of things in action are debts, rights to sue for breach of contract, and shares in a company. Things in action have no independent form and exist only insofar as they are recognised by a legal system. This means that the presence of a thing in action in the world is dependent on there being both a party against whom the thing in action (the right) can be enforced and a legal system willing to recognise and enforce that right. The category of things in action is sometimes given a much broader meaning as a residual class of personal property — that is, it is sometimes regarded as encompassing any personal property that is not a thing in possession.
2.9 Things in possession and things in action are susceptible to different types of legal treatment.
2.10 In the 1885 case of Colonial Bank v Whinney, Lord Justice Fry said: All personal things are either in possession or in action. The law knows no tertium quid [third thing] between the two.
2.11 Although this statement has largely been taken as reflecting the correct position in law, it is almost certainly no longer correct (to the extent that it ever was). As Professor Fox and Professor Gullifer observed in their joint response to our call for evidence: The reasoning in [Colonial Bank v Whinney] turned on the interpretation of the bankruptcy statutes then in force. It has been taken out of context and used as authority for a proposition that it [was] not meant to support.
Digital assets as things in possession or things in action
2.12 Digital assets do not sit easily in either of the traditionally recognised categories of things in possession or things in action (at least in the narrow sense). They are not tangible things in the normal sense, meaning that courts are likely to feel unable to find that they are things in possession. Nor are they claimable or enforceable only by legal action or proceedings. Crypto-tokens would continue to exist even if the law were to fail to recognise them as objects of personal property rights and even were a law to prohibit their existence.18 Their useful characteristics and the ability of people to use, enjoy and interact with them (and exclude others from them) would also continue to exist: the functionality of the crypto-token system would remain unaffected. They therefore function more like objects in themselves.
2.13 Some digital assets, such as crypto-tokens, might represent, record, or be linked to other things (including legal rights – that is, things in action) which are external to that particular crypto-token and/or crypto-token system. In our work, however, we concluded that the better view is that a crypto-token is a thing in itself to which personal property rights can relate, regardless of whether it is also linked to another thing. Specifically in respect of crypto-tokens, almost all consultees agreed that crypto-tokens cannot be conceived of as merely rights or claims in themselves and that they can be used and enjoyed independently of whether any rights or claims in relation to them are enforceable by action. Further, the use or enjoyment of a thing in action is dependent entirely on the enforceability of the right or claim of which it is constituted. That is not true of crypto-tokens, for example. This is the crucial distinction that needs to be made for proprietary classification purposes.
2.14 Crypto-tokens and certain other digital assets can be used and enjoyed independently of whether any rights or claims exist in relation to them. Moreover, any property rights in relation to them can be asserted by use and enjoyment of the thing and by the exclusion of others from it. This is one of the fundamental underlying innovations of crypto-tokens, because it is all achieved through software where this was not previously possible.
2.15 It is this quality of digital assets, as things independent of the rights that relate to them, that makes them susceptible to involuntary alienation. This is relevant to a proprietary classification because it helps to distinguish between the legally relevant characteristics of different things. A debt, for example, as a thing in action, cannot be alienated from a person without a legal process (usually one which requires that person’s consent). A crypto-token, on the other hand, as a thing in possession like a car or a watch, can as a matter of fact be alienated from a person without a legal process and without their consent.
2.16 So, despite the longstanding existence of two categories, the courts have consistently concluded that certain things (often digital assets) are capable of being objects of personal property rights, even where the thing in question does not neatly fit within either of the traditionally recognised categories of thing to which personal property rights can relate. The courts have done so, either expressly or impliedly, in respect of milk quotas, European Union carbon emission allowances (“EUAs”), export quotas, waste management licences, and a wide variety of crypto-tokens, including non-fungible tokens (NFTs).
2.17 In the recent case of AA v Persons Unknown, the High Court of England and Wales said that “[cryptocurrencies] are neither [things] in possession nor are they [things] in action”. Nonetheless, in that case, the court held that cryptocurrencies were a form of property. Mr Justice Bryan said that it would be “fallacious” to proceed on the basis that the law of England and Wales recognises no form of property other than things in possession and things in action. He explicitly recognised the difficulty in the classification of crypto-tokens (which, on their face are things which are neither things in action nor things in possession). He held that a crypto-token could be an object of personal property rights even if it was not a thing in action in the narrow sense.
2.18 The Court of Appeal has said that “a cryptoasset such as bitcoin is property” under the law of England and Wales. This is also affirmed, or necessarily implicit, in at least 23 other cases decided at first instance, although most were decided in connection with interim relief.
2.19 Since the judgment in AA v Persons Unknown was handed down in 2019, courts in at least 14 of those 23 cases, including the Court of Appeal,31 have cited that judgment in support of the proposition that the digital asset in question is a thing which is capable of being an object of personal property rights.
2.20 Taken together, the case law demonstrates that the courts of England and Wales now recognise crypto-tokens as distinct things which are capable of being objects of personal property rights. Further, through the consistent application of AA v Persons Unknown (as opposed to any contrary approach), courts have deliberately proceeded in a manner that carves out a third common law-based category of thing to which personal property rights can relate.
2.21 Courts in other jurisdictions have reached the same (or a similar) conclusion. Courts across the common law world, including in Australia, Canada, Hong Kong, New Zealand, Singapore, and the United States, now consistently proceed on the basis that crypto-tokens are capable of being objects of personal property rights and are therefore susceptible to the various consequences that follow. This includes recognition that crypto-tokens can be subject to an interlocutory proprietary injunction, are capable of being held on trust and fall within certain broad statutory definitions of “property”.
2.22 Examples of this can also be seen in some civil law-based systems, including Japan, Liechtenstein, and Switzerland.
2.23 Our conclusions are also consistent with international law reform developments, including those that are intended to be applicable in civil law jurisdictions. The UNIDROIT Working Group recently published a set of international principles, which set out a proprietary framework applicable to digital assets. The UNIDROIT Working Group Principles apply to “electronic records”, of which digital assets are a sub-set. In effect, the Principles apply proprietary concepts to a category of things distinct from things in possession and things in action.
OUR RECOMMENDATION: STATUTORY CONFIRMATION OF A “THIRD THING”
2.24 We have therefore concluded that a thing is not, and should 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. We recommended the explicit recognition, in statute, of a third category of personal property, to encourage a more nuanced consideration of new, emergent things. A distinct, third category will better allow the law to focus on attributes or characteristics of the things in question, without being fettered by analysis or principles applicable to other traditional objects of personal property rights. As discussed below, we consider that such things include, but are not necessarily limited to, crypto-tokens such as bitcoin.
2.25 Although it may not change the common law position, we conclude that such a statutory confirmation will provide greater legal certainty and will allow the law to develop from a strong and clear conceptual foundation. A statutory confirmation will alleviate any lingering judicial concern surrounding Colonial Bank v Whinney or any concern that recognising a third category is not an appropriate development for the common law to make. The exact parameters which describe a third category thing, and the legal treatment afforded to such things, will be matters for common law. There are centuries of case law considering the factors that make a thing an appropriate object of personal property rights, which the courts can continue to apply in this context so that the third category does not become inappropriately broad. We consider this to be the most effective and least interventionist recommendation that we can make to facilitate the law’s development on this point.
2.26 A statutory confirmation will explicitly recognise the reality that in the modern world there exist things that are neither purely intangible rights nor conventionally tangible objects, and that the law is capable of treating those things as objects of personal property rights. This in turn will allow the law of England and Wales to discuss crypto- token systems (and other systems that might manifest third category things) more directly in terms of powers and incentives/incentive mechanisms of participants, rather than in terms of claims/rights, corresponding duties and obligations. It also means that the category of things in action can remain usefully distinct and descriptively accurate.
2.27 A statutory confirmation will reduce the time spent by the courts on questions of categorisation of objects of personal property rights, and instead allow them to focus on the substantive issues before them. It gives explicit effect to: [the] powerful case for reconsidering the dichotomy between [things] in possession and [things] in action and recognising a third category of intangible property ... in a way that would take account of recent technological developments.
2.28 A statutory confirmation is likely to help protect new and emergent forms of property from intermediation imposed by the application of ill-fitting private law principles, such as the concept that such things are things in action. A statutory confirmation is also likely to help protect emergent forms of property from regulation which might mandate intermediation or reduce a person’s ability to self-custody their own asset; that is, to hold it directly rather than through an intermediary such as a wallet provider.
2.29 A statutory confirmation will provide a strong signal to market participants that the law of England and Wales will continue to protect personal property rights, even in new and emergent forms of property. It will also re-emphasise the fundamental difference between third category things that can be “owned”, and other existing types of software, the rights to which are generally governed by a mixture of statute (for example, intellectual property rights) and contract (for example, licences granted by Microsoft), without clear principles of “ownership”. Crypto-tokens, for example, are so fundamentally different to other types of software or digital assets that this distinction alone is worth codifying in statute. Doing so will facilitate and encourage innovation based on the underlying principle that certain digital things can now be “owned”.
