The English Law Commission, an independent body that reviews and recommends reforms to the law of England and Wales, has recently published a consultation paper on the legal treatment of digital assets. Digital assets are broadly defined as any intangible asset that exists in electronic form, such as cryptocurrencies, tokens, smart contracts, and digital art. The paper explores the current legal uncertainties and challenges posed by digital assets and proposes a new legal framework that would recognize and regulate them as property.
The paper argues that the existing law of property is ill-equipped to deal with the novel features and functions of digital assets, such as their intangibility, divisibility, transferability, and programmability. For instance, it is unclear whether digital assets can be owned, possessed, or transferred in the same way as physical or intellectual property.
It is also unclear how digital assets can be secured, enforced, or recovered in case of theft, fraud, or insolvency. Moreover, the paper notes that the current law does not adequately address the role and responsibility of intermediaries, such as platforms, exchanges, and custodians, that facilitate the creation, storage, and transfer of digital assets.
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The paper proposes a new legal approach that would recognize digital assets as a new category of property, distinct from personal and real property. The paper suggests that this would provide clarity and certainty to the users and providers of digital assets, as well as to the courts and regulators.
The paper also proposes a set of principles and rules that would govern the creation, ownership, possession, transfer, security, and enforcement of digital assets. The paper further proposes a statutory definition of digital assets that would capture their essential characteristics and functions.
Some of the current legal uncertainties include:
Whether digital assets can be owned, possessed, or transferred in the same way as physical or intellectual property.
Whether digital assets can be secured, enforced, or recovered in case of theft, fraud, or insolvency.
Whether digital assets can be subject to taxation, inheritance, or succession laws.
Whether digital assets can be used as evidence or proof in legal proceedings.
How digital assets can be valued or appraised.
What are the rights and obligations of the intermediaries, such as platforms, exchanges, and custodians, that facilitate the creation, storage, and transfer of digital assets.
The paper proposes a new legal approach that would recognize digital assets as a new category of property, distinct from personal and real property. The paper suggests that this would provide clarity and certainty to the users and providers of digital assets, as well as to the courts and regulators. The paper invites responses from stakeholders and interested parties on its proposals and questions by 30 September 2023.
The paper states that the aim of the consultation is to gather views and evidence that would inform the development of a draft bill on digital assets. The paper also states that the law commission intends to work closely with other jurisdictions, such as Scotland and Northern Ireland, as well as with international organizations and initiatives, such as UNCITRAL and ELI-UNIDROIT, to ensure coherence and compatibility of the proposed reforms.
The paper is part of a wider project on smart contracts that the law commission launched in 2020. The project aims to examine the legal implications and challenges of smart contracts, which are self-executing agreements that are written in code and run on distributed ledger technology (DLT), such as blockchain. The project also aims to propose reforms that would facilitate the use and adoption of smart contracts in England and Wales.
The UK aims to adopt a balanced and proportionate approach to digital asset regulation, that supports innovation and competition while mitigating the risks and harms associated with digital assets. Some of the potential benefits and challenges of this approach are, Benefits: By providing clarity and certainty on the legal status and treatment of different types of digital assets, the UK can foster a conducive environment for innovation and growth in the digital asset sector.
By applying existing rules where appropriate and introducing new rules where necessary, the UK can ensure that consumers and investors are protected from fraud, scams, market abuse, and operational failures. By adopting a flexible and adaptive regulatory framework, the UK can respond to the evolving nature and diversity of digital assets and maintain its position as a leading global financial center.
By applying a case-by-case approach to digital asset regulation, the UK may face difficulties in defining and categorizing different types of digital assets, especially those that have hybrid or novel features or functions. By having multiple regulators involved in overseeing different aspects of digital assets, the UK may create overlaps or gaps in regulation, or inconsistencies or conflicts in regulatory objectives or standards. By trying to balance innovation and risk management, the UK may face trade-offs between fostering growth and ensuring stability in the digital asset sector.