Digital assets: Law Commission consults on private international law issues and draft legislation recognising a third category of personal property rights

On 22 February 2024, the Law Commission published two documents relating to digital assets: (i) a call for evidence on private international law issues relating to digital assets and electronic trade documents; and (ii) a consultation on draft legislation to confirm the existence of a third category of personal property for assets such as crypto-tokens.

The English courts have repeatedly demonstrated the flexibility of the common law in applying traditional concepts to novel circumstances and new types of asset, including cryptocurrency and NFTs. However, the Law Commission's continued activity in this area, with a view to implementing targeted reforms, aims to increase legal certainty and facilitate the development of English law as a law of choice underpinning the use of blockchain technology. It is therefore to be welcomed.

Private international law 

The call for evidence on private international law issues derives from a 2022 request from the Ministry of Justice for the Law Commission to consider how private international law rules should apply in the digital context, bearing in mind the disputes likely to arise in that context (including contractual, tortious and property disputes), and to make any necessary recommendations for reform.

Digital assets can give rise to difficult questions of private international law, relating to which country's courts should hear a dispute and which country's law should be applied, leading to uncertainty for those who invest in and use such assets. The reason is obvious: such assets challenge the underlying territorial basis on which modern systems of private international law are premised, such as the location of an asset or where an event occurred.

The call for evidence sets out two main priorities for this stage of the project: understanding which issues relating to digital assets can be accommodated satisfactorily within existing private international law rules in England and Wales; and classifying the issues according to their prevalence in market and legal practice, so as to ensure a focus on issues that cause problems in practice. The aim will then be to classify all issues as high, medium or low priority for the next stage.

The project focuses in particular on crypto-tokens and electronic trade documents because these assets are prevalent in market practice, while also posing novel theoretical challenges to the traditional methods of private international law.

Responses are requested by 16 May 2024.

Personal property rights

In June 2023, the Law Commission published a report on digital assets in which it concluded that some digital assets, such as crypto-tokens, do not fit into the traditional binary categorisation of personal property as either "things in possession" (such as physical objects) or "things in action" (such as contractual rights), but are nevertheless treated by the common law as capable of being the object of personal property rights. The report referred to digital assets in this "third category" as "digital objects", while noting that non-digital assets, such as milk quotas and certain carbon emissions allowances, could also fall into this category.

The report recommended, among other things, that legislation should be introduced to confirm and support the existing common law position by providing that a thing will not be deprived of legal status as an object of personal property rights merely because it falls outside the two traditional categories. However, the report concluded that it was not necessary or appropriate to try to define the hard boundaries of such a third category of personal property by way of legislation, taking the view that this was best left to the common law.

The Law Commission's current consultation follows on from the 2023 report, proposing a simple draft Bill to implement the recommendation for new legislation which states that:

"A thing (including a thing that is digital in nature) is capable of being an object of personal property rights even though it is neither—
(a) a thing in possession, nor
(b) a thing in action."

The consultation notes that 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" and will "facilitate and encourage innovation based on the underlying principle that certain digital things can now be 'owned'".

Responses are requested by 22 March 2024.

Note: On 30 July 2024, the Law Commission published a supplemental report and a slightly revised draft Bill, which amends the wording but is not intended to change the substance. The amended version is expressed in the negative rather than the positive, stating that a thing "is not prevented from being the object of personal property rights merely because it is neither" a thing in possession nor a thing in action. On 11 September 2024, the government said that it would be taking forward the Bill via the Law Commission’s special procedure, which allows Law Commission Bills that are regarded as uncontroversial to be progressed in a more streamlined fashion by providing for certain stages to be carried out in Committee.