The hotly anticipated Law Commission (the “Commission”) consultation into Digital Assets was released yesterday, to general surprise at the length (longer than Crime and Punishment), and rigorous depth of analysis and proposal – in its stride, linking bitcoin, to the nature of property, to carbon credits and ‘soulbound’ tokens. The Commission has put forward a series of proposal for changes to the law and civil procedure, calling for responses by 4 November 2022.

The Commission argues the changes and ensuing certainty would help to make more attractive the English law jurisdiction for the digital asset sector, and ensure alignment with similar US and EU developments.

What is the key proposal?

The Commission sets out the key conundrum in respect of digital assets: they are ‘just’ information, but people treat them like property; they can be controlled and monopolised, but not possessed, nor a clear rights to stop others using them. The law presently divides into two types: ‘things in possession’ and ‘things in action’. Tangible items such as buildings and vehicles are typically the former, whilst shares of companies are the latter, as they are rights only enforceable by court actions. However, digital assets are neither tangible nor enforceable by legal action. In contrast, they operate as objects on their own. The Commission therefore suggest the introduction of a 3rd type of property, “data objects”, to provide clarity to title and enforceable rights.

What would be considered as “data objects”?

The consultation paper suggests that three requirements for something to be considered a data object. It must:

• be data expressed electronically, for example, in the forms of digital or analogue signals or computer codes;
• exist independently of persons and the legal system; and
• be rivalrous, where the usage of the property excludes another from using it.

Expect to hear much more in the coming months about ‘rivalrous’ as a property and use type for digital assets, along with the spectrum of 'rivalrous' to 'non-rivalrous' types of information and asset. In this framework, ‘rivalrous’ use is all that distinguishes a bitcoin unit from a digital media file – and yet items can have multiple uses, and also different degrees of 'rivalrousness' (for example multiple ‘identical’ copies of an NFT, or a single copy of the master of an unreleased film – in the former another blockchain based seems to not be rivalrous to the other NFTs, and in the latter, a second leaked copy of the film could be very rivalrous to it). The consultation in several places acknowledges the spectrum of these properties, but difficult edge cases seem to remain.

The consultation considers ‘control’ as a key attribute for demonstrating ‘ownership’ of a data object (versus possession). This is intuitively right, but again, there are edge cases for participants to reflect on, such as multiple copies of a private key all safely locked up – if one is stolen, who (if anyone) controls the asset thereon. As with most aspects of cryptoassets, the degree of technological innovation means the legal hypotheticals are numerous. The above example might have different answers, for example, if parts of a ‘m of n’ wallet (where a certain number (but not all) of pre-made ‘jigsaw pieces’ are needed to assemble the whole private key) have their control transferred or duplicated.

The thinnest ice, it seems, the consultation encounters is in respect of ‘divestability’ as a property of a digital asset. Classically, divestability is seen as a required feature of property, because ownership is the relationship between a person and property: if person and property cannot be separated, they are so entwined that the ‘property’ is in fact a part of the person (not a thing the person holds or owns). While eager to maintain this approach, the Commission acknowledge that technological innovations such as ‘soulbound’ NFT tokens or ‘proof-of-attendance’ protocols strain these ideas, and may need exceptions.

There is further intellectual bravery where the consultation acknowledges that a data object, as they define it, is mere information (presently incapable of being property in itself) – but the existence of the blockchain network, of miners and nodes, and other participants would elevate the information to being property. That apparatus and those participants make the information exist independently (of people, and of legal systems), and make the information rivalrous, and therefore would allow it to become property in itself.

The Commission should also be commended for their international perspective and contextualising. There are various references, and contrast to the similar initiatives ongoing with the UNIDROIT Digital Assets and Private Law Working Group and the Uniform Law Commission’s (“ULC”) Uniform Commercial Code and Emerging Technologies Committee, along with international caselaw references and summaries. The fundamentally international nature of the cryptoasset and blockchain sector means that incompatibility between jurisdictions can be more paralysing (and create more polarising outcomes) than usual.

Two roads diverge

The Law Commission provided two options for the development and implementation of “data objects”: common law reform or statutory intervention – inviting feedback on the merits of each.

These proposals by the Law Commission are aimed to provide protection for users and to foster innovation in technology. With more clarity in the regulation for digital assets, users are better informed when making decisions. The proposals also complement governmental plans to make England and Wales a centre for digital asset systems.

We look forward to grappling with these issues in our response to the consultation, due 4 November 2022.