The Law Commission of England and Wales has been consulting on a range of proposals that relate to the treatment of digital assets under the law of England and Wales. The range and depth of the proposals are vast and nuanced – touching on property rights and transaction rights, as well as principles relating to equity, data storage, computing and other technology systems, custody and financial regulation. The Commission proposes that English law recognises a new third category of property, defined as ‘data objects’ which are data represented in an electronic medium, that exist independently of people and legal systems, and have the property of being “rivalrous”.

Deloitte Legal (UK) is broadly supportive of the consultation proposal to clarify the existing law, with the unambiguous recognition of property rights over data objects – notwithstanding that certain cryptoassets are likely already properly considered property under English law. Uncertainty in this area is illustrated by the glossing over, in recent precedents, of precise details of how such property rights in cryptoassets manifest, and what category they are. English law would duly benefit from a clear expression of the nature, basis, and requirements for cryptoassets to be considered property.

Great care must however be taken in respect of the relationship between these newly recognised property rights and other property rights, such as intellectual property rights, that exist either within, or in relation to, data objects. We believe that the optimal way to implement these changes would likely be through legislative change, allowing for a cohesive package of change, rather than through common law precedent which carries a risk of piecemeal updates leading to uncertainty and a lack of clarity, as well as potentially extensive litigation and substantial legal costs for litigants. Further, a legislative approach would allow for the native features of distributed ledger systems to be built in.

For example, an ‘innocent acquirer’ rule in respect of data objects would allow for ‘on-chain’ ways for the (superior) legal owner to give notice to potential acquirers of their title and claim; therefore it would be proportionate for innocent acquirers to be deemed to have notice of such claims. These mechanisms help to keep a balance between the ‘property rights’ of the legal owner, versus the ‘transaction rights’ of the acquirer.

In our view – which differs with some of the provisional consultation conclusions – proper analysis of title transfer (in most cases) of crypto-tokens is one of non-derivative transfer (as set out in the UK Jurisdiction Taskforce, Legal Statement on cryptoassets and smart contracts). However, we agree with the Commission that it is preferable to adopt a legal fiction, whereby such transfers are treated as being derivative transfers of title, as this aligns with market custom and user expectations.