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The Law Commission of England and Wales has published recommendations for the reform and development of the laws relating to digital assets. The publication represents the first time the government has commissioned common law analysis on how the region can accommodate the likes of NFTs and crypto-tokens while keeping consumers safe.

Digital asset, cryptocurrency and NFT use cases continue to grow, evolve and have all proved useful when investing, making payments, linking to debt and equity securities and for a range of other purposes in the UK. In England and Wales, existing personal property laws have, for the most part, sufficiently accommodated the introduction of digital assets.

While existing UK laws have proved flexible enough for the last decade, as the digital asset market and related technology become more complex, legal uncertainty has increased in this area.

In response, the government commissioned the Law Commission to carry out an analysis of common law to discover how applicable laws in England and Wales can respond and change to changing technologies. Ultimately, it aims to recommend a comprehensive legal foundation for digital assets which enables new technologies to flourish, enabling a diverse range of market participants to interact with and benefit from them.

The government has certainly taken notice of the growing number of uses for digital assets, and continues to look for ways to retain its position as a global leader and hub for the space, amid strong global competition. In February, the Treasury and the Bank of England stated a case for the introduction of a state-backed digital pound, or CBDC.

How could these recommendations change the digital assets landscape? 

In its report, the Commission reveals that the common law of England and Wales is “well-placed” to provide a coherent and globally relevant regime for existing and new types of digital assets.

Digital assets significantly differ from physical assets, as well as from right-based assets like debts and financial securities. This means they do not fit within traditional ways used to categorise personal property.

Despite this, the Law Commission suggests that the current flexibility of common law is capable of accommodating a distinct category of personal property to better recognise and protect its unique features. The Commission also recommends legislation to confirm the existence of this category and remove any uncertainty.

This will enable a more nuanced approach to recognise digital assets, export quotas or different types of carbon emissions allowance can be objects of personal property rights.

Further, to help courts respond sensitively to the complexity of emerging technology, the Commission has urged the government to establish a panel of industry experts who can provide guidance on technical and legal issues relating to the control of digital assets.

It also recommends creating a bespoke legal framework that better facilitates the entering into, operation and enforcement of collateral arrangements relating to cryptocurrencies and crypto-assets.

The Commission also makes recommendations to introduce legal tools that do not currently exist in England and Wales, such as new ways to take security over crypto-tokens and tokenised securities.

‘We look to further strengthen the future of our globally-renowned legal system’

The government will now take time to decide whether it intends to take the Law Commission’s recommendations forward.

Professor Sarah Green, the Law Commissioner for Commercial and Common Law, explained the need for changes in the digital asset space in the UK: “The use and importance of digital assets has grown significantly in the law few years.

“The flexibility of the common law means that the legal system in England and Wales is well-placed to adapt to this rapid growth.

“Our recommendations for reform and development of the law, therefore, seek to solidify the legal foundation for digital assets. We also aim to ensure that the private law in England and Wales remains a dynamic, globally competitive and flexible tool that enables further technological innovation.”

Government views on the Law Commission’s recommendations

Andrew Griffith, Economic Secretary to the Treasury, commented on the work done by the Commission: “Our reputation for straight dealing, use of the English language and flexible common law attracts business across the world. This, combined with our straightforward approach to regulating crypto-assets puts the UK at the vanguard of innovation to drive growth in digital assets and boost our economy.

“I firmly welcome the Law Commission’s Final Report on Digital Assets and the work done to meet the complexities of these technologies well into the future – and will carefully consider their findings and recommendations.”

Mike Freer, Parliamentary Under-Secretary for the Ministry of Justice, also discussed how laws should be adapted to ensure the UK can remain a leading hub for crypto-assets.

Freer said: “The UK is a world leader in legal innovation and these findings demonstrate the strength of English and Welsh law in responding to the fast-paced changes caused by emerging technologies in the law sector.

“We must ensure our law remains equipped to meet the complexities of these technologies well into the future, and we will carefully consider these findings as we look to further strengthen the future of our globally-renowned legal system.”