Digital assets: One step closer to rounding those square pegs

Turn your minds back to 2021: It was mid-pandemic and we had all been working from home for about a year.

A rollout of 5G accelerated internet speeds; AI and automated technologies were widely implemented to streamline operations; bank notes and coins caused everyone to recoil; and online collaboration tools such as Zoom and Teams were commonplace. We quickly became accustomed to interacting and functioning digitally.

It was at this point that the Law Commission decided it really should address what common law had already been attempting to do for a while. The courts had recognised that a digital asset is a thing which is capable of being an object of personal property rights since 2019 when the judgment of AA v Persons Unknown[1] was handed down. Statutory legislation was not quite so quick and nimble, and digital assets such as crypto-tokens did not fit neatly into the historical legal categories of personal property that statute recognised (see our article “Digital Assets and Litigation: Square Pegs in Round Holes?”).

The Law Commission agreed that digital assets should not be deprived of legal status as objects of personal property just because of their unique characteristics. Statutory confirmation of a third category of personal property was required to provide greater legal certainty, and to “allow the law to develop from a strong and clear conceptual foundation”.

The Law Commission commenced a lengthy consultation process on proposed legislation designed to “confirm that crypto-tokens, and potentially other assets such as voluntary carbon credits, are capable of being recognised by the law as property”. A final report was published in June 2023, and in February 2024, the Law Commission published a consultation on a new, short draft Bill which recognised a third category of property. It is following this consultation, that on 30 July 2024, the Law Commission took the latest step in this process and published a revised draft Bill entitled "Property (Digital Assets etc) Bill" and supplemental report.

The draft Bill is short, and states as follows:

Although the new draft Bill is substantially the same, the previous draft of the legislation said that “a thing…is capable of being the object of a personal property rights even though” it is neither a thing in possession nor a thing in action. The new draft provides 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. This amendment seeks to address concerns that the previous wording could have provided any “thing” was capable of being personal property, and the Law Commission wants to make it clear that there may be other reasons why something does not satisfy the requirements for being an object of personal property. Examples given include pure information and certain digital assets such as digital files and records, email accounts and domain names.

The Law Commission deliberately refrains from imposing hard boundaries and is aware that there will be other things yet to be developed which may fall into this third category of personal property. Careful drafting seeks to ensure that the statutory basis is able to integrate with technology as it develops. It also incorporates the potential for other non-digital assets to be included.

This latest development is not the end of the wrestling with these complex legal topics. However, the implementation of the draft Bill (2 months after it is passed) will mean that the courts no longer have to grapple with this particular question, thereby setting them free to identify, shape and develop the parameters.