The UK Jurisdiction Taskforce (UKJT), led by Sir Geoffrey Vos (Chancellor of the High Court and Chair of the UKJT) recently published an authoritative statement on the legal status of cryptoassets and smart contracts under English Law. The statement was a welcome analysis in an area of legal uncertainty and whilst not binding, it will provide persuasive authority when these matters eventually arise in the courts.
The statement considered two key questions, firstly whether cryptoassets would be considered property under English law and secondly, whether smart contracts can be defined as a validly created contract under English law.
Are cryptoassets ‘property’?
For those unfamiliar, the term ‘cryptoasset’ refers to a digital asset which utilises cryptography, peer-to-peer networking, and a public ledger to regulate the creation of new units, verify transactions, and secure the transactions without the requirement of a centralised middleman. The most famous of those and the very first was Bitcoin, which came into existence in 2009. Many other cryptoassets have since been developed using ‘blockchain’ technology and it is a market which continues to expand.
The UKJT concluded that cryptoassets have all the indicia of property and that the intangibility and the decentralized nature of them should not disqualify them from being constituted as property. Ultimately they found that one of the key aspects of property is ownership and a cryptoasset is capable of being owned.
However, they also concluded that cryptoassets are not “things in possession” meaning that they are not capable of being possessed. This leads to the analysis that whilst it is possible to declare a trust over an ownership interest in a cryptoasset, it cannot be the subject of a bailment, lien or pledge.
Cryptoassets and insolvency
The Insolvency Act 1986 has its own definition of property under Section 436(1). The UKJT reached the conclusion that as cryptoassets constitute property at common law, they are property for the purposes of the Insolvency Act. They held that even if they were not considered property at common law, it could still be deemed as property if it is within the scope of the words ‘obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property.’ In almost all circumstances cryptoassets would satisfy this definition.
This is of particular significance to insolvency practitioners when considering the value of an insolvent estate, however the practicalities of actually realising cryptoassets for value may pose a more cumbersome hurdle for insolvency practitioners.
Cryptoassets as security
The UKJT determined that certain types of security such as pledges or liens cannot be created for a cryptoasset as they are not capable of being possessed as set out above. However, a mortgage or an equitable charge can be created over intangible property and thus these types of security can be created over cryptoassets. This is welcome news for individuals/companies seeking to use cryptoassets as a form of security to raise capital.
Are smart contracts valid contracts?
A smart contract is a computer protocol that digitally facilitates, verifies or negotiates the performance of a contract using blockchain technology. Smart contracts allow the exchange of money, property, shares or anything of value using automated rule-driven coding without the requirement of a middleman.
The statement came to the conclusion that smart contracts would constitute a legally binding contract under English law. For a contract to be valid there must be 1) an offer and acceptance 2) consideration and; 3) an intention to create legal relations. As the contract would be defined by its code, it is capable of being identified, interpreted and enforced like a regular contract. The legal statement found that the automated nature of a smart contract would not be an excluding factor for a legally binding contract.
This follows the approach taken in other jurisdictions for example in B2C2 Ltd v Quoine Pte Ltd [2019] SGHC (I) 03 where the Singapore International Commercial Court held that an algorithmic trading platform which enabled transactions to be entered automatically had binding contractual effect.
Comment
The UKJT’s statement is an important step towards ensuring the courts approach cryptoassets and smart contracts in a uniform manner. However, as both remain relatively novel concepts in the market, we are sure that more clarification will be needed - either from the courts as disputes arise or possibly in the form of legislative intervention.