Financial regulators around the world are looking to tighten their control over crypto markets, especially after a turbulent year for digital asset prices and marketplaces. Although regulators can tell crypto companies and even investors how to behave, they don’t actually make the laws that could inform their regulations.
Legislators who put these laws in place, however, could lack the subject matter expertise to actually draft legislation. To address this shortfall, the U.K. government has entrusted an independent body made up of high court judges, lawyers and law professors to study the crypto space and recommend ways to govern it.
A Law Commission project completed last November found the existing law of contract in England and Wales can be applied to smart contracts that underlie crypto transactions. It is also working on a conflict of laws project, exploring how to determine which courts should handle digital asset disputes because of their global nature. Recently, the body published a paper for consultation on its view that crypto should be treated as personal property to make it easier for investors to recover losses if they have their funds stolen or lost.
About two-thirds of the Commission’s work ends up being implemented by the U.K. parliament, according to Professor Sarah Green, the commissioner for commercial and common law. The Commission’s work can have influence in other jurisdictions as well. In cases where the U.S. doesn’t have legal precedents, the court "may consider” the Commission’s consultation paper on digital assets, according to U.S. Judge Martin Glenn, who is currently overseeing the bankruptcy proceedings for crypto lender Celsuis.
With the U.K.’s government set – for now, at least – on turning the country into an international hub for crypto, the Law Commission’s projects may not only be important but also urgent.
CoinDesk spoke to Green about the Law Commission’s projects, which could shape the future of crypto law in England and Wales.
The following interview, conducted via Zoom, was edited for brevity and clarity.
CoinDesk: Why is the Law Commission interested in crypto?
Green: I could spend 50 million pounds sterling on a non-fungible token [NFT]. You could hack into my computer and take it. It's not clear that I would have any recourse in the law because the law at the moment does not know how to treat them.
What has the consultation research for your digital assets project shown you?
Users of NFTs, companies who issue these things, individuals who buy them, they want to be certain that when something goes wrong the law will step in to meet their expectations. When we've been speaking to lawyers on the legal side, they want the same thing because, of course, they have to give advice.
Judges have a similar issue in that they are faced with hundreds of years of commercial law precedent that just doesn’t have anything in it on digital assets because they haven’t been a thing and they haven’t been a problem. There's a quite delicate constitutional balance that judges have to tread. They develop the common law but they have to do it in step with law that comes from Parliament. At the moment, there are a few common law decisions or precedent that suggest intangible things can't be a subject of possessory proprietary rights. That's simply because we haven't really seen things like crypto assets before. The law is just not used to dealing with them.
But the problem now that we do have is that the law hasn't kept up. Some judges feel quite uncomfortable about just making that leap in a court case and saying, well, this thing is intangible but it's not quite like the intangibles – like ideas and depths – that we're used to dealing with.
So a few judges in their judgments have referred this issue to the Law Commission and to Parliament to say some guidance would be helpful, and I am not surprised at all about that because it’s such a big step.
You have recommended creating a new category that would enable digital assets to be treated like personal property. Why set up a new one?
If everybody was wiped out tomorrow but computers weren't, crypto assets would still exist. What we're recommending is that after hundreds of years of there being two categories – things you possess like a car and things in action which are recognized through legal action like you owing someone money – there should now be a third one which is specific for data objects, crypto assets.
If the consultation responses we get agree with that approach and it becomes one of our final proposals the other question is, how do we do it?
Do we sort of make a statement that gives judges the guidance, the assurance and the sort of constitutional underpinning they feel like they need, because we're a statutory body, to develop the common law? Or do we draft a statute which is completely undeniable right? At the moment we don't know. My feeling is that we need at this stage a basic, short statutory piece of guidance and then judges can develop that idea.
Would there be a new definition for crypto assets within this statute?
At the moment everybody is talking about blockchain, everybody is talking about distributed ledger technology, but in five or 10 years it is going to be a different technology. What we don’t want to do is make a statute which is quite soon obsolete. So the approach we prefer to “definitions” is characteristics. What we would rather do is say when an asset has the following characteristics it can be treated in the same way. What we don’t want to do is make every single electronic or digital thing subject to those property rights. There's a very good reason why you don’t have property rights for your average set of photos or word document – one of them being that they are almost infinitely reproducible. So if I send you a Word document I still keep that Word document and that’s no good if we’re talking about property rights because, say I am the bank that advances money on that word document. I’m not going to be very happy if loads of people get exactly the same document and can claim that money from me.
We need to keep it to digital assets which are discreet and unique, which are completely transferable so that when I pass it to you… nobody else can have it and that’s really important.
So what we prefer is pointing out those characteristics and saying where digital assets exhibit these characteristics they will be in this [new third] category.
What are some more examples of cases that would benefit from digital assets being treated like property by common law?
If you've got bitcoin and say a wallet provider is looking after that and they lose it, then it would require our reforms to give you proprietary rights to give you any means of getting anything back from them. Without that proprietary right you would have a contractual right against that wallet provider – which is kind of OK – but doesn't help you in a situation of insolvency because if you have a contractual right you're what's called an unsecured creditor. Everybody else gets their money back first, and if there's no money you just won't get any.
Banks and stablecoins are a bit different because once something is treated as money for technical terms it's subject to a whole new set of rules, but also cryptocurrencies at the moment are not treated as money in English law.
What are cryptocurrencies treated as currently?
We don’t know.
Is your recommended law going to be enough to ensure that clients get their funds back or does there have to be an improvement in technology?
I think it's both and what I'm really hoping is that once legal clarity is there those technological developments will happen a lot quicker and people will be keener to do it.
In your report you said in-game digital assets like those found in the metaverse could not fit in this new category. What could help people have access to their rights in this case?
In situations where you don't have something that fits the criteria, you still have a contractual claim. So if, for instance, you bought in-game assets from a particular provider and then you were prevented from using them, then you would have a claim. You'd have a contractual claim. That's a result of your agreement with the game. They might give you some money back for not being able to use them or they might be compelled by a court to let you use them.
What will your DAO project be looking at and why?
It's really important to know when you set up a company where your liabilities end, and at the moment with DAOs it's not clear what they are.
Ultimately, we want to be able to say if you set up a DAO, this is what you've got to do. And this is what's going to happen when things go wrong.
What will your conflict of laws project be looking at and why?
We don't know what rules will apply [because crypto is decentralized and global]. So, we want to make a list of rules to say which law will apply and which court will decide the dispute when it involves digital assets.
Read more: Is a DAO + LLC Still a DAO?
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