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Classifying digital assets as property – does the law have it right?

Crypto assets are a novel (but at times very valuable) class of assets, occupying a space where the law is playing catch up. A recent report from the Law Commission outlines the judicial position that crypto assets are legally considered property, but it is unclear whether this position will carry forward to future applications as its foundations seem tenuous.

Historically, English property law classifies as ‘property’ choses in possession (tangible items that can be held) and choses in action (a grouping of rights that can be enforced). However, when taking digital assets into account, these definitions become less clear: they are neither tangible, nor do they embody rights capable of enforcement.

In National Provincial Bank v Ainsworth [1965, Lord Wilberforce provided a definition of property, namely that property must:

  • Be definable;
  • Be identifiable by third parties;
  • Be capable of assumption by third parties, and
  • possess some degree of permanence and stability.

Crypto assets are property

In AA v Persons Unknown [2019] the court reached the determination that crypto assets are property, relying on Lord Wilberforce’s classic four criteria definition of property. While this is considered by some as an obvious decision, it is arguably anything but. The reasoning supporting this proposition in case law relies heavily on the UK Joint Taskforce’s (UKJT) Legal Statement on Crypto Assets and Smart Contracts, which identifies that crypto assets are neither choses in action nor possession but can still be classified as property. The Law Commission acknowledged that this classification is not ideal, as the four criteria should be taken as a starting point rather than a sufficient condition for classifying property. The Law Commission is of the opinion that the four criteria are important indicia, but in using the UKJT’s own words, they are “not capable of precise definition, nor are they exhaustive”.

But there is room for doubt

Using the four criteria as the sole basis of characterising crypto assets as property is therefore a tenuous justification. The law would certainly benefit from more cases robustly debating this issue, especially as two mainstay cases (AA v Persons Unknown [2019] and Ion Science Limited & another v Persons Unknown [2020]) were uncontested (with the defendants either not appearing or appearing without representation).

The foundations of the judicial aims in classifying crypto assets as property seem to be protection of victims of crypto theft or fraud. For example, currently the English courts allow proprietary injunctions as relief for such victims, which would not be permissible if the assets were not classified as property.

The future of crypto asset classification in law

Whereas the creative judicial approach is certainly laudable and produces more equitable outcomes, the classification of crypto assets (including NFTs) as property is not a clean fit and the longevity of the classification may therefore be limited. The Law Commission’s Digital Assets Consultation Paper stresses that the regime around digital assets needs to evolve to encompass sufficient sophistication and recognise the nuanced features of such assets – in short, we must develop an intuitive and flexible reasoning underpinning the remedies made available to victims by the English courts and which make the English courts an attractive place to litigate.

The Law Commission is looking to re-evaluate justifications for making reliefs such as proprietary injunctions available. Their proposals include integrating a third category of personal property in addition to choses in possession and choses in action (either through common law reform or statutory intervention). The third category would encompass things with a rivalrous nature (meaning that the use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time). The Law Commission is also considering clarification on the scope and application of section 53(1)(c) Law of Property Act 1925.

Digital assets are an emerging technology that is evolving at a rapid pace. Surrounding legislation needs to be agile to keep pace with the industry it regulates. The current position developed by the courts in recent cases is acceptable, and allows for victims to access important remedies, but it largely amounts to a “sticking plaster”. This is clearly recognised, and we are excited to see how this area of law develops over the coming months and years.

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