digital assets

Law Commission: Digital assets require new third category of personal property

The Law Commission of England and Wales has suggested the creation of a new third category of personal property as part of reform of the law relating to digital assets.

Digital assets – which include crypto-tokens (see cryptocurrencies) and non-fungible tokens (NFTs) – are used for an increasing variety of purposes in modern society, such as for investment and for making payments.

Currently, the law in England and Wales provides for rights over personal property via choses in action or choses in possession. While digital assets have been governed by these rules until now, the Law Commission feels digital assets now require a new distinct category of chose to address “residual uncertainty and complexity”.

“Because digital assets are not tangible and differ significantly from physical assets, and from rights-based assets like debts and financial securities, they do not fit within traditional categories of personal property,” said the Law Commission.

Nonetheless, the Commission argues that the flexibility of common law can accommodate a distinct category of personal property to better recognise and protect their unique features. The Commission also recommends legislation to confirm the existence of this category and remove any uncertainty.

Implications for property logbooks

While these changes may have no direct impact on conveyancing as of yet, this does impact digital property logbooks. While these belong to the homeowner, they are also somewhat attached to properties.

“We have been working with the Law Society to define how this connection should be realised in the Buying & Selling process,” said Nigel Walley, Chair, Residential Logbook Association.

“This report clarifies that a digital logbook should fall within a third category of assets and needs to be considered.

The RLBA prepared a detailed submission for the Law Commission looking at ALL potential ‘digital assets’ as they relate to property.

In the RLBA’s original submission to the Law Commission’s consultation, we suggested that the residential property and conveyancing industry needed to recognise three groups of digital assets that were becoming problematic in residential property:

  • Performance data held against a specific property by utilities
  • Online accounts attached to fixed hardware (eg central heating apps and CCTV apps)
  • Data and digital documentation held in long-term records (eg residential property logbooks)

The big question for conveyancers is ‘how will this affect us’. Digital assets (including logbooks) have already been included in the BASPI data schema/questionnaire, but we are hoping that the presence of a digital logbook will eventually make its way into the Material Information list so that agents are obliged to flag them as available.

For conveyancers, the question will be whether they are responsible for ensuring digital assets are included in contract documentation and are handed over with the keys.”

The Law Commission’s recommendations in full

  1. Legislation to confirmthe existence of a distinct third category of personal property under the law which can better recognise, accommodate and protect the unique features of digital assets. The report does not set out clear boundaries for this third category, arguing instead that common law is the best vehicle to determine which objects can fit within it. This will allow for a nuanced approach to recognising that things such as crypto-tokens, export quotas or different types of carbon emissions allowance can be objects of personal property rights.
  1. Creation of a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding advice to courts on complex legal issues relating to digital assets.
  2. Creation of a bespoke legal framework that better facilitates the entering into, operation and enforcement of collateral arrangements relating to crypto-tokens and crypto-assets.
  3. Statutory law reform to clarify whether certain digital assets fall within the scope of the Financial Collateral Arrangements (No 2) Regulations 2003.

Professor Sarah Green, Law Commissioner for Commercial and Common Law, said:

“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.”

Justice Minister, Mike Freer, said:

“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.”

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