Digital assets: the common law gets a third category of thing

The Property (Digital Assets etc) Bill is very short. Its single substantive clause reads:

Objects of personal property rights

A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither (a) a thing in possession, nor (b) a thing in action.

The measure follows on from the Law Commission’s Final Report on Digital Assets: a report that sets out a suggested framework for common law development in relation to recognising digital assets as property. Historically, such recognition was neither certain nor straightforward because digital assets do not fit easily into the common law’s long-established (and exhaustive) categories of personal property. These categories are those set out in the bill: things in action and things in possession. Things in possession are those things that can be touched, held and perceived with the unaided senses, like laptops and paintings. Things in action, on the other hand, are those things that have no existence outside of their legal recognition, such as debts.

One important difference between these two categories is the remedies that are available when disputes arise. And the difference between those remedies is in turn dictated by the physical characteristics of the assets in question. For example, a thing in possession, such as a laptop, can be taken from its possessor without consent as a matter of fact. It can also be damaged, destroyed or improved. As a result, the remedies available for taking, damaging or destroying someone else’s thing in possession are designed to recognise these losses and to compensate for them.

A thing in action such as a debt, however, is not vulnerable to the same types of interference because it has no existence in the world independent of its legal recognition. It cannot, therefore, be taken from its holder without consent: there is nothing to carry off and it cannot be therefore be involuntarily alienated. The remedies available for interfering with a thing in action recognise this and, as a result, are in some ways more limited than those available for interferences with things in possession. The latter, for example, impose strict liability in that they do not require an interferer to intend, or even to realise, that she is interfering with the property of another. Interferences with things in action, on the other hand, are actionable only on proof of intention.

Whilst this distinction worked well for centuries, the advent of digital assets disrupted its clean lines. The modern digital asset revealed that tangibility, for so long the means of distinguishing between the two classifications, was no longer capable of doing the work it once did. Digital assets could, thanks in no small part to distributed ledger technology, emulate for the first time the features of things in possession, despite lacking their tangibility. Since digital assets have an existence in the world independent of their legal recognition and of any parties who might lay claim to them, they are in some ways like things in possession. But, because they cannot be perceived with the unaided senses, or physically passed from one hand to another, they don’t fit perfectly into that category. Neither, however, do they belong in a category with things in action because they can be taken without consent, damaged and destroyed. Hence the need for a third category that can develop to suit their particular features and uses.

Again, the bill is short. Deliberately so. Not only is the common law far better suited than statute to respond to the development of different forms and uses of digital asset, but it has already made giant leaps in the right direction. The purpose of the bill, therefore, is to provide a confirmatory and clarificatory statement on which the common law can continue to build. What is more, when the Law Commission consulted on its proposed reforms, it was the judiciary who asked for just such a bill, saying that they felt it would give them parliamentary backing in guiding the common law through uncharted waters.

The Law Commission also proposed, and the government has accepted, that a multi-disciplinary expert group be set up to produce ongoing guidance as to how the new legal classification might apply to ever-evolving technological forms. The extent and nature of a holder’s ability to control an asset, for instance, is a crucial indicia of that asset’s legal status, but control in relation to one digital form will not always seem obviously analogous to that exercised within, say, a different system or on a different platform. This expert group or “Control Panel” will be tasked with ensuring that judges will know control when they see it.

Law rarely provides definite answers, but it does aim to provide a rigorous marking scheme. This bill, and its accompanying recommendations, aim to update that scheme to the latest version. As with any update, there are bound to be teething problems, not least for users trying to navigate their way around the new legal rules. Identifying, for instance, when an asset has the requisite features to qualify it for the third category is something that will need to be done on a case by case basis, but the analysis in the Law Commission’s Final report provides extensive guidance on that. The good news however, is that because the bill functions to extend existing rules, rather than to re-draw the entire landscape, there are established routes to finding answers if you know where to look.

We have already started to see common law developments along the lines set out by the Law Commission’s work, making the preparation for the exam far more straightforward. Participants in the digital assets space are now accordingly reviewing and structuring their approaches in this area with increased confidence that their digital assets will receive proper legal protection.

Professor Sarah Green
 is head of digital asset & trade finance, D2 Legal Technology and former law commissioner of England & Wales for commercial and common law