Why crypto really is a new kind of 'thing'

Visionaries in the cypherpunk movement - the cradle of what is (currently) a trillion dollar crypto economy - used to claim that their innovations would usher in a world with a need for neither governments nor laws. Peer-to-peer trust would be guaranteed by the immutable certainty of cryptography. The naivety of that position is laid bare today in a 545-page paper from the Law Commission reviewing just one aspect of crypto law - concluding that not only is the law necessary but that government very much has a role in making it. 

The commission's review set out to examine the legal status of digital assets such as crypto-tokens and to propose ways to ensure they are recognised and protected in law. It was acting at the request of the government, which, with the enthusiastic support of the master of the rolls, wants to ensure that English law is the jurisdiction of choice for the burgeoning sector. 

While the tentative proposal for courts to make awards denominated in crypto made the headlines, the commission's main substantive proposal was for the explicit creation of a new kind of object subject to property rights, to sit alongside 'things in possession' and 'things in action'. (Incidentally, what happened to the old term ‘chose’? It seems a little patronising to decree that today's supposedly multicultural generation cannot cope with the occasional foreign word.)

The commission's case for the creation of a 'data object' category of property is that property rights must be grounded in a 'thing' and that currently it could be argued that crypto assets - streams of digital data held in the ether of a computing cloud - do not fit either kind of thing currently recognised in English law. They are clearly not a tangible thing, but neither are they a 'thing in action', whose existence depends on there being a party against whom claims can be enforced. This gap potentially creates a problem in litigation involving crypto assets.

The apparently obvious solution - to recognise property rights in information - is rightly ruled out by the commission. It points out that such a course would be impractical and go against the public benefit of free circulation of information. And in any case, information is already the subject of a comprehensive legal regime, including statutory copyright and other IP laws.

To qualify as a 'data object' enjoying property rights, the commission proposes that a digital asset should:

• Be composed of data represented in an electronic medium;
• Exist independently of persons and the legal system; and
• Be rivalrous, that is not capable of being shared without prejudicing the first owner's ability to use it.

Apart from the emphasis on 'electronic' in the first condition (Who knows what possibilities lie ahead in photonic or even DNA data processing?) these criteria make sense. The quality of rivalrousness is particularly pertinent, because that is the breakthrough enabled by cryptographic asymmetry, most famously solving the 'double spending' problem with digital currencies. 

The remaining question is how this legal certainty could be created. The commission points out that it could be done through common law: judges already seem to be leaning in this direction. As a judgment in one recent 'persons unknown' case put it, crypto tokens meet the criteria of being definable, identifiable by third parties, capable of assumption by third parties and having some degree of stability.

But the commission is wary about leaving it to judges, noting that they have been 'cautious about making a significant conceptual change in a single case'. The iterative approach, while one of the strengths of the common law, 'may mean the position remains uncertain for some time'. Legislation, by contrast, 'would give the courts legal certainty that it is possible to recognise new objects of property'.

If this seems over the top treatment for a fringe and flaky economic sector, think again. Crypto is about a lot more than the current booms and busts in digital coins and non-fungible tokens. As Sir Geoffrey Vos pointed out in an important speech this week, distributed ledger technology enabled by encryption 'offers advantages that will inevitably be taken up across the financial and industrial sectors'. Put simply, there are a million reasons for adopting technology that can incontrovertibly record a transaction. One is to enable self-executing contracts. Another, already examined by the Law Commission, is to enable electronic bills of lading, which today must usually exist as physical documents - an increasingly absurd drag on commerce. 

But without legal certainty, all this is just carving in the snow. In general, parliament should tread lightly when it comes to fast-developing technological breakthroughs, but this is a case where it can do something right.

Michael Cross is the Gazette's news editor. He holds no personal position in crypto assets.