Law reforms proposed for digital assets, including NFTs and other crypto-tokens
Digital assets, which include crypto-tokens — sometimes referred to as cryptocurrencies — and non-fungible tokens (NFTs), play an increasingly important role in modern society.
The emerging technologies are used for an increasing variety of purposes, including being valuable in themselves, used as a form of payment, or used to represent or be linked to objects or rights, such as equity or debt securities.
The Government asked the Law Commission to review the law on digital assets, to ensure that it can accommodate them as they continue to evolve and expand.
The Commission’s proposals aim to deliver wider recognition and legal protections for digital assets, allowing a more diverse range of people, groups and companies to interact online and benefit from them.
While the law of England and Wales has gone some way to accommodate the rise of new technologies, the Commission argues that there are several key areas that require law reform, to recognise and protect the rights of users and maximise the potential of digital assets.
In its new consultation paper, which seeks views from legal experts, technologists and users, the Law Commission examines how existing personal property law does — and should — apply to digital assets.
Because they are not tangible, digital assets have many different features to traditional physical assets. Their unique qualities mean that many digital assets do not fit easily into current private property law categories or definitions.
The consultation paper argues the law must therefore go further to acknowledge these unique features, which in turn would provide a strong legal foundation for the digital assets industry and for users. Through these reforms, the legal system would help to create an environment that is more conducive to digital assets and their markets.
The Commission’s proposals are designed to ensure that the law remains dynamic, highly competitive, and flexible, so that it can support transactions and other arrangements involving the technology.
The reforms also aim to help to achieve the Government’s stated goal of the jurisdiction of England and Wales becoming a global hub for digital assets, and in particular, for crypto-tokens and crypto-token systems.
Commenting on the new proposals, Professor Sarah Green, the Law Commissioner for Commercial and Common Law, said:
“Digital assets such as NFTs and other crypto-tokens have evolved and proliferated at great speed, so it’s vital that our laws are adaptable enough to be able to accommodate them.
“Our proposals aim to create a strong legal framework that offers greater consistency and protection for users and promotes an environment that is able to encourage further technological innovation.
“It’s important that we focus on developing the right legal foundations to support these emerging technologies, rather than rushing to impose structures that could stifle their development. By clarifying the law, England and Wales could reap the potential rewards and position itself as a global hub for digital assets.”
Proposals set out by the Law Commission in its consultation paper include:
- Explicitly recognising a distinct category of personal property under the law which is better able to accommodate the unique features of digital assets. The distinct category is provisionally called “data objects”.
- Options for how this distinct category of personal property could be developed and implemented under current law.
- Clarifying the law around ownership and control of digital assets.
- Clarifying the law around transfers and transactions involving digital assets.
What is a digital asset? Digital asset is an umbrella term, covering non-tangible assets in digital form. They could include databases, software, digital records, domain names, and crypto-tokens (including cryptocurrencies).
What is a crypto-token? A crypto-token is a type of digital asset that uses cryptography – the process of coding information so that it can be transferred securely. Crypto-tokens are digital tokens that can be traded, used to represent another asset, or used as a store of value.
One type of crypto-token is a non-fungible token (NFT), which is a crypto-token that is unique or capable of being differentiated from other crypto-tokens. NFTs are often linked to data, such as data representing digital artwork, but they can also be used to link to a wide range of assets and rights.
The term “crypto-token” is sometimes used interchangeably with “cryptocurrency”. While they have many overlapping features, cryptocurrency is a term that generally refers to crypto-tokens that are largely intended to be used for making payments as digital currencies, while crypto-tokens are used for this and a number of additional purposes, outlined above. For this reason, our paper is concerned with crypto-tokens. Consultation paper definitions: The above definitions are for high-level guidance purposes only and are not the definitions or descriptions used in the consultation paper. Our consultation paper aims to develop descriptions of the above terms.
Responding to the consultation
The Law Commission is seeking responses to its consultation by Friday 4 November 2022. Responses to the consultation may be submitted online from Thursday 28 July.
Alternatively, comments may be sent by email to digitalassets@lawcommission.gov.uk.
Visit the project page and read the consultation paper here.