UKJT issues legal statement on the Status of Cryptoassets and Smart Contracts
The UKJT is one of the six taskforces of the LawTech Delivery Panel. LawTech comprises a team of industry experts and members of the government and the judiciary formed to help the UK legal sector grow and fulfil its potential.
The Legal Statement is not a treatise or an academic paper and neither does it intend to state how the law in the area should develop. Instead, it sets out what the UKJT believes English law to be now and aims to provide some degree of legal certainty and predictability in areas which are important to both the technological and legal communities, and to the global financial services industry.
There were a number of areas of law which were intentionally deemed out of scope by the UKJT for the purposes of the consultation, in particular, the regulation of dealings in cryptoassets as well as matters relating to taxation, anti-money laundering, intellectual property, data protection, and consumer law.
Key findings – could cryptoassets constitute property?
The first key conclusion of the Legal Statement is that, as a matter of English law, cryptoassets have all the legal characteristics of property and as such, should be treated in principle as property. This conclusion is likely to have important consequences for the application of a number of legal rules, including those relating to succession on death, the vesting of property in personal bankruptcy, and the rights of liquidators in corporate insolvency, as well as in cases of fraud, theft or breach of trust.
The Legal Statement describes the features of a cryptoasset as “novel” with five key characteristics namely, intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation and rule by consensus. These characteristics do not preclude cryptoassets from being treated as property. The Legal Statement further notes that one of the fundamental aspects of property is “ownership”, and that cryptoassets are capable of being owned. Whether English law would treat a particular cryptoasset as property ultimately depends on the nature of the asset, the rules of the system in which it exists and the purpose for which the question is asked.
The Legal Statement goes on to state that despite being property, cryptoassets are not things in possession because they are “virtual” and therefore cannot be possessed. The main implications that flow because of this conclusion are as follows. First, cryptoassets do not constitute “goods” for the purposes of the Sale of Goods Act 1979, which operates on the assumption that “goods” are capable of being possessed. Secondly, cryptoassets cannot be the object of a bailment because by nature, bailment requires the transfer of possession. Thirdly, cryptoassets are limited in terms of what types of security can be granted over them. Those securities are likely to be mortgages or equitable charges. Pledges and liens can only be created if it is possible to transfer possession of the asset. As such, a cryptoasset cannot be the object of a pledge or lien. The Legal Statement also makes clear that cryptoassets are not documents of title, documentary intangibles or negotiable instruments, nor are they instruments under the Bills of Exchange Act 1882.
Key findings – could a smart contract constitute a contract formed under English law?
The UKJT further notes that English law principles typically do not require contracts to be in "any particular form" and will allow for the enforceability of any contract which meets the common law requirements for formation of a contract, provided there are no vitiating factors.
The Legal Statement further notes that where there is a statutory requirement for a document to be signed, such a requirement is highly likely to be capable of being met by means of a private key. This is because an electronic signature which is intended to authenticate a document will generally satisfy a statutory signature requirement and a digital signature produced using public-key cryptography is just a particular type of electronic signature.