UKJT issues legal statement on the Status of Cryptoassets and Smart Contracts
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Introduction
On 18 November 2019, the UK Jurisdiction Taskforce (UKJT), chaired by Sir Geoffrey Vos (Chancellor of the High Court), published a legal statement on the status of cryptoassets and smart contracts under English law (Legal Statement) following a public consultation process. Launching the Legal Statement, Sir Geoffrey Vos said that it was a "watershed for English Law and the UK's jurisdiction" and "something that no other jurisdiction has attempted".
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.
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.
Background
Prior to the issue of the Legal Statement, the UKJT released its consultation paper in May 2019 to address issues of perceived legal uncertainties with respect to these new technologies. The consultation was centred around two issues and accompanied by various ancillary questions relating to each issue. In relation to the legal status of cryptoassets, the question was under what circumstances, if any, would a cryptoasset and a private key be characterised as personal property. In relation to the enforceability of smart contracts, the question was under what circumstances is a smart contract capable of giving rise to binding legal obligations, enforceable in accordance with its terms. The UKJT received over 140 written responses from a broad range of respondents including academics, technologists, businesses and individuals, lawyers and non-lawyers.
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.
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 Legal Statement does not attempt to define precisely what a cryptoasset is. Instead, the term “cryptoasset” in the Legal Statement refers to dealings in assets of some kind which are represented digitally by reference to the rules of the system in which the asset exists. Functionally, it is said that a cryptoasset is represented normally by a pair of data parameters. First, a public one containing encoded information about the asset, such as its ownership, value and transaction history, and secondly, a private key which permits transfers or other dealings in the cryptoasset to be cryptographically authenticated by digital signature.
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.
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 second key conclusion of the Legal Statement is that a smart contract is capable of satisfying the basic requirements of an English law contract and can therefore be interpreted accordingly and enforced by the courts. It recognises that the main distinctive feature of a smart contract is its “automaticity”, that is, such contracts can be performed, at least in part, automatically without the need for human intervention, and therefore leaves little room for interpretation. This may remove the need for a party to resort to the law to enforce a promise by their counterparty. However, this fact alone may not be sufficient to warrant differing treatment of smart contracts in principle from conventional contracts. There remains a real risk of non-performance of a smart contract due to factors external to the coding of a smart contract, which may give rise to legitimate dispute claims.
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.
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.
Concluding remarks
The Legal Statement is not binding legal authority as Sir Geoffrey Vos recognises in his foreword, but is nevertheless a critical step in looking to provide much needed market confidence and a certain degree of legal certainty which is crucial to the successful development of the use of cryptoassets and smart contracts in all sectors, including the financial services sector. Further, whilst the authors of the Legal Statement clearly envisage some form of legislative intervention, the publication of the Legal Statement by the UKJT signals a willingness, at least from senior members of the judiciary, to promote the flexibility of the common law as a means of offering pragmatic solutions to the novel legal issues raised by cryptoassets and smart contracts.