Published Dec 9, 2019
By Ben Whitby, Regulatory Affairs at Qredo
Crypto assets can be considered a new form of property, and smart contracts are enforceable under English law.
That’s according to a selection of UK judges and lawyers, who have penned a statement that lays a fresh legal foundation for the crypto asset industry.
The statement, issued by the UK Taskforce of the Lawtech Delivery Panel, follows several rounds of public and private consultation, and makes the UK the first jurisdiction to take an authoritative stance on the status of crypto assets as property.
With this clear legal statement, a fog of uncertainty has been lifted from the crypto asset industry. And not just in the UK, which is the second largest legal services market in the world, but around the world in 27 percent of the world's 320 legal jurisdictions that rely on English and Welsh Law.
Two Key Findings
Crypto assets can be considered property under English law
Despite the difficulty of actually defining a crypto asset "because of the great variety of systems in use and kinds of assets represented", the statement says crypto assets “have all the indicia of property” — such as being identifiable by third parties and having some degree of permanence or stability, while also carrying no unique features which would disqualify them—and “are therefore to be treated in principle as property”.
The idea of cryptocurrency being categorized as property is not new. Indeed, many individual courts around the world have already reached the same conclusion—like in Seoul, where Bitcoin was designated as property so it could be confiscated in a criminal case, and in Ohio, where Bitcoin was found to constitute property that was covered under a traditional homeowner’s policy.
But as the first official legal statement from a corporate body making recommendations to governments, the statement from the taskforce represents a pivotal moment for cryptocurrency.
And why does the property classification matter? Because property can be owned...
By classifying bitcoin as property, lawyers can refer all the historic case law of property to crypto assets. This could include rulings that were originally applied to assets like houses, gold coins, sports cars, or antique furniture, and change the way that crypto assets are dealt with in common court cases like fraud, theft, succession on death, or the vesting of property in personal bankruptcy.
Exactly what kind of property crypto assets are is less clear — they are obviously not physical, like a sports car or gold bars, or “things in action”, like a debt or a contractual right, but instead are said to represent a new form of legal property
But as private keys themselves are just information — that cannot be owned per se, and only passed on —cryptocurrency is said to require categorization as a new type of property where ownership is conferred by lawful knowledge and control of the private key controlling the crypto assets.
Because ownership of the private key alone can't infer wrongful holding, every transaction is considered on its own merit. In this way, every transaction becomes a new piece of property.
Smart contracts are legally binding
Just as crypto assets don't have any characteristics that prevent them from being categorized as property, smart contracts are not considered to have any characteristics that prevent them from constituting legally binding contracts. Whether the parties’ contractual obligations are “defined by computer code” or implemented through code, the smart contracts are said to be imbued with “contractual force” that can be recognized under English law.
In the same way that a signature might represent agreement to a paper contract, the statement also recognizes that a digital private key is equivalent to signature, and can be used to sign legally binding smart contracts.
But, the statement does emphasize that having legal backing to smart contracts is likely to be important in circumstances where “performance is affected by an event external to the code”, like bugs or system failures.
The lord chief justice, Lord Burnett of Maldon, said the courts were well placed to handle any disputes relating to smart contracts: "Many believe smart contracts will not require the intervention of lawyers, much less of judges. I very much doubt that."
Now that crypto assets have been assessed by the taskforce as holding legal property status under English common law, the UK Law Commission has been invited to consider whether existing regulations are sufficient to govern their use, or if further legislation in this area is necessary.
Though the legal statement has set a clear direction, we could expect controversies to emerge as disputes gradually pass through the courts and the implications of crypto assets being considered property ripples out to impact other legal areas including matters of taxation, data protection, intellectual property, consumer protection, money laundering, and crypto asset custody.
As authorities determine the appropriate legal position on crypto assets for the UK, Qredo will continue to engage with regulators and lawmakers.
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