Law Commission proposes new property category for digital assets in UK

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The Law Commission of England and Wales is urging the United Kingdom government to create a new personal property category for digital assets, in a report advocating for legal reforms to better account for the unique features of digital assets.

The Law Commission is a statutory independent body created to keep the law of England and Wales under review and recommend reform where needed. On July 30, it published a supplemental “final report” highlighting the inadequacy of the current categorization of personal property and its legal implications on digital assets.

Personal property rights, in general, assist courts and individuals in a number of situations, not least in cases of bankruptcy or insolvency, where objects of property rights are interfered with or unlawfully taken, and for the legal rules concerning inheritance and succession on death. They are also crucial for properly characterizing legal relationships, including custody relationships, collateral arrangements, and structures involving trusts.

As the commission summed up, “property rights are powerful because, in principle, they are rights that are recognised against the whole world.”

However, U.K. law is somewhat ambiguous regarding digital assets and property rights, which is why the commission made its recommendations.

“The Law Commission has been considering how principles of private law, specifically personal property law, apply to digital assets,” said the report.

In considering digital assets as property, the commission first had to clarify what it was referring to. Specifically, it defined “crypto-token” or “cryptoassets,” as a notional quantity unit manifested by the combination of the active operation of software by a network of participants and network-instantiated data; cryptocurrency as a subset of crypto-token designed to act like money; and digital asset as any asset that is represented digitally or electronically.

In terms of the latter, the commission stated that “there are many different types of digital assets, not all of which will be capable of being things to which personal property rights can relate. In this report, we use the term in a broad sense.”

This was a reference to a previous report on digital assets, published in June 2023, in which the commission concluded that “certain types” of digital assets are things to which property rights relate.

However, after coming to this conclusion, the commission admitted that certain digital assets don’t easily fit within the existing categories of personal property that have been traditionally recognized in the England and Wales.

English law categorizes personal property into two main types: things in possession, i.e., tangible property, and things in action, i.e., intangible property, such as debts or rights. Digital assets, including digital currencies and non-fungible tokens (NFTs), can possess both qualities or neither, and the confusion can hinder dispute resolution in court proceedings.

For this reason, the commission proposed in its latest report introducing a “third category” that it hopes would ensure property rights related to digital assets are clear and enforceable:

“We conclude that the flexibility of common law allows for the recognition of a distinct category of personal property that can better recognize, accommodate and protect the unique features of certain digital assets (including crypto-tokens and crypto assets).”

In order to achieve this, the commission recommended a ‘Property Bill’ that would clarify that “a thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither— (a) a thing in possession, nor (b) a thing in action.”

This bill would allow for digital assets to be considered property, whether or not they fit into either of these two existing categories, but leaves it to “common law development”—in other words, the courts—to develop the third category for digital assets.

The Law Commission also recommended that the Government create a panel of industry experts, legal practitioners, academics and judges to provide guidance on the factual and legal issues relating to certain digital assets, in order to assist the courts.

It added that its various recommendations “are currently being considered by the Government.”

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