Guy Robson, Senior Associate, Elliott Fellowes, Associate and Liam Croucher, Paralegal discuss whether the UK is the most favourable jurisdiction for cryptoassets and smart contracts, in Lawyer Monthly.
Guy, Elliott and Liam’s article was published in Lawyer Monthly, 11 February 2020, and can be found here.
According to Guy Robson, Senior Associate, Elliott Fellowes, Associate and Liam Croucher, Paralegal, this statement tackles perceived areas of legal uncertainty and seeks to demonstrate that English law provides a solid foundation for industry and investors to continue to develop these novel technologies and their possible use cases.
Below the team at Signature Litigation come together to explain the legal ins and outs of crypto assets and smart contracts in the UK, touching on the potential proliferation of cryptoassets and demand for services surrounding crypto-assets and smart contracts in the legal sphere.
The UKJT’s legal statement considered two main questions:
• Under what circumstances, if any, would the following be characterised as personal property:
○ A cryptoasset; and
○ A private key?
• In what circumstances is a smart contract capable of giving rise to binding legal obligations, enforceable in accordance with its terms?
These questions underpin the legal status of the technology under English law, and a number of practical consequences flow from their answers. Numerous ancillary questions were also considered, including how transfers will be affected if cryptoassets are considered to be property under English law.
The UKJT concluded that cryptoassets have all the indicia of property and should be treated as personal property under English law. No issue is caused by the distinctive and novel features of cryptoassets, such as their being held on a decentralised ledger, nor is there any other reason as to why they should be disqualified from proprietary status. The legal statement affirms that there is “no doubt” that cryptoassets are property under both common law and under s436(1) of the Insolvency Act 1986 (which defines ‘property’ for the purposes of the Act). However, a private key (essentially a cryptographic ID) is not considered to be property but rather simply a string of data.
This conclusion is expected to encourage the proliferation of cryptoassets, particularly in the financial services sector, and to increase the investment in potential use cases of the blockchain technology which underpins them. It is worth considering, for example, that whilst cryptoassets are purely virtual and as such cannot be the object of pledges or liens, the UKJT “see[s] no obstacle to the granting of other types of security“. Cryptoassets could, therefore, form part of security packages in financial transactions.
This conclusion is expected to encourage the proliferation of cryptoassets, particularly in the financial services sector, and to increase the investment in potential use cases of the blockchain technology which underpins them.
Despite this welcome conclusion, further adoption of cryptoassets may lead to an increase in sophisticated fraud and attempted theft as this new asset class is opened to a wider pool of investors of different levels of sophistication. The recourse available in the event of any wrongdoing is something that investors should bear in mind, as we are yet to see how the English courts will deal with enforcement of any awards over cryptoassets.
The UKJT’s statement also confirms that a smart contract is capable of giving rise to a legally binding contract and that there is no reason why the normal rules of contractual interpretation should not be applied. The UKJT concludes that “there is nothing novel in this: it is precisely what judges do on a regular basis when determining the basis on which parties have contracted“.
Any requirement that certain documents must be “signed” or “in-writing” can be met by using a private key to fulfil these requirements.
Despite the UKJT statement, there remain questions as to identifying and transferring ownership of cryptoassets. For example, cryptoasset transfers usually take place via on-chain transactions registered on a ledger. However, these ledgers are not currently considered as a valid register for the purposes of transferring legal title to assets.
The UKJT considers that control and knowledge of a private key could be an indication of ownership. However, if the cryptoasset is owned by a company, the individual who has control and knowledge of the private key may not in fact be the legal owner of the asset. It remains to be seen how this evidential question will be determined by the courts.
There are similar practical issues with respect to smart contracts. For example, there is no legal requirement for parties to know each other’s true identity. Whilst this is not a unique issue, it remains to be seen how this may complicate a potential breach of contract claim and whether the English courts will be flexible enough to deal with such questions.
Whilst it may take future court decisions to finally determine these issues, the UKJT’s statement clarifies that these, still new, assets generally fall within established legal principals. This should provide comfort to market participants, as their rights and obligations in respect of these new technologies are, under English law at least, now much more clearly defined. A system which affords market participants adequate legal remedies in the event that disputes arise is a crucially important factor in the UK being seen as an attractive jurisdiction for new technologies to flourish.