The case for legal certainty in digital assets

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Introduction

The Financial Markets Law Committee (the FMLC or the Committee) has issued a response to the Law Commission’s Consultation on digital assets and (electronic) trade documents in private international law (June 2025).

The FMLC, whose mandate is to identify issues of legal uncertainty or misunderstanding in the framework of the wholesale financial markets which may pose material risks, and to consider how such issues should be addressed, appreciates the Law Commission’s engagement on this subject but raises concerns about the lack of clarity and predictability in its proposed framework for digital assets. The letter reiterates the FMLC’s prior recommendations from its Digital Assets - Governing Law and Jurisdiction paper (June 2024) (FMLC Paper) and urges the introduction of a clear statutory rule to determine the governing law in property disputes involving digital assets, alongside a jurisdictional gateway enabling English courts to hear such claims. The response does not address electronic trade documents.

The case for legal certainty

The main focus of the FMLC's arguments is the requirement for clarity and consistency in determining the governing law for any disputes involving digital assets. The Committee contends that the Law Commission’s proposed approach (whereby courts would weigh up a wide range of factors to reach a 'just disposal' of proceedings) could result in inconsistent and unpredictable outcomes. Without a clear rule, parties cannot know in advance which law governs their rights or the enforceability of security interests over digital assets. This uncertainty may deter market participants from adopting digital assets or distributed ledger technology (DLT) systems, potentially impeding financial innovation and the UK’s competitiveness. The FMLC warns that as the UK integrates crypto-assets into its regulatory framework (expected by 2026) and develops the Digital Securities Sandbox, participants need to be confident that digital asset arrangements are legally enforceable from the outset.

Ambiguities and inconsistencies

The FMLC criticises the Law Commission’s lack of precision in determining the meaning of 'wholly decentralised' in relation to applications of DLT and in identifying which scenarios exhibit 'omniterritorial challenges' and which do not. Further, the FMLC notes that the distinction between wholly de-centralised and permissioned DLT systems is a 'false dichotomy'. The Law Commission appears to confine its analysis to 'omniterritorial' and fully decentralised systems while relegating permissioned systems to contract law (noting disputes in relation to such systems do not generally require the consideration of property issues). However, many permissioned DLT systems operate without a central administrator, relying instead on consensus mechanisms similar to those in permissionless systems, and therefore 'permissioned' and 'centralised' should not be regarded as synonymous. The absence of a clear boundary creates uncertainty about which systems the Law Commission’s proposals would actually govern. The FMLC calls for a consistent approach in respect of all property disputes involving digital assets, across all DLT systems, whether permissioned or otherwise.

Proprietary issues in financial markets

The FMLC refers back to the FLMC Paper which noted that proprietary issues and the related uncertainties were less relevant to the current implementations of digital assets in the financial markets for a number of reasons, but emphasises that these statements were not intended to suggest that proprietary issues were not of significant importance to the financial markets, now or in the future. The FMLC notes that while many current tokenised securities are structured so that the tokens themselves are not objects of property, future developments, particularly the use of native digital securities, will probably change this. Further, proprietary disputes (for example, over collateral, competing assignments, or third-party enforcement) can arise even within permissioned DLT systems. The FMLC stresses that contractual frameworks cannot eliminate all property issues, particularly where third parties outside a contractual relationship assert rights in digital assets.

Party expectations and international consistency

The Law Commission posits that uncertainty in the substantive laws of different legal systems limits the ability of a fixed applicable rule to provide legal certainty, and that a fixed governing law rule could frustrate parties’ 'legitimate expectations,' especially if the designated law prohibits digital assets. The FMLC rejects this reasoning, asserting that certainty itself shapes expectations. A clear rule would allow parties to identify the applicable law and to structure transactions accordingly. Moreover, by establishing a fixed rule, English law could set a global benchmark, encouraging harmonisation across jurisdictions and reducing the risk of conflicting judgments from courts in multiple countries. The Committee also cautions that ignoring the express choice of law embedded within a DLT system or digital asset undermines the expectations of participants who relied on that choice when transacting.

Party autonomy and comparative models

The FMLC strongly advocates for party autonomy as the starting point for conflict-of-law rules in digital asset property disputes. If a DLT system or digital asset specifies a governing law, that law should apply. The Committee argues that traditional objections to party autonomy in property law, based on the lex situs principle, lose force in decentralised contexts where no physical 'situs' exists. Comparative international examples bolster this argument: the Hague Securities Convention recognises choice of law in securities transactions; the US Uniform Commercial Code (UCC §12-107) which since June 2024 (when the FMLC Paper was published) 35 US states have enacted) enshrines party autonomy for digital assets; and the UNIDROIT Principles on Digital Assets and Private Law provide for an express choice of law with fallback options, closely mirroring the FMLC’s proposal.

Implications for the UK’s financial markets

The FMLC concludes that without a clear private international law rule governing digital assets, the UK risks deterring innovation and ceding ground to more legally certain jurisdictions. Legal uncertainty could reduce the use of digital assets as collateral, limit liquidity, and impede the government’s broader strategy for financial services growth and competitiveness. The Committee emphasises that English law has an opportunity to serve as a model for international cooperation, balancing predictability with adaptability in the digital era.

The response in full can be found here.