What's the issue?

NFTs – records of digital ownership stored on a distributed ledger technology (usually blockchain) – are likely to fuel the Metaverse economy, enabling verification of identity and ownership.  NFTs can already be worth millions of real world pounds, and yet, the legal status of digital assets like NFTs is unclear.

English law traditionally recognises two types of property:  things in possession (any object that can be physically possessed), and things in action (something which embodies a legally enforceable right or obligation).  The UK Jurisdiction Taskforce's (UKJT) Legal Statement on cryptoassets and smart contracts found in 2019, that digital assets (which include NFTs and cryptoassets) were neither.  Despite this, the courts have recognised digital assets as property. The recent case of AA v Persons Unknown, found that cryptocurrencies were a form of property.

In order to clarify the position, the Law Commission of England and Wales published a call for evidence in 2021 looking at issues around digital assets including possessability, transferability and ownership.

What's the development?

At the end of July 2022, the Law Commission published a consultation on its proposals to reform the law on digital assets.

The most significant recommended reform is the explicit recognition of "data objects" as a "third" category of personal property, distinct from things in possession and things in action.  The Law Commission believes this would allow for a more nuanced consideration of "new, emergent and idiosyncratic objects of property rights", and suggests this be introduced through iterative, common law reform or limited statutory intervention.

Data objects, it is suggested, would be digital assets which:

• are composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals
• exist independently of both persons and of the legal system, and
• are "rivalrous", meaning that the data asset's use by one person prevents the ability of others to make equivalent use of it at the same time.

The consultation goes on to look at the application of this category to different types of data objects, including digital files and records, email accounts, in-game digital assets, domain names, carbon emissions trading schemes and crypto-tokens.  Considerable time is spent discussing the nature of cryptoassets. 

Crucially, the Law Commission proposes classifying NFTs as cryptoassets (and therefore as data objects), rather than creating a separate category for them.  This is because an NFT can link to and transfer legal rights in things other than itself or in the crypto-token system in which it is instantiated.  The Law Commission points out that NFTs are confusing to buyers as they may not, in fact, or as a matter of law, confer rights.  It recognises  that NFTs are likely to play an increasingly important role in online transactions and a "leading, exploratory role in establishing property rights in data objects in mainstream and retail use" but also suggests that the most radical legal development NFTs might bring "is a change in how the market, market participants, and the legal system operate and transact with respect to intellectual property rights".

What does this mean for you?

While the consultation paper is lengthy, there are relatively few concrete proposals for change.  The introduction of a third category of property would certainly be radical but, for the most part, the Law Commission suggests many of the issues raised by digital assets, can be dealt with under common law which is sufficiently flexible to accommodate them.  The Law Commission is wary of restricting innovation through the creation of a new legal regime, but it recognises the provisional reform proposals as "foundational".

As we discussed here, the legal position of NFTs and other digital assets does need greater clarity.  It will be interesting to see whether the responses to the Law Commission's consultation (which are required by 4 November 2022) precipitate legislative changes beyond those currently proposed.