Law Commission's report on digital assets: what's next?

Quick read

On 28 June 2023 the Law Commission released its final report on digital assets setting out its recommendations for reform.

The key theme of the Report is that the courts of England and Wales are well equipped to deal with digital asset disputes. The Law Commission therefore recommends that save in respect of a few areas (addressed below), the legal developments needed to meet the challenges posed by digital assets should be left to the common law.

The key changes proposed by the Law Commission are:

New legislation to recognise a third category of property which can attract personal property rights.
A new cause of action in tort to address a gap in the law for the wrongful interference with digital assets.
The formation of a technical expert panel which would provide assistance to the court in cases concerning digital assets.

Third category of property

While there have already been a number of English court decisions recognising certain digital assets as property , the Law Commission concluded that it would be helpful for the government to introduce legislation confirming that digital assets can attract personal property rights. The Law Commission proposes that such assets would fall within a "third category of things".

A digital asset or "third category of thing" would need to satisfy the following criteria:

Be composed of electronic data (eg computer code)
Exist independently of persons and independently of the legal system
Be rivalrous (ie when used or consumed by one person, or a specific group of persons, it cannot be used or consumed by one or more other persons).

New cause of action in tort

The Law Commission concluded that for most disputes involving digital assets, there will be a cause of action available. For example, if there has a been a breach of contract concerning a digital asset, then a claim could be brought for damages in the usual way. Or, if digital assets have been misappropriated as a result of fraud of other wrongful interference, a claimant would be able to pursue personal and/or proprietary claims against the wrongdoer or recipient of the digital asset.

However, the Law Commission has identified a couple of gaps in the current law:

The tort of conversion is unlikely to extend to claims in respect of digital assets as they are intangible and cannot be "possessed" in the usual way.
Existing tortious remedies are unlikely to be available in certain factual scenarios that are unique to digital assets such as burning (which involves irreversibly sending a crypto-token to a public address the private key of which is unknown).

Rather than trying to expand the scope of liability under existing torts, the Law Commission recommends that the common law develop specific and discrete principles of tortious liability, which would draw on some of the elements of the tort of conversion, to deal with wrongful interferences with digital assets.

New expert panel

The Law Commission acknowledges that it would be an enormous task for the judiciary to keep up to date with all the technological developments in this area. It therefore recommends that the Government creates or nominates a panel of industry-specific technical experts, legal practitioners, academics and judges who would provide non-binding guidance to the judiciary on digital asset systems and how they operate, or the digital assets market more broadly.

A specialist list

Other future developments may include the creation of a specialist court or list which caters specifically to crypto claims. At the recent Annual Crypto in Disputes Conference, His Honour Judge Pelling expressed the view that a specialist list could be established quickly and at limited cost. This new court or list could be modelled on the Dubai International Financial Centre's (DIFC) new Digital Economy Court (DEC), which was formed in 2021 and has adopted a set of industry-first specialised rules.

If you would like to discuss any of these developments in more detail, please contact: Georgina Jones, Emma Allen, Samantha Brendish, Laurence Lieberman, Stephen O'Grady.

Look out for our future updates on developments in this area here.

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