In June 2023, the Law Commission published its final report on digital assets (the Report), concluding that certain types of digital assets are capable of being considered ‘property’ under English law. It considered this to be the case despite such assets not fitting easily within Fry LJ's assessment of personal property in the 1885 case of Colonial Bank v Whinney, namely that "all personal things are either in possession or in action; the law knows no tertium quid [third thing] between the two", a statement that has largely been taken as reflecting the correct legal position. A conclusion of the Report was to recommend legislation confirming the existence of a third category of personal property rights, which many of their consultees agree has already been developed at common law in England and Wales, which would include certain types of digital property that do not fall within the Colonial Bank v Whinney parameters. Property falling within such third category would not constitute a thing (or "chose") in action (a legal right or enforceable claim) or a thing in possession (a tangible object).
In late February 2024, and as highlighted in our Financial Services Regulatory team's post of 23 February 2024, the Law Commission published its short consultation on draft clauses for digital assets as personal property which proposes a draft bill (annexed to the consultation (the Draft Bill)) intended to provide that third category of personal property. The Draft Bill aims to confirm that (following recent cases) crypto-tokens, and potential other cryptoassets, are capable of being recognised as personal property by English law. The Draft Bill can be found here.
Cryptoassets, by nature, are not tangible and are also not enforceable by legal proceedings alone and therefore do not fall within the two "currently accepted" forms of property. There have however been clear departures from the traditional two-category classification by the English courts, and it is clear that they recognise certain cryptoassets as things that are capable of having personal property rights:
- The UK Courts have already concluded that certain things (including digital assets) can have personal property rights, even where the "thing" in discussion does not neatly fall into the two established categories – such assets have included milk quotas, European Union carbon emission allowances and crypto-tokens (for example NFTs).
- Justice Bryan in the High Court in AA v Persons Unknown [2019] stated that crypto-currencies "are neither in possession nor are they in action" but concluded that they were a form of property. This judgment has been cited numerous times in support of the proposition that the digital asset under examination is a thing which is capable of being an object of personal property rights.
This view was affirmed by the Court of Appeal in Tulip Trading v Van Der Laan [2023] in which Lord Justice Birss stated "a cryptoasset such as bitcoin is property".
It is worth noting that courts in other common law jurisdictions have reached conclusions similar to those reached by the English courts, as have a smaller number of civil-law jurisdictions.
The Draft Bill is incredibly short in nature and was intended to be so. The operative clause states that "A thing (including a thing that is digital in nature) is capable of being an object of personal property rights even though it is neither: a thing in possession, nor (b) a thing in action"; a clear-cut departure from Colonial Bank v Whinney. It is worth highlighting that it does not:
- attempt to define what "a thing" is
- state which things are personal property despite not being in possession or in action
- state what the personal property rights of the third category are.
The rationale behind this approach is that these questions should be answered by common law and the Draft Bill allows the courts to develop the law in a way they think fit and as appropriate to the particular "thing". A third category "thing" may operate differently to a thing in possession or in action but in some cases similar doctrines could be ported over to that third category. The express reference to "including a thing that is digital in nature" (which was not contemplated by the Law Commission's initial recommendation) is helpful because this is the type of thing that (at least in the short and mid-term) will most likely fall into this new category. However, the drafting also allows other, unspecified, things to also fall into the third category.
If adopted, the Draft Bill will provide explicit statutory confirmation of a third category, greater legal certainly around this topic and will confirm the common law position. This will not only allow such cases to be resolved quicker, but also provide the path that can be paved by further development of the larger cpryto-space under English law. It would also given effect to the oft referenced 2014 case of Your Response v Datateam Business Media Ltd [2014] in which Lord Justice Moore-Brick stated that there was a "powerful case for reconsidering the dichotomy between in possession and in action and recognising a third category of intangible property … in a way that would take account of recent technological developments". From a wider point of view, the adoption of the Draft Bill would send a strong signal to the market that English law will protect personal property rights and will evolve as required to deal with new technologies, even in the instance that a new type of property is created.
It is worth noting that, if adopted, the Draft Bill would be a significant update in law (despite the courts already applying this approach). Introducing the third category would significantly challenge Lord Justice Fry's influential dichotomy in Colonial Bank v Whinney referred to above as once adopted, the Draft Bill will recognise that, in fact, the law does know of and will recognise a tertium quid and, based on the market and consumer uptake, that tertium quid is here to stay.
