As has been widely reported, the Government's UK Jurisdiction Taskforce has published its legal statement on cryptoassets and smart contracts which aims to provide market confidence, legal certainty and predictability by giving guidance on the legal status of these asset classes.
The legal statement is especially relevant as we are seeing an increasing number of instructions concerning cryptocurrency and smart contracts. In particular, we are currently advising on litigation arising out of a crypto fraud involving detailed considerations of the options available to recover crypto asset losses from a variety of parties. We are also acting for several clients seeking regulatory advice in this area, and so the legal statement is a significant development which is highly material for our ongoing work.
Here, we look at the key findings of the report and what they mean for dealings and disputes involving cryptoassets and smart contracts.
Background to the legal statement
The UK Jurisdiction Taskforce (UKJT) is one of six taskforces established by the UK Government-backed LawTech Delivery Panel. The LawTech Delivery Panel aims to promote the use of technology in the UK legal sector, while the UKJT's specific objective is to demonstrate that English law and the legal jurisdiction of England and Wales provide a state of the art foundation for the development and use of distributed ledger technology, smart contracts and associated technologies.
In May 2019, the UKJT issued a consultation paper on the status of cryptoassets, distributed ledger technology and smart contracts in English law. The consultation paper identified that the development of these technologies has far-reaching implications for domestic and international financial markets, but that a lack of certainty around the legal status of these technologies could be hampering development. The consultation sought views of stakeholders on the principal areas of uncertainty, with a view to providing guidance and certainty in this area, and to bolster the use of English law and the jurisdiction of England and Wales in transactions involving these assets and technologies.
Scope and status of the legal statement
The legal statement addresses a number of fundamental principles around the characterisation and treatment of cryptoassets and smart contracts, including whether a cryptoasset is 'property' and/or 'goods'; the ownership and transfer of cryptoassets; whether security may be granted over a cryptoasset; and whether a smart contract is legally binding and enforceable.
It does not however seek to formulate a precise definition of what cryptoassets or smart contracts are, but rather sets out to identify and describe the features of cryptoassets and smart contracts that are novel as compared to their more traditional equivalents, and to assess whether and how those novelties might affect their legal treatment.
The legal statement also expressly does not address specific legal areas including the regulation of dealings in cryptoassets, taxation, criminal law, data protection, intellectual property, consumer protection or anti-money laundering. These are matters the UKJT considers to be best dealt with by other bodies and are logically subsequent to the more fundamental questions it has sought to address.
As Sir Geoffrey Vos, Chancellor of the High Court and Chair of the UKJT, says in his foreword, "there is no doubt that some of the matters covered by the legal statement will, in the future, be the subject of judicial decision. But my hope is that, in the meantime, the legal statement will provide a foundation for the responsible future utilisation of cryptoassets and smart contracts." While the statement has no formal legal effect, it will no doubt be treated as highly persuasive both in crypto / smart transactions, and in disputes arising out of them.
While acknowledging that the law is highly fact-sensitive and that there are many factors which will affect the status of cryptoassets or smart contracts in a given context, the statement comes to a number of general conclusions.
The overarching conclusion is that English common law is well able to deal with and adapt to technological developments and has a strong track record of responding flexibly to new commercial mechanisms, which makes it the perfect 'home' for transactions involving these technologies, and related disputes. As the statement says, "rather than depending on the often cumbersome, time-consuming and inflexible process of legislative intervention, judges are able to apply and adapt by analogy existing principles to new situations as they arise… Time and again over the years the common law has accommodated technological and business innovations including many which… were at the time no less novel and disruptive than those with which we are now concerned."
In terms of more specific findings, the statement concludes as follows:
- Cryptoassets have all the indicia of property, e.g. they are definable, identifiable by third parties, and have some degree of permanence or stability.
- It is in principle possible to identify who owns a cryptoasset (typically the person who lawfully controls the private key).
- The novel or distinctive features of some cryptoassets (e.g. their intangibility, cryptographic authentication or decentralisation) do not disqualify them from being property.
- Cryptoassets are therefore to be treated in principle as property.
- Cryptoassets are purely virtual, and cannot be physically possessed, which limits the types of security which may be granted over them.
- A smart contract is capable of satisfying the requirements of a contract in English law (i.e. that there is agreement between two or more parties, those parties intend to create legal relations between them, and each has given consideration (something of benefit to the other)). Whether these requirements are met in a given case is (just as it is with traditional written or oral contracts) fact-sensitive.
- A smart contract can be identified, interpreted and enforced using well established legal principles, just as with more traditional forms of contract. The parties' agreement may be defined by computer code, or the code may merely (seek to) implement an agreement formed elsewhere.
- English law is capable of addressing a situation where anonymous or pseudonymous parties contract, whether by smart contract or otherwise.
- Smart contracts and the use of private keys can in principle meet statutory requirements for contracts to be "in writing" or "signed", where these apply to specific types of agreement.
Impact of the statement
There has been much-agonised commentary on whether cryptoassets are, can be or should be regulated and subject to the law, or if their nature and unique features mean they sit outside traditional legal rules in the same way that, because of their decentralisation, they sit outside of traditional financial systems. This legal statement firmly (and unsurprisingly) concludes that cryptoassets are not outside the law, and demonstrates that the law is and has already shown itself able to adapt to technological advances.
It is apt that the statement's celebration of the common law's inherent flexibility and adaptability in fact follows on the heels of recent judicial decisions that align with its findings - judges are already making these decisions and will no doubt be bolstered by the statement in doing so. In the months prior to the legal statement, we have for example seen the English courts granting worldwide freezing injunctions to preserve misappropriated cryptocurrency, and ordering the operators of a digital currency exchange to disclose information on a digital wallet used in suspected fraud.
The conclusion that cryptoassets are to be treated as property has important ramifications in a number of areas, e.g. in the rights of liquidators in corporate insolvency, the vesting of property in personal bankruptcy, and in cases of fraud, theft or breach of trust.