Legal statement on cryptoassets and smart contracts
On 18 November 2019, the UK Jurisdiction Taskforce (UKJT), published the findings of their public consultation on the principal issues of legal uncertainty regarding the status of cryptoassets and smart contracts under English law in a Legal Statement.
The Legal Statement is not binding legal authority as Sir Goffrey Vos recognises in his foreword, but is a considered response to the key legal questions which have been identified following the Consultation on Cryptoassets, Distributed Ledger Technology and Smart Contracts earlier this year.
The Legal Statement identifies two key legal questions which it seeks to answer:
- whether cryptoassets satisfy the legal characteristics of property under English law; and
- whether smart contracts are capable of being interpreted and enforced in accordance with established English contract law principles.
In the words of Sir Goffery Vos, the intention is that the measured responses will provide certainty in order to create a foundation for the responsible future utilisation of cryptoassets and smart contracts.
Cryptoassets as property
The Legal Statement addresses a question which many readers will be faced with – why does it matter if a cryptoasset is capable of being property? In short, it matters because it impacts on the rights and remedies available in law, particularly in insolvency law and the creation of security.
To consider this, the Legal Statement does not shy away from attempting to address the other elephant in the room – what is a cryptoasset? It succeeds in suggesting clear ‘features’ of what a majority of the industry would associate with cryptoassets (intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, and rule by consensus) but even in its 11 paragraph description, it has not achieved to bridge the open gap between a multitude of overlapping and sometimes synonymous terms for this new asset class. Its analysis is further hindered by the admission that there is no clear definition of ‘property’ under English law and so instead it focuses on the authoritative description of the ‘necessary characteristics of property’ established under UK common law. These characteristics are whether a right or interest if (i) definable, (ii) identifiable by third parties, (iii) capable in its nature of assumption by third parties, and (iv) has some degree of permanence or stability.
The UKJT concludes that cryptoassets should be treated in principle as property. The reason for this is that (1) they ‘have the indicia’ of the aforementioned characteristics of property, (2) their novel features do not disqualify them from being property and (3) nor are they disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action.
Are ‘smart contracts’, legal contracts?
The Legal Statement concludes at the outset that a smart contract is capable of satisfying the basic requirements of a legal contract under English law, and can therefore be interpreted accordingly and enforced by the courts.
It recognises that one of the key features of smart contracts, is its automaticity and therefore objectively leaves little room for interpretation. This therefore may remove the need for a party to resort to the law to enforce a promise by their counterparty. This fact alone would not be sufficient enough to warrant differing treatment of smart contracts in principle, from conventional contracts. There remains a real risk of non-performance of a smart contract due to factors external to the coding of a smart contract, which may give rise to legitimate dispute claims.
The UKJT further notes that English law principles typically do not require contracts to be in “any particular form” and will allow for the enforceability of any contract which is deemed to satisfy the common law requirements for the formation of a contract, (provided there are no vitiating factors). These requirements under the English contract law are (i) the fact that an agreement is being made, (ii) the intention of the parties to be legally bound, and (iii) unless made by deed, the fact that all parties must give consideration. The Legal Statement proposes that all of these requirements are capable of being met by smart contracts.
The Legal Statement delivered by the UKJT will no doubt be closely considered throughout the FinTech community. It simultaneously makes bold and clear statements as to legal interpretations on complex matters but recognises that all interpretations are fact-specific and emphasises on that cryptoassets and smart contracts are ‘capable’ of satisfying legal requirements to classify them as property and legally binding contracts respectively. This has the effect of outlining a strong case for the conclusions set out in the Legal Statement but leaving open room for different interpretation which is reflective of the sentiment of community members that there is no single type of ‘cryptoasset’ or unifying definition of a smart contract. Whilst this may mean the legal analysis will always be an open risk for cryptoasset issuers, the Legal Statement achieve what it sets out to do, which is to provide the foundation for responsible uses of cryptoassets and smart contracts alike.
Following the publication of the Legal Statement, the UK is now the first jurisdiction to produce an authoritative statement surrounding the issues raised. It highlights the strength of the English legal system in its ability to adapt to change without requiring ‘cumbersome, time-consuming and inflexible process of legislative intervention’. The Legal Statement launch speech outlined the potential for the following actions to follow:
- Further regulation and the standardisation of enforcement remedies surrounding dealings in cryptoassets; and
- Legislative confirmation of the legal status of cryptoassets and smart contracts, which is to be considered by the UK Law Commission.