W Legal was recognised, in November 2019, for participating in the release of the highly anticipated UK Jurisdiction Taskforce’s Legal Statement on cryptoassets and smart contracts.
W Legal’s Data Specialist Team, David Ellis and Raphael Uribe, recently participated in the Taskforce’s consultation which helped frame the Legal Statement and identify current areas of English Law relevant to regulating and defining cryptoassets and smart contracts. The Chairman of the Taskforce, Chancellor of the High Court, Sir Geoffrey Vos, said that “the objective of the Legal Statement was to demonstrate the ability of the common law in general, to respond consistently and flexibly to new commercial mechanisms”. W Legal, together with other named specialist lawyers in this broadening field, are cited in the Legal Statement annex, including those from the Bank of England.
In an area of rapidly developing law, it is key to work with legal advisers at the cutting edge in understanding and shaping solutions. We want to share with you some of the new legal and regulatory aspects that the expanding digital world presents and hope to be able to work with you in the future in this challenging and exciting field.
The Legal Statement demonstrated the benefits of the English common law system’s inherent flexibility outlining how our law of property and contract can define and understand cryptocurrencies, cryptoassets, Distributed Ledger Technologies (DLTs) and smart contracts. Whether English law treats a particular cryptoasset as property will depend on the nature of the asset. Cryptoassets have no distinguishing feature that would disqualify them from being deemed to be property and the concept of ownership will also apply.
A person can acquire control of a private key in a way similar to that of a person in possession of a tangible asset. The Legal Statement proposed that cryptoassets are not a “thing or chose in possession” because they are not tangible and cannot be possessed. However, for a cryptoasset to be a “thing or chose in action” remains an open point as it is akin to litigation or action involving a debt or contractual right.
Commercial disputes often have foreign parties and the common law rules allow for particular disputes to be settled in accordance with another country’s laws. DLT implementation under English Law would mean that parties have to say expressly that English law applies. If they do not, then judges normally apply the law of where the property is situated at the time. That is largely for two reasons. First, at least when dealing with tangible property— “things in possession”—the country in which the asset is located is easily identified and third parties might, therefore, reasonably suppose that the law of the country determines property issues. Secondly, that country has physical control over assets within its borders, and a court judgment, which is in conflict with its laws, will often be ineffective.
The law allocates an artificial location to certain types of intangible property, which is often the place in which some sort of control over the property might be exercised. Many “things in action” are therefore considered to be situated in the country where they are properly recoverable by action or can be enforced. However, the rules and how they apply are often difficult to state with any certainty. For a truly decentralised system, such as Bitcoin, it does not make much sense to say that there is any one country where the asset is recoverable or enforceable.
The Legal Statement tentatively suggests that the following factors might be particularly relevant in determining whether English law governs the proprietary aspects of dealings in cryptoassets:
(a) Whether any relevant ‘off-chain’ asset is located in England and Wales;
(b) Whether there is any centralised control in England and Wales;
(c) Whether a particular cryptoasset is controlled by a particular participant in England and Wales (because, for example, a private key is stored there);
(d) Whether the law applicable to the relevant transfer (perhaps by reason of the parties’ choice) is English law.
Smart contracts are capable of satisfying the need in English Law that, when two parties have reached agreement and intend to create a legal relationship, there is a benefit to each one. English law does not struggle with the concept of anonymous or pseudonymous parties contracting; nor with the notion that a contract can be formed between individuals by virtue of each of them having agreed to subscribe to a set of rules (as happens, for example, in a club).
In terms of whether security can be given over cryptocurrency or over a smart contract, English Law only recognises four kinds of security: pledge, contractual lien, equitable charge and mortgage. Pledges and liens can only be created if it is possible to transfer possession of an asset which is not the case. The view, at this time is that, at least theoretically, is that a mortgage or equitable charge can be created over cryptoassets.
Whether you are issuing, investing, contracting with or paying with cryptocurrencies; assets or contracts, the laws and regulations need to be carefully considered as they are still in a developing and changing phase. W Legal and its specialist team in this area are following developments and contributing to the discussions on new laws and regulations and will be very pleased to discuss your issues, ideas and assist in resolving any challenges that you face.
Here is a link to the Consultation Paper: https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf
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