Redefining property in the digital age

Cambridge Uni law student Tristan Toh Zhi Shun takes a look at how the emergence of digital assets has disrupted legal definitions of property and how regulation will have to adapt to keep up with innovation in this area

The rapid ascent of cryptocurrency has triggered pressing legal issues in the financial sector, particularly in property law. Conventional forms of ownership, such as tangible assets or enforceable rights, must be redefined to accommodate the unique attributes of digital assets like cryptocurrency. The current interpretation of ‘property’ has led to a legal issue whereby UK law fails to adequately acknowledge or safeguard digital assets, thereby jeopardising market participants and the financial system.

The UK Law Commission’s release of a supplementary report and draft Bill on digital assets as personal property is a pivotal step in addressing this issue. The proposed legislation confirms the recognition of a new form of personal property rights that can hold specific digital assets, such as cryptocurrency. The redefinition of ‘property’ to include cryptocurrencies is crucial as it aligns the law with technological advancements and underscores the UK’s steadfast ambition to become a global hub for cryptocurrency and blockchain technology. This ambition has been articulated in recent governmental frameworks, which have placed emphasis on creating an environment conducive to the growth and regulation of cryptocurrencies. By establishing clear regulatory guidelines, the UK aims to provide both clarity and confidence to investors and innovators alike. This approach not only aligns with global standards but positions the UK at the forefront of digital finance, reinforcing its status as a leader in this rapidly evolving sector.

The legal issue presented by cryptocurrencies stems from their intangible nature. Cryptocurrencies, unlike physical properties, only exist in the virtual world, making it challenging to categorise them within existing legal principles of possession and action. As a result, the courts have grappled with how to recognise cryptocurrencies within these traditional categories, leading to significant legal ambiguity.

Several landmark cases have shaped the recognition of cryptocurrencies as property in UK law. In Vorotyntseva v Money-4 Ltd (T/A Nebus.com) [2018], the court considered whether cryptocurrencies could be classified as property to grant an injunction. Although the court did not definitively rule on the matter, it proceeded on the assumption that cryptocurrencies could be considered property, marking the judiciary’s initial engagement with this issue.

A more definitive step came with AA v Persons Unknown & Ors [2019], where the High Court granted proprietary injunctions to freeze fraudulently obtained Bitcoin. Mr Justice Bryan explicitly recognised cryptocurrencies as property, citing the UK Jurisdictional Taskforce’s (UKJT) Legal Statement on Cryptoassets and Smart Contracts. This case established a clear legal precedent that cryptocurrencies could be treated as a third category of property, capable of being subject to proprietary claims and remedies.

The case of Tulip Trading Ltd v Bitcoin Association for BSV [2023] further explored the implications of treating cryptocurrencies as property. The Court of Appeal examined if Bitcoin developers were required to help recover stolen assets, as they may have fiduciary duties to users. Although the court confirmed Bitcoin’s classification as property, it also emphasised the intricate relationship between conventional legal concepts and the decentralised nature of cryptocurrencies. This case highlighted that even though cryptocurrencies can be considered property, applying standard fiduciary duties to digital assets remains an unresolved legal issue.

The inconsistencies and unresolved issues surrounding the legal treatment of digital assets, particularly cryptocurrency, underscore the urgent need for a comprehensive statutory framework. While case law is valuable, it must be enhanced to address complex legal contexts such as asset recovery and cross-border enforcement. Landmark rulings have set crucial precedents but also reveal the limitations of an incremental, court-driven approach. Without explicit statutory reform, vital questions regarding fiduciary obligations and cross-border enforcement remain unresolved. As a result of this legal uncertainty, corporations navigating different and evolving regulatory regimes would face greater complexity and ambiguity, inhibiting their ability to comply with the relevant obligations and requirements. Consequently, these corporations would bear more significant financial burdens through increased legal and compliance costs to meet various regulatory standards. Therefore, there is a pressing need for clear and consistent guidelines to ensure legal certainty and protection for market participants and the broader financial system.

In light of the evolving complexities surrounding digital assets, the UK Law Commission’s Supplemental report and draft Bill are both timely and essential. This proposed legislation seeks to formally recognise a “third category” of personal property tailored to encompass digital assets like cryptocurrency. Such a move is critical because the existing legal categories—”things in possession” and “things in action”—are ill-suited to capture the unique nature of these assets. Without a clear legal framework guiding regulated activities, there would be material legal uncertainty for corporations that deal in or with digital assets such as cryptocurrency. This may prove problematic as it creates numerous pitfalls for the digital assets industry and the viability of digital asset utilisation in the financial sector. For instance, in the case of collaterals, a collateral-taker wanting to take security by way of a fixed equitable charge over digital assets would have to take a certain level of control over the relevant digital assets. However, pertinent legal issues surface when determining accountability in areas such as control-based proprietary interest and other broader obligations, which are not the norm for other intangible assets. Without statutory reform, the current reliance on case law, while valuable, risks leaving significant legal ambiguities unresolved, particularly in areas like asset recovery and cross-border enforcement.

The main goal of the proposed Bill is to give clear legal recognition to digital assets as property, creating a consistent framework for how they are dealt with in the legal system. This clarity is essential, particularly in complex legal situations like insolvency or international disputes, where the current legal position of digital assets remains unclear. Furthermore, the recommendation from the Law Commission to establish a panel of industry experts to assist the courts in these legal matters underscores the significance of having expertise in dealing with the intricate technical aspects of digital assets. This approach increases legal certainty and establishes a strong foundation for further development of common law in this dynamic legal area.

In conclusion, the formal recognition of digital assets as a distinct category of property under UK law is a significant reform necessary to address the urgent challenges posed by the rise of cryptocurrencies and other digital assets. The draft Bill proposed by the UK Law Commission is crucial for providing legal clarity and consistency. By enacting this legislation, the UK could enhance its position as a global leader in regulating digital finance and ensure its legal system is equipped to meet the demands of a modern, digital economy. This reform not only strengthens the safeguards associated with digital assets but also paves the way for further research, innovation and legal amendments at the intersection of law and technology, contributing to a more robust and adaptable legal framework for the future.

Tristan Toh Zhi Shun is a law undergraduate at the University of Cambridge and a brand ambassador for Legal Cheek. He is passionate about applying academic and practical knowledge to legal and compliance challenges in commercial law, fintech law and financial services regulatory compliance.