The cryptocurrency dilemma: Should volatile digital assets receive legal recognition as property?

BCL student at the University of Oxford, Niranjana Ramkumar, explores the limitations of English property law when it comes to crypto

In September, the Law Commission’s draft bill regarding the proprietary status of digital assets, including cryptocurrency tokens, was introduced in parliament. This draft bill was the result of a years-long project carried out by the Law Commission, where it was asked by the government to recommend reforms to the law in this area. The introduction of the draft bill is the first step in a process that could lead to the eventual statutory recognition of crypto tokens and other digital assets as property.

Although some court decisions have recognised in principle that digital assets could be considered property, putting this on a statutory footing would ensure greater clarity and certainty in the law. This is especially important for companies and individual investors in the cryptocurrency market. Moreover, the fact that the bill was introduced in parliament in the first-place acts as a signal that the UK is looking to become a growth hub for the digital assets industry, which could draw investors and innovators to the UK, leading to an evolution in the market.

However, a lot has changed since the Law Commission began its project in 2021. Following the collapse of numerous cryptocurrencies and exchanges, including the high-profile collapse of FTX in November 2022, the crypto market has proven to be highly volatile. The market is also replete with scams and hacks, perhaps more so than with other kinds of investment. It is therefore worth considering why there was uncertainty as to the legal status of cryptocurrency and what the new draft Bill could mean for property law. It must also be asked exactly why cryptocurrency needs to be recognised as property. Although enabling innovation and encouraging new technologies is important, the recognition of crypto specifically risks giving the market a legitimacy which it may not entirely deserve.

Why is there uncertainty about the legal status of cryptocurrency?

Traditionally, there are two types of rights which are recognised as personal property rights:

• choses in possession are rights to things which are capable of being possessed, such as my title to my pen
• choses in action are rights to things which are not capable of being possessed because of their intangible nature and are only enforceable by legal action, such as a share in a company

Cryptocurrency does not fit into either of those categories. Since crypto tokens are digital assets, they are intangible and so they are not capable of being possessed. Title to a crypto token is therefore not a chose in possession. However, crypto tokens are also not capable of being enforced via legal action. Without getting into the details of the technology, the holder of a crypto token is essentially the holder of a private key allowing them to make transactions in the system. The crypto token does not consist of any underlying legal obligation that can be enforced against anyone, so the crypto token cannot be a chose in action either.

This may seem strange to non-lawyers; after all, if cryptocurrency is just a digital thing, like a pound coin in real life is a physical thing, then why can’t a cryptocurrency token be property just like a pound coin is? But the issue is that, in a technical sense, property is about rights rather than things, and when it comes to rights, as Robert Stevens points out, the categories of chose in possession and chose in action are exhaustive. Either the right relates to a thing capable of being possessed, or the right is only enforceable by legal action.

Some commentators suggest that this should not be a barrier to the recognition of cryptocurrency as property. Some characterise digital assets as the power to engage in transactions within a particular system. Cryptocurrencies and other digital assets are meant to exist outside of the legal system. As will be explored further below, the whole point of cryptocurrency is that it is independent of the legal system, and so any transactions made according to the rules of the code are valid and irreversible. This means that you have to be the holder of a crypto token to transact within the system, and some commentators suggest that the power granted by holding the crypto token is a right that can be conceptualised as a proprietary right.

But we don’t recognise such powers to transact as property rights in other contexts. For example, if I own a photocard of a particular K-Pop star, that gives me the power to engage in the often lucrative photocard trading and selling market. But my power to do so doesn’t exist as a property right independently of my ownership of the card. My property right is my title to the photocard. You might say that the photocard trading market isn’t meant to exist outside of the legal system in the way that the cryptocurrency market is. But there’s a tension there: if cryptocurrency as a system is meant to exist outside of our legal strictures, why should crypto tokens be recognised as property at all?

Should crypto tokens be recognised as property?

If the Law Commission’s draft bill is passed by parliament, there would no longer be the issue of whether cryptocurrency is property. The draft bill states that something is not prevented from being the object of personal property rights even if it isn’t a chose in action or a chose in possession, which gets rid of the problems outlined above. But an important question to consider is whether cryptocurrency should be recognised as property in the first place. Hardcore cryptocurrency enthusiasts would insist that ‘code is law’, the point of cryptocurrency as a system being that it exists outside of the government-imposed legal system and that interactions on the blockchain are governed by the code. If that is the case, what is the purpose of property law in the system? Why not just let the code govern the validity of interactions on the blockchain, particularly if that is an explicit draw of the system?

Some argue it is necessary to recognise cryptocurrency as property because crypto and other digital assets are becoming an increasingly important part of our financial system. In fact, there is still a high level of institutional interest in cryptocurrencies as an investment. However, the market is highly volatile, being heavily affected by the fluctuations affecting the ordinary stock market as well as the collapses of cryptocurrency exchanges and tokens, so there’s no telling how long the bubble will grow before it pops again like it did in 2022.

Rather than facilitating the development and growth of cryptocurrency, there is a case for the law regulating cryptocurrency more stringently than it does right now. Cryptocurrency scams have risen sharply in recent years, with victims losing more on average than in any other type of scam. Outside of scams, hackers and weaknesses in the blockchain can lead to individuals and institutions losing lots of money; a notable example of this is the cyberattack that affected Axie Infinity, a play-to-earn crypto video game that provided many players with a primary source of income. Attacks and scams like this have tested the limits of the ‘code is law’ mantra. If a hack or a fraud occurs, the code has no way of knowing this, so any fraudulent transactions would be considered legitimate—that is the risk of engaging in a system that explicitly puts itself outside the law. But, understandably, the victims of fraud or hacks aren’t happy about this, and so they turn to the law to help.

The handful of court cases we have that recognise cryptocurrency as property reflect an instinct to help the victims of fraud. For example, in AA v Persons Unknown, the issue was that a hacker had demanded a ransom payment in the form of Bitcoin, and Bryan J granted a freezing injunction in respect of the Bitcoin paid. It could be argued that the statutory recognition of cryptocurrency as property could grant greater protection to victims of fraud and hacks.

However, perhaps we can afford to be a bit more sceptical of a system that insists it is self-governing and that its code is law right up until the moment something goes wrong. Rather than trying to modify the existing system of property law to enable cryptocurrency to fit it, perhaps we should go about handling the legal issues raised by crypto in another way, one that is more apt to solve the problems inherent in the fraud-ridden, low-trust environment the system seems to have created.

Niranjana Ramkumar is studying for the BCL at the University of Oxford. She has a particular interest in private law, especially the law of property.

The Legal Cheek Journal is sponsored by LPC Law.