UKJT’s Legal Statement on the Status of Cryptoassets and Smart Contracts
04/12/19 – Prompted by a perceived need to provide legal certainty and market confidence in distributed ledger technology (DLT) and smart contracts, the UK Jurisdiction Taskforce (part of the LawTech Delivery Panel) published a Legal Statement on the Status of Cryptoassets and Smart Contracts on 18 November 2019. The Statement follows on from a consultation launched on 9 May 2019.
In relation to cryptoassets, the UKJT’s main conclusions are:
- Cryptoassets should be treated in principle as property under English law because:
- cryptoassets have all the key characteristics of property – “… definable, identifiable by third parties, capable in its nature of assumption by third parties, and […] some degree of permanence or stability” (para. 39), and
- none of the distinctive features of cryptoassets – such as intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation and rule by consensus – disqualify cryptoassets from being property.
- Cryptoassets’ status as property has important consequences in a number of areas, including succession on death, insolvency, fraud, theft and breach of trust.
- As with other intangible assets, title to cryptoassets can be vested or transferred by assignment or agreement of its owner. The Statement suggests that an ‘on-chain’ assignment (i.e. a transfer of the cryptoasset itself) is best analysed by way of the creation of a new cryptoasset owned by the transferee, with the ‘old’ cryptoasset ceasing to have any value or function because it is treated by the consensus as having been spent or cancelled (and as a result any further dealings in it would be rejected).
- It is also possible to transfer a cryptoasset ‘off-chain’, where the cryptoassets represents or is linked to a conventional asset, such as money, land or a contractual debt. An off-chain transaction would however allow the transferor to retain a copy of the private key, and therefore expose the transferee to the risk of ‘double-spending’ by the transferor.
- A distributed ledger (such as a blockchain) operates as a “reliable record in practice of which person, or which address-identifier, has control of a cryptoasset, because only dealings in a cryptoasset that are both consistent with the transaction history recorded in the ledger and signed with the relevant private key will be accepted as valid” (para. 131). But unless and until it is given binding legal effect by statute, the distributed ledger does not constitute a definitive record of legal rights in the way that the records held by the Land Registry or the Intellectual Property Office do.
- Although cryptoassets are not documents of title, documentary intangibles or negotiable instruments, some types of security can be granted over them, including mortgages and equitable charges. Because a cryptoasset cannot be physically possessed, you cannot create a lien over it, or sue someone for conversion of it (wrongfully dealing with it). For the same reason, a cryptoasset cannot be the object of a bailment.
In relation to smart contracts, the UKJT’s main conclusions are:
- Whether the contractual obligations under the smart contract are defined by computer code, or the code is implementing an agreement whose meaning is to be found elsewhere, English law is able to identify, interpret and enforce smart contracts using ordinary and well-established legal principles.
- English law is also able to deal with smart contracts formed between anonymous or pseudonymous parties, and can also deal with bilateral smart contracts as well as those structured around Decentralised Autonomous Organisations (DAOs).
- A statutory “signature” requirement can, in principle, be met by using a private key which authenticates a document, and a statutory “in writing” requirement can be met in the case of a smart contract whose code element is recorded in source code.
In addition to the conclusions mentioned above, the Statement provides a comprehensive, useful description of the key technical and operational characteristics of both cryptoassets and smart contracts.