Expanding property rights – introducing “Digital Objects”
Michael Higgin, a Partner in our Real Estate Team and Alekh Singh a Paralegal in the same team, summarise the key proposals put forward by the Law Commission in their Consultation Paper on Digital Assets published 28 July 2022.
The Law Commission’s consultation
Digital assets, such as crypto-tokens, electronic signatures, smart contracts and distributed ledgers have become increasingly valuable in modern society. They are used for a variety of purposes – such as a means of payment, collateral for a loan, executing documents and storing data represented in an electronic medium. The high value of these necessitates regulation, to ensure that market participants act and behave in accordance with recognised rules.
In this context, the Law Commission acknowledges that (to a certain extent, at least) the law of England and Wales has proven itself to be sufficiently robust, flexible and iterative in accommodating digital assets. However, the Commission then goes on to state that this can only really go so far within the constraints of traditional property law concepts such as ‘things in possession’ (objects which are capable of physical possession, such as a bag of gold) or ‘things in action’ (rights enforceable only through legal action or proceedings, such as debts, and shares in companies).They assert that expanding the definition of property to introduce the concept of ‘Digital Objects’ is the only way to ensure the consistent legal recognition and development of digital assets.
To be considered a Digital Object, an asset must:
- be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital, or analogue signals;
- exist independently of persons and exist independently of the legal system; and
- be “rivalrous” in the sense that use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time.
The proposals for reform, for the most part, are a welcome development in this area (with one important caveat that is discussed below).
The proposed reforms closely align with international developments and the work being carried out by the American Law Institute and Uniform Law Commission’s Uniform Commercial Code and Emerging Technologies Committee in the United States, and by the International Institute for the Unification of Private Law (UNIDROIT) Digital Assets Working Group. Such harmonisation would simplify and expedite transactions concerning digital assets which are being traded on global markets and have fewer ties to individual jurisdictions.
The three-pronged criteria for what would constitute a Digital Object, mentioned above, is also well drafted. The first limb, by limiting Digital Objects to data represented in an electronic medium, excludes physical chattels (or things in possession) such as tables, chairs, etc. The second criteria, by mandating existence independent from persons, excludes from the definition unsevered human body parts, friendships and thoughts – things which are historically and traditionally considered inappropriate to give rise to property rights. Finally, the requirement to exist independently from the legal system excludes things in action such as debts and company shares, and rivalrous-ness (as defined above) is a fundamentally important feature of things that are appropriate objects of property rights: this unique essence is what distinguishes a non-fungible token (NFT) from a mere copy of an item.
The only caveat is that the Law Commission’s justification for introducing a third category of property (i.e. Digital Objects) is dependent on a narrow interpretation of things in action (as defined above). That ignores the debate in this area whereby things in action are defined more broadly by some and therefore arguably already capable to accommodate Digital Assets. How this area develops remains to be seen, but there is no doubt that the Law Commission’s marathon 549 page Consultation Paper on Digital Assets is a significant contribution to the discussion.
For those interested in this topic, a link to the 20 page Summary document can be found here. The full Consultation Paper itself is available here, and those who wish to submit responses can do so until 4 November 2022 using the online form if possible, or alternatively via email to [email protected].
Article contributor, Alekh Singh