A key challenge under English law is the application of common law principles to emerging technologies like cryptoassets and NFTs. There are two established categories of property right under English common law – things in possession, and things in action. Things in possession are capable of physical possession, whereas things in action are intangible but rights may be asserted through legal action or enforcement. NFTs do not neatly fit into either category.
In 2019, the UK Jurisdiction Taskforce – a task force formed of prominent lawyers, regulators and members of the judiciary (“UKJT”) - issued a paper providing a detailed overview and analysis of the legal treatment of cryptoassets, which asserted that cryptoassets had all of the indicia of property under English law, and should not be disqualified from being considered property purely because they are intangible assets that do not fit into existing categories. Although the findings of the UKJT paper were not legally binding, the English Court has since confirmed that cryptoassets such as bitcoin are considered property. This analysis has been subsequently confirmed in relation to NFTs as well in a more recent case.[3]
The UKJT’s analysis also indicated that taking security over cryptoassets was unlikely to work in the same manner as with traditional asset classes. For example, in principle, a pledge or lien requires the ability to transfer physical possession of an asset but it is not clear whether holding a private key would constitute physical possession – as the private key constitutes information and is not itself property. The UKJT concluded that it is not clear that a pledge or lien would be possible in respect of unregulated cryptoassets. The UKJT also indicated, however, that it believed a mortgage or equitable charge could be created over cryptoassets in the same manner as other intangible property, and subject to the same requirements.
The Law Commission in England has subsequently published a public consultation (dated July 2022) that addresses the challenges inherent under English common law and makes recommendations in relation to the categorisation of cryptoassets (including NFTs) within the existing framework. The Law Commission recommended that a third category of personal property – known as “data objects” – be created through legal reform to accommodate cryptoassets and ensure further certainty for cryptoasset owners. In relation to the application of traditional security mechanisms to the proposed “data objects” category, the Law Commission indicated that it sees limited value in possessory security arrangements (e.g. pledges, liens) in relation to this category of personal property. The recommendation instead is that reforms are developed to create more robust cryptoasset collateral arrangements and therefore to strengthen non-possessory security mechanisms. The Law Commission’s recommendations will now be considered further and policy reforms may be developed to implement certain of these recommendation – we will await further updates to clarify the direction that will be taken.
[3] Osbourne v (1) Persons Unknown and (2) Ozone trading as Opensea [2022] EWHC 1021 (Comm)