A step towards greater legal certainty
According to Sir Geoffrey Vos, Chancellor of the High Court, who wrote the foreword to the legal statement, perceived legal uncertainty is the reason for some lack of confidence among market participants.
"In legal terms, cryptoassets and smart contracts undoubtedly represent the future. I hope that the legal statement will go a long way towards providing market participants with much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial industry," he said.
As such, the legal statement aims to provide answers to various critical questions under English law.
However, it is not meant to be an academic paper and does not set offer a detailed explanation of the law of property or contract, focusing instead on those aspects of cryptoassets and smart contract that are potentially new and distinctive.
Cryptoassets can be property
The legal statement said that, in general, "cryptoassets have all of the indicia of property" and should therefore be treated in principle as property.
This should have important consequences for a number of legal rules, including in respect of succession of death, the vesting of property in personal bankruptcy, the rights of liquidators in corporate insolvency and in cases of fraud, theft and breach of trust.
The fact that cryptoassets have new and distinctive features, such as being intangible, decentralised, ruled by consensus, or the fact that they use a distributed transaction ledger and cryptographic authentication, does not preclude them from being property.
Neither are cryptoassets disqualified from being property as "pure information", or because they might not be classified as "things in possession" (as they are not tangible and cannot be possessed) or as "things in action".
"Whether [a cryptoasset] is a thing in action depends on how that term is used, i.e. whether it means a right that can be claimed by action or simply any thing that is not in possession. Our view is that if a cryptoasset does not embody a legally enforceable right or obligation then it is neither necessary nor useful to classify it as a thing in action," the statement said.
Further, a private key is not in itself to be treated as property because it is information.
Bailments and other animals
Since cryptoassets cannot be physically owned (as they are virtual), they cannot be the object of a bailment, a pledge or a lien, and only some type of security can be granted over them, such as a mortgage or equitable charge.
The legal statement also makes clear that cryptoassets are not documents of title, documentary intangibles or negotiable instruments, nor are they instruments under the Bills of Exchange Act.
Why does the fact that cryptoassets can be property matters?
The legal statement explained that the fact that cryptoassets can be property matters because proprietary rights are recognised against the whole world, whereas other rights (eg, personal) are recognised only against someone "who has assumed a relevant legal duty".
"Proprietary rights are of particular importance in an insolvency, where they generally have priority over claims by creditors, and when someone seeks to recover something that has been lost, stolen or unlawfully taken. They are also relevant to the questions of whether there can be a security interest in a cryptoasset and whether a cryptoasset can be held on trust", the statement said.
Ownership and transfer
Here, the legal statement stated that cryptoassets cannot "meaningfully be treated as property unless it is possible in principle to determine who owns it, and how it can be transferred".
In general, someone who has acquired "knowledge and control of a private key by some lawful means" would be treated as the owner of the cryptoassets.
However, ownership would depend on the circumstances and rules around a relevant system. For example, someone may hold a key on behalf of someone else, a cryptoasset may have multiple keys or a key may have been obtained illegally.
As to transfers, in short, the legal statement said that this can be done either "on-chain", as the transfer is reflected in the ledger or blockchain, or "off-chain", "where parties enter into an agreement to transfer a cryptoasset but where the transfer is not recorded in the transaction ledger and no new data parameters are created."
An off-chain transfer may also expose the transferee to the risk of double-spending by the transferor.
Smart contracts can be binding legal contracts
Under English law, three requirements need to be met for there to be a contract: the parties have reached an agreement; they intended to be legally bound by their agreement; and they have given something of benefit.
"A smart contract is capable of satisfying those requirements just as well as more traditional or natural language contract, and a smart contract is therefore capable of having contractual force," the legal statement said.
Interpreting computer codes
A computer code may have been used to define the parties' contractual obligations, in which case there may be little room for traditional contractual interpretation.
It may also be the case that the code may merely implement an agreement whose meaning is to be found elsewhere, in which case, the statement said that the code is "unimportant from the perspective of defining the agreement".
"Either way, however, in principle a smart contract can be identified, interpreted and enforced using ordinary and well-established legal principles", the statement concluded.
Anonymous and pseudo-anonymous parties
On this point, the legal statement was it was in no doubt that a smart legal contract between anonymous and pseudo-anonymous parties can give rise to binding legal obligations, as English law does not require parties to a contract to know each other's real identity.
Still, there are obviously "inherent risks" in contracting with a party whose identity may never be clear, not least in terms of identifying who can be sued if a contract is breached.
Statutory signature and "in writing" requirements
Some legal rules call for some documents to be "signed" or "in writing".
The view expressed in the legal statement was that a statutory signature requirement can be met through a private key intended to authenticate the document.
"That is because an electronic signature which is intended to authenticate a document will generally satisfy a statutory signature requirement, and a digital signature produced using public-key cryptography is just a particular type of electronic signature," the statement explained.
As to the requirement for a contract to be "in writing" or "evidenced in writing", the legal statement said that these are "very rare in English law".
"The starting point is that it is clear that the mere fact that a document is in electronic form does not mean that it cannot meet a statutory “in writing” requirement… The only question is whether there is something about computer code, as opposed to natural language, which would result in a different conclusion," the statement said.
So, the document concluded that this requirement can be met in the case of a smart contract whose code element is recorded in source code, and to the extent it is in readable format, object code.
"We believe however that in very many cases the terms of the relevant contract will not be contained in the code itself; instead, the correct analysis will be that the parties have agreed to be bound by the effect of whatever the code does, rather than by what it says," the document said.
However, if a smart contract is in a form that cannot be read, then it will not be a "contract in writing".
What was left out
Although the legal statement covers numerous areas of law, some were also left intentionally out of scope, including the regulation of dealings cryptoassets or issues relating to monetary policy or the nature of cryptoassets as money.
Also, according to the legal statement, the remedies that the law will provide in any particular circumstances follow on from an analysis of the relevant legal rights, and "can be developed as necessary over time in appropriate cases".
Further, issues of taxation, criminal law, partnership law, data protection, intellectual property, consumer protection, settlement finality, regulatory capital, anti-money laundering and counter-terrorist financing were said to be best dealt with by other bodies or organisations.
How the legal statement came about
In May 2019, the UKJT issued a consultation on cryptoassets, which aimed to identify key issues of legal uncertainty in respect of DLT and smart contracts.
The legal statement is based on the 140 consultation responses received from businesses, academics and the legal sector.
The statement was prepared by four barristers – Lawrence Akka QC, Sam Goodman (both from Twenty Essex), David Quest QC (3 Verulam Buildings) and Matthew Lavy (4 Pump Court) – under the authority of the UKJT, which is one of the six taskforces of the LawTech Delivery Panel.