The UK Jurisdiction Taskforce (“UKJT”) is one of six taskforces that make up the LawTech Delivery Panel established by the UK government, the judiciary and the Law Society of England and Wales as a collaborative discussion forum to promote the use of technology in the UK’s legal sector.
In May 2019 the UKJT issued a public consultation seeking to identify the principle issues over which there is perceived to be confusion regarding the status of cryptoassets and smart contracts under the law of England and Wales.
Subsequently, on 18 November 2019 Sir Geoffrey Vos (the Chancellor of the High Court), in his capacity as Chair of the UKJT launched the publication of the UKJT’s Legal Statement on the Status of Cryptoassets and Smart Contracts (“the Legal Statement”).
The purpose of the Legal Statement is primarily to set out what the UKJT believes the law to be on the following questions:
1) Under what circumstances, if any, would a cryptoasset and a private key to it be characterised as personal property? and
2) In what circumstances is a smart contract capable of giving rise to binding legal obligations, enforceable in accordance with its terms?
In summary, the answers provided were:
1) There is nothing that makes cryptoassets sufficiently distinguishable from other types of property recognised by English law to prevent them being treated as such. However, a private key to the cryptoasset is pure information and therefore not capable of being treated as property; and
2) Smart contracts are capable of meeting all of the requirements for a valid, legally enforceable contract and accordingly they should be treated as such by the courts.
The Legal Statement also provides the following guidance in response to various ancillary questions:
a) A cryptoasset cannot be a thing in possession because it is entirely digital and it is probably not correct to classify cryptoassets as things in action either because they do not meet the critieria set out in long established case law. It is more appropriate, if they must be classified in this way to treat them as another, third kind of transferable property, as the court has previously treated EU carbon emissions allowances.
b) An on-chain “transfer” of a cryptoasset is best analysed as extinguishing the cryptoasset being transferred and creating a new, functionally identical cryptoasset in the hands of the transferee.
c) A cryptoasset cannot be the subject of a bailment by virtue of its purely digital nature.
d) Where a cryptoasset relates to physical property located in the UK it is reasonable to assume that the courts here will assume jurisdiction over it. However, the fiction of an asset being located within the jurisdiction when it is purely digital and governed by a truly decentralised system are hard to justify. It is therefore thought likely that legislation will be required to clarify when, as a matter of policy, the courts of the UK should assume jurisdiction.
e) A cryptoasset is not capable of being the subject of a pledge or lien, due to its purely digital nature. A cryptoasset is however capable of being the subject of an equitable charge or legal mortgage, as in order to subsist they have no requirement that the beneficiary must be in physical control of the charged asset.
f) Cryptoassets will be treated as property for the purposes of the Insolvency Act 1986.
g) Cryptoassets cannot be characterised as documentary intangibles, probably should not be characterised as documents of title and there is no reason they should need to be characterised as negotiable instruments.
h) A cryptoasset cannot be characterised as an instrument under the Bills of Exchange Act 1882, nor as goods under the Sale of Goods Act 1979.
i) A distributed ledger is only capable of amounting to a register of title, such that its contents are legally binding regardless of the accuracy of the ledger, if that is prescribed by statute, such as applies to the Land Register in the case of real property.
j) The Courts of England & Wales can generally be expected to treat smart contracts written entirely in code as being clear and unambiguous and confined to the code in which they are contained.
k) In rare cases where that is not the case, judges should be expected to take into consideration extraneous evidence to ascertain what the parties objectively intended their obligations under the smart contract to be.
l) It will always be open to judges to look beyond the mere outcome of a running computer code to determine the agreement between the parties because the code itself is merely a part of the evidence that is admissible in court. In reality, it is hard to imagine a contract that is defined entirely by a running computer programme, without any reference to natural language (which code can usually of course be decoded into).
m) There is no reason that the courts will not intervene in the usual way in the case of duress, fraud, misrepresentation and so on, merely because a contract is a smart contract.
n) A smart contract between anonymous or pseudo-anonymous parties is capable of giving rise to binding legal obligations.
o) A private key is capable of meeting the requirements of a statutory signature.
p) It is well established that digitally produced contracts can satisfy a requirement that they must be “in writing”. However, a smart contract that is in a format such that it cannot be read cannot satisfy a statutory requirement for a contract to be “in writing”. It is recognised by the Legal Statement that such requirements are, in any event, rare under the law of England & Wales.
The Legal Statement is to be welcomed insofar as it responds to the prior consultation’s findings that commercial entities require confidence in their ability to rely on a conventional interpretation of property and contractual rights, regardless of the intervention of blockchain or other distributed ledger technology.
Regrettably, it is beyond the scope of this short summary to consider the future potential of smart contracts and cryptoassets and how their many forms and definitions are likely to test the hypotheses set out in the Legal Statement in the future. However, it remains likely that the more decentralised, autonomous and smart such assets and contracts become the more the law is going to have to adapt to ensure that it does not undermine their functions and the innovation that they aim to deliver.
The full Legal Statement can be accessed here.
For further information and advice about cryptoassets, smart contracts and how the law is likely to treat them both now and in the future, please feel free to contact the author Lee Donoghue at Teacher Stern LLP.