The LawTech Delivery Panel has concluded that cryptoassets are to be treated in principle as property. The Panel's Statement, launched by Sir Geoffrey Vos, Chancellor of the High Court, states that firstly they have all of the indicia of property. Secondly many of their distinctive features (such as their intangibility, decentralisation, rule by consensus etc) do not prevent them from being property. Nor the fact that they are regarded as pure information and might not be classified as things in possession or things in action. This article examines the Statement's findings.
Cryptoassets do not respect national borders. Take a truly decentralised system like exchanging Bitcoin via a Blockchain. It is notoriously difficult to pinpoint any one country where the cryptoassets are recoverable. In fact, that is very much the point. Normally, where there is dispute as to which jurisdiction governs the transaction, the court will look to where the property is situated at the relevant time. But the Statement recommends that these normal rules should not apply to decentralised systems such as Bitcoin.
The Statement concludes that such complex issues are best resolved by legislation following international cooperation. In the meantime, it recommends trying to ascertain whether any control of the cryptoassets can be ascribed to a jurisdiction. For example, whether the cryptoasset is controlled by a participant known to be in a particular jurisdiction, or if there is any centralised control based in a jurisdiction.
The Statement offers good news for creditors. The Insolvency Act 1986 provides a deliberately broad definition of property. As such cryptoassets are certainly capable and indeed likely to be considered property in an insolvency. This reinforces what we know already – you cannot hide assets in an insolvency process by concealing them in cryptoassets. Insolvency practitioners can thus gather and sell the cryptoassets and distribute the proceeds to creditors.
Distributed ledgers as records
Transfers of cryptoassets like Bitcoin are typically recorded on a digital distributed ledger (i.e. Blockchain). Whilst they are reliable records of which person has control of a cryptoasset, the Statement says that actually distributed ledgers are not definitive registers of legal rights, unless a statute has given it binding legal effect (for example, the Land Register). The court therefore would not be bound by the information in the ledger. For example, it is possible to acquire cryptoassets outside of a distributed ledger. Though you cannot help but feel that a court would still find the ledger highly persuasive.
Much like leaving a coat in a cloakroom, bailment is a temporary transfer of possession of an asset, but not a transfer of ownership. As cryptoassets are incapable of being 'possessed' it follows that they cannot be capable of bailment.
Cryptoassets can be used as security to the extent that a mortgage or equitable charge can be created over them. However they cannot be the subject of a pledge or lien, as they require transfer of possession (like bailment).
Documentary Intangible / Documents of Title / Negotiable
Documents of title and documentary intangibles are documents that give the holder ownership rights of the goods it represents. The transfer of the document effects the transfer of the asset. Examples include warehouse receipts and delivery orders. The Statements confirms that cryptoassets cannot be characterised as either of these concepts. They are purely digital stores of value and thus there is no need for a physical document.
If property is negotiable, a purchaser (acting in good faith) can acquire good title to it, even if the seller does not have good title to the property (e.g. they have stolen the cryptoassets and then attempt to sell them on). The Statement clarifies that cryptoassets cannot be negotiable as the law currently stands.
The Statement does not characterise cryptoassets as goods for the purposes of the Sale of Goods Act 1979. They are not capable of being 'possessed' and should be considered 'things in action' and therefore not goods under section 61 SOGA 2917.