In November 2019, the UK Jurisdiction Taskforce (the “UKJT”) of the LawTech Delivery Panel of the Law Society issued a legal statement (the “Legal Statement”) on the status of cryptoassets and smart contracts under English and Welsh private law (“English Law”). The aim of the Legal Statement, rather than advising on how the law should be built, is to provide the best possible answers to complex questions under English Law, in order to support market confidence and legal certainty.
The UKJT is a representative body composed by several individuals from the legal world, including representatives of barristers and solicitors, judges, the Financial Conduct Authority and the Law Commission, with Sir Geoffrey Vos, Chancellor of the High Court, as Chair.
In May 2019, the UKJT issued a Consultation Paper (appended to the Legal Statement) on the status of cryptoassets, distributed ledger technology and smart contracts in English Law. Sir Geoffrey observed that legal uncertainty is the main reason for the lack of confidence amongst market players and investors. In this respect, the UKJT has considered various legal questions with regard to areas of perceived uncertainty in order to provide its conclusions through the Legal Statement.
THE LEGAL STATEMENT’S CONCLUSIONS
The Legal Statement is based on two relevant conclusions reached by the UKJT:
- cryptoassets may be objects of property rights; and
- smart contracts may be enforceable and create legal obligations under English Law.
Cryptoassets as objects of property rights
A cryptoasset is broadly defined as any virtual representation of value or rights secured by cryptography. The Legal Statement provides the distinctive features contained in such asset, i.e.:
- intangibility;
- cryptographic authentication;
- use of distributed ledger transaction;
- decentralisation; and
- rule by consensus.
On the other hand, property, according to the Legal Statement, describes a legal relationship with a thing: “it is a way of describing a power recognised in law as permissibly exercised over the thing”. This key finding is relevant because it grants cryptoassets with all the associated concepts existing in law which derives from the right of property, such as in relation to ownership, transfer, inheritance, fraud, insolvency and bankruptcy.
The Legal Statement describes the owner of a cryptoasset as “a person who has acquired control of a private key by some lawful means (a person who acquires a private key through hacking, for example, is not considered the owner of the associated asset, just like someone who steals property is not considered its owner either)”.
However, as the Legal Statement concludes, since those cryptoassets are not “goods” under the Sale of Good Act 1979 and “physical things”, they cannot be subject to a possessory relationship, such as bailment or pledge.
This key finding is relevant for investors and cryptoassets businesses because it brings certainty in respect of the rights attached to a cryptoasset owner. Such legal status given by the Legal Statement grants cryptoassets with all the associated concepts existing in law which derives from the right of property, such as in relation to ownership, transfer, inheritance, fraud, insolvency and bankruptcy.
Smart Contracts as capable of being enforced and creating legal obligations under English Law.
In respect to smart contracts, the UKJT does not provide a precise definition of them, but instead identifies their key features being as: terms and conditions recorded in a “computer-readable form” and performed “automatically and without the need for human intervention”.
The Legal Statement asserts that smart contracts can constitute binding legal contracts under English Law and be enforceable by the courts, since this technology satisfies the English Law requirements for the formation of contracts, i.e.: agreement between the parties, intention to be legally binding and consideration.
On the other hand, the UKJT does not believe that smart contracts necessarily satisfy the requirement of being “in writing”. Regarding the requirement of signatures, the Legal Statement provides that the use of a private key intended to authenticate a document and the way that this is codified can replace the traditional signatures of the parties in the document.
This conclusion is important because it gives smart contracts the same legal status as standard written contracts which, in turn, may result in an increase of transactions that use this technology, since market players feel more legally protected and, thus, confident. Smart contracts should be interpreted in the same way as traditional contracts, and the courts similarly should look at the parties’ real intentions.
NEXT STEPS TO BE EXPECTED
As mentioned above, the Legal Statement represents a landmark in the cryptoassets’ industry as it gives legal certainty when recognising such asset class as property and smart contracts as enforceable under English Law. This, in turn, may result in a wider application of the traditional English private law in transactions involving such technologies. It remains uncertain, however, whether these conclusions will be followed and applied by the courts or not, and we have to wait for the next chapters to find this out.
To view the Legal Statement and the Consultation Paper please click here.
For more information, and any guidance on cryptoassets and smart contracts and the impact of the conclusions taken by the Legal Statement on transactions involving these technologies, Cleveland & Co External in-house counsel, your specialist outsourced legal team, are here to help.
