On 28 June 2023, the Law Commission of England and Wales published its recommendations for reform and development of the law relating to digital assets.
The final report stemmed from a UK Government request to “make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish.” In response, the Law Commission found that the “common law system in England and Wales is well placed to provide a coherent and globally relevant regime for existing and new types of digital asset.” However, determining that personal property rights can attach to digital assets, the Law Commission proposed four key recommendations.
- Creation of a panel of industry-specific technical experts, legal practitioners, academics and judges – The Law Commission recommends a panel of experts should be created to provide non-binding advice on legal issues relating to the control of digital assets. The panel should include “those with expertise in the crypto-token markets, and not just those with expertise in traditional finance markets or intermediated securities markets.”
- Creation of a bespoke legal framework that facilitates collateral arrangements – The Law Commission’s third recommendation is a legal framework which “better facilitates the entering into, operation and enforcement of collateral arrangements relating to crypto-tokens and crypto-assets.”
- Statutory reform to clarify the classification of digital assets under the Financial Collateral Arrangements (No 2) Regulations 2003 (FCARs) – The final recommendation is an amendment to clarify the categorisation of digital assets within the definition of ‘cash’ under the FCARs, alongside confirmation that an asset which satisfies the ‘financial instrument’ or ‘credit claim’ definition will remain unaffected should it be “merely recorded or registered by a crypto-token within a blockchain-or DLT-based system.” As part of its 11 July 2023 consultation setting out proposals for the UK’s first financial market infrastructure (FMI) sandbox, which will enable firms to set up and operate FMIs using innovative digital asset technology, performing the activities of a central securities depository, and operating a trading venue, HM Treasury has confirmed that it is considering amendments to the FCARs to ensure that provisions operate in a DLT/digital assets context, particularly in relation to security arrangements constituted in a register or account-based system.
Next Steps
The UK Government will consider the Law Commission’s recommendations and determine whether to implement such proposals. We will continue to monitor any developments in this area.
(Co-authored with Nicola Russell)
