21
Examination of witnesses
Professor Sarah Green and Lord Ponsonby of Shulbrede.
Q1 The Chair: Welcome to this first evidence session of the Special Public Bill Committee on the Property (Digital Assets etc) Bill. Our job is to have a careful look at this Bill over a series of evidence sessions, and we are accepting written evidence that we will take into account. I invite the witnesses to declare any relevant interests they might have and to introduce themselves for the record before we proceed to the questions.
Professor Sarah Green: I am currently professor of private law at the University of Bristol. I am also head of digital assets and trade finance at D2 Legal Technology, which is a legal and technology consultancy company. I do not have any relevant interests in the current question, because, despite the fact that I work with digital assets, that work is in no way affected by the outcome of this Bill, We tend to advise on the basis of technological implementation, which will not be affected by the legal position one way or another.
The Chair: Is it right that you led the Law Commission’s consultation and reporting process on what became this Bill?
Professor Sarah Green: Yes. Until September of this year, I was the Law Commissioner for commercial and common law. I led on the entirety of the digital assets project up to that time. The consultation paper, the final report, the supplementary report and the draft Bill took three years of my time.
Lord Ponsonby of Shulbrede: I am the Parliamentary Under-Secretary of State in the Ministry of Justice, and I have no interest to declare.
Q2 The Chair: Thank you both very much for coming. I will start with a question for you, Professor Green, to set the scene for the committee at our first evidence session. As simply as you can, can you explain the types of assets this Bill is designed to apply to, and how such assets are currently treated by the laws of the United Kingdom and in other major jurisdictions?
Professor Sarah Green: The final report of the Law Commission digital assets project is an incredibly important ingredient in this whole question, because it will guide the development of the common law that goes alongside this Bill, should it pass. As the digital assets and types of assets that we are talking about are a genuinely new creature as far as law is concerned, we need these legal changes.
When this Bill has been referred to, particularly in the media, it has been called the crypto Bill. There is an idea that it applies only to cryptocurrencies like bitcoin, which is one I am sure everybody has heard of. Although it potentially applies to those sorts of assets, it is broader than that. There are types of assets now that are completely new creatures as far as law is concerned, which includes tokens and digitised securities. Why is that? The Bank of England recently set up a digital securities sandbox to allow parties to imitate real-world use of digital securities, which gives a very good idea of how it can apply in the real world. This is used increasingly in mainstream financial interactions.
Why the need for the change in law? The common law of England and Wales recognises two types of interest when it comes to property rights. The first, historically, has been completely intangible assets like a debt. That is the obvious example. The second is tangible assets that we can hold and possess like pens, laptops, horses—historically—and bags of gold.
The digital assets that this Bill responds to are not quite either of those things. Why not? A digital asset like a non-fungible token is a token that exists on a distributed ledger. Basically, it is a piece of software on a piece of hardware that represents a particular right. This is not intangible in the same way as a debt, as a purely intangible contractual right, because it has an independent existence in the world, separate from its legal recognition and from the claims that parties make against it.
If you have a debt, it is good only as long as a legal system recognises it and will enforce it, and it exists only as long as parties claim it. So it is purely intangible. If you have a token, a digital asset that exists on a blockchain, it has an independent existence. It does not rely on a legal system to recognise it in order to exist, and neither does it rely on claims in relation to it in order to exist. So it is a thing in the world.
Historically, the problem has been that it does not feel, particularly to a lot of private lawyers, like a thing that one can possess, because it exists on hardware. You cannot hold it or pass it to another person, and it is hard to see it as a conventional asset able to be possessed. However, these assets exist and are increasingly being used in mainstream finance. So the reason for our project at the Law Commission, and the specific reason for this Bill, is to allow the law to develop, recognising that these assets are not quite one or the other in terms of those categories. That was quite a long answer. Did it answer your question?
Q3 The Chair: Yes. If we start with the law of England and Wales, are you saying there is some doubt as to whether some of these assets count as property at all? Is that a legally doubtful matter?
Professor Sarah Green: When we started the project, it was definitely something there was a lot of uncertainty about. I would have said that there was definitely doubt about it. That would have been 2021. Since then, we have seen five or six common law decisions, so we have more case law now. It all seems to be moving in the direction of recognising that these things can be the object of property rights. Such is the common law and case law development that all these cases address slightly different aspects of the broad question: can these things be the object of property rights?
We have a common law position now that is far closer to being one where there is almost no doubt that these things can be the object of property rights. However, as case law does, it answers different elements of that question, so I would say that there is still some doubt, some uncertainty, albeit much less than when we started this project.
The other thing the Bill does, and where there is definitely more uncertainty and doubt, is to go a step further and ask not only whether these things are the object of property rights but what the consequences of that are, the nature of those rights, and what we do when things go wrong, essentially.
The Chair: You say it is almost certain that the courts treat them as property rights, but perhaps it is less certain how those property rights will be characterised.
Professor Sarah Green: Exactly.
The Chair: Could I repeat the second half of the question? What is the position in other major commercial jurisdictions in the world? Is it clear there as well, or is it perhaps clearer, that these things are property rights? Is it clear what sort of property rights they are?
Professor Sarah Green: It is true to say, in terms of recognising that these things can be the object of property rights, that most major jurisdictions of which I am aware and with which we are usually compared to have reached the same conclusion, recognising these assets as being the object of property rights. However, there is some divergence in the second part of what I just mentioned. Are they property rights? As a consequence of that, exactly how are they categorised and, therefore, how are they treated by the law of property?
I started by mentioning things in possession and things in action: so pure contractual rights—things in action; and things that we can traditionally hold and pass on to other people—things in possession. There is a very recent Australian judgment that regards digital assets as being in the things in action category, so as pure intangibles. There are a number of reasons for that judgment. One is that it proceeds on the basis that there are only two categories, which is the situation that this Bill tries to change. It puts them in things in action, because they are not things in possession. So that judgment sets up things in action and things in possession—or chose in action and chose in possession, however you want to label those categories—in opposition to one another and decides that, because they are not tangible, they cannot be possessed. Therefore, they must belong in the things in action category. This is a natural result if those are the categories, and if—this is the important point—you regard tangibility as the touchstone of the difference. As I hope I explained a few minutes ago, tangibility is not the touchstone. It is the independence—this is the position explained in the Law Commission report—from persons in the legal system that is important.
Tangibility has historically been used as a proxy to identify these things, because before we had digital assets of this type, this was not a question that came up. Any asset that you wanted to possess physically you could: a pen, a laptop, a watch. It is only the advent, development and scalability of distributed ledger technology that has allowed assets in digital form to emulate those possessable things, to have this independence in the world, to be fully transferable from one party to another. This is the thing that has brought up the tangibility question and actually tested it. It has never really been tested before. I do not think, and the analysis in the Law Commission report that underpins this Bill takes the view, that tangibility is not what is important. It is that independence, the legally important features of that. So the Australian judgment puts them in things in action because they are not tangible, but, as I have said, the tangibility point should not be determinative.
There is also a Singapore judgment that sees them as things in action, so as intangibles, in the same way. That judgment proceeded on the basis that there are contractual rights to redemption in favour of those assets. One of the points about the Bill—I am just thinking whether to say this now or in response to a later question; perhaps it is better to do it now—is that it says that digital assets, simply because they are not things in action or things in possession, can still be the object of property rights. That has been interpreted a couple of times as saying that if you have a thing that you can possess and hold, that somehow displaces the idea that you can also have contractual rights in relation to it.
That it is an either/or, and that does not happen in relation to things like share certificates. This Bill is saying that if you have a contractual or a general legal interest that is represented by a digital asset, there is no reason why that digital asset, if it has the requisite independence and transferability, cannot be treated in the same way as, say, a share certificate, which is a piece of paper, and the law has no problem seeing the piece of paper as an asset that you can possess. That does not detract from the things in action that you have as a result of holding that piece of paper. Those rights still exist.
So this Bill is not trying to say that, just because you might have a thing that you can hold in digital form, everything to do with your interest becomes something that you can hold in digital form. The Singapore judgment tends to elide those two things, which is one of the potentially confusing things that this Bill aims to clarify.
New Zealand and Dubai are other jurisdictions with which I am familiar and to which we usually look as lawyers. Dubai specifically adopts the recommendations of the Law Commission’s report and, in one very recent judgment in the past 12 months, recognises the recommendation of a third category and follows that.
Case law from New Zealand does not really analyse in full the things in action and things in possession distinction, albeit that it definitely recognises that digital assets should be the object of property rights. There is also a Hong Kong judgment that, again, does not analyse the issue in any great detail because it was not the focus of the case, but does accept that such things are not things in action. So it is mixed.
The Chair: It is a mixed picture.
Q4 Lord Shamash: I am not sure whether you have half answered the question I was going to put, but you are trying to create the sense of tangibility. If I had these property rights and I popped my clogs tomorrow, would I be able to pass this on to my family and benefactors under any will that I have? If you have a non-fungible token or something like that, which is an electronic bit of information, it will have a value somewhere along the way. How would I pass that on, because it would have a value somewhere along the line? Has that been discussed, or have I just missed it?
Professor Sarah Green: Do you mean in legal terms or in factual terms?
Lord Shamash: In legal terms, absolutely. In the matter of probate, how would I prove my ownership of this thing so that I could pass it on to my wife, my kids or whoever? Has that been considered, or is that a bit out of left field?
Professor Sarah Green: No, it is not out of left field at all. We did not specifically consider that narrow question, only because the Bill aims to achieve equivalence with conventional assets, where that is appropriate. So what the Bill does is unlock the ability for courts to take the categorisation of a digital asset as X or Y, and deal with it as appropriate. The idea is that if it came within the third category and ticked the relevant boxes, it could be dealt with in the same way as the equivalent thing in possession, with which of course those rules are used to dealing. Obviously, there is the factual and evidential potential difficulty, which you rightly identify, of being able to prove your ability to control and then your ownership of that thing, but of course that is the factual question rather than legal question. So we did not consider that as a specific issue, because we were really dealing with what I regard as the anterior question, the fundamental question, of how these things are treated.
Lord Shamash: Is the battle not going to happen further down the road when there is an argument about a property? Who has that right to enforce that right against the electronic data?
Professor Sarah Green: Yes, absolutely.
Lord Shamash: How do you go about doing that?
Professor Sarah Green: There will potentially be that question, and I am sure it will arise, but that is a matter of fact and evidence that could arise in relation to any assets. When it comes to digital assets, and certainly the mainstream ones that I am thinking about, there are many ways in which your ability to prove your connection to that asset—I am deliberately using generic non-legal words for this—is easier, in terms of its record on a distributed ledger, because you have the entire audit trail of where that thing has been, from which party it has passed and to whom. That will not always be the case, but I do not think we should presume that simply because it is a digital asset your title to that thing will be harder to prove than it might be in relation to something that exists as a conventional possessable asset that several people might be claiming as theirs.
So it will be a factual problem, but I do not think it is one that is specific to digital assets.
The Chair: Thank you very much, Professor. I am conscious it was a very general question, and you have answered it with admirable fullness. I am also conscious of the clock, so I would exhort both questioners and answerers to be as economical as they can. On that basis, Minister, we would like to bring you in, and Lord Holmes has a question for you.
Q5 Lord Holmes of Richmond: Thank you, Chair. First, I declare my technology interest on the register and specifically to this committee as adviser to Members Capital Management, Lombard Electronic Market Infrastructure and Ecospend Technologies. I also had a speaking engagement last month at Digital Assets Week and one in September at a Travers Smith Future of Fintech event.
Minister, what do you expect the benefits of the Bill to be? Can they be quantified?
Lord Ponsonby of Shulbrede: Thank you for that question. There will be three main benefits to this Bill. The first is ensuring that certain digital assets, like crypto tokens, can be properly recognised by the law. This will help give certainty and protection for people and businesses who own and transact these assets.
Secondly, on decreasing litigation costs, the Bill will remove the need to debate whether something can be property, even if it is not a thing in action or possession. So it will save the court time and money. An example of this is a recent High Court judgment from September 2024, where 69 paragraphs were spent debating this very question.
The third benefit we see is championing the jurisdiction of England and Wales. The Bill will ensure that our laws remain modern and up to date, making England and Wales an attractive place to deal with, and litigate property disputes related to digital assets. The Bill should help to secure the UK’s status as a hub for innovation and emerging technology. This will support the growth of our excellent legal services sector, which in turn will contribute to the wider government growth mission.
Lord Holmes of Richmond: Professor Green, would you like to add benefits over and above what the Minister has set out?
Professor Sarah Green: The only thing I would add builds on one of those points. When we were consulting on the digital assets project we spoke to our law reform counterparts in other jurisdictions—the authors of the Uniform Commercial Code, for instance, and members of the committee that drafted the UNIDROIT principles on digital assets. There was a strong feeling that this would be really good for us to lead on—and, as I said, that has already happened with the principles in Dubai. When we were speaking to these jurisdictions there was very much a sense that they were waiting to see what England and Wales would do, because, as an international law of choice, the law of England and Wales is very important. So it would be really good if we could provide this clarity and set the scene that, alongside the Law Commission report, its analysis and framework, would be beneficial for us as a jurisdiction to do.
Lord Holmes of Richmond: To that point, in the Australia and Singapore judgment, did the judgments obiter say anything about the potential for this piece of legislation to come through from our jurisdiction?
Professor Sarah Green: I do not know, actually.
Q6 Lord Holmes of Richmond: No problem. Thank you. Finally, Minister, what work have the Government done to put any quantum around the likely benefits if we pass the Bill?
Lord Ponsonby of Shulbrede: I am not aware of any quantum in answering that question. However, the Government are very keen to promote the rule of law, arbitration and England and Welsh law internationally, and this will be another factor in our ability to promote the use of English and Welsh law.
Q7 The Chair: I have been looking at the impact assessment that accompanied the Bill, and, indeed, it does not monetise the costs or benefits of the option. But I noticed that it does record that, although court time might be saved, because everyone will now know that digital assets may be considered property, the Bill might introduce scope for further arguments about whether a specific asset fits within the new category and, indeed, how the new category is to be defined.
Professor Green, in your consultation paper, you initially set out to define what this third category might look like and, for whatever reason, decided that was too ambitious a task, or not one that was appropriate for you to do. Might we be saving argument on one issue and inviting argument on another?
Professor Sarah Green: There will certainly be argument around whether anything fits in a particular category. We did indeed begin the consultation stage by thinking that it might be a good idea to be more definitive and set out a list of criteria, or at least an indicia of assets that would go in the third category.
As I am sure you know, the Law Commission is highly consultative, and we consulted extensively before publication of the consultation paper and in between that and the final report, so there are indeed some material differences. The majority of the consultees agreed with our final position. We were never absolutely sure on that point, and sometimes, if you are not sure about something, it is a good idea to put it in a consultation paper and invite discussion. So it was definitely something that we were on the fence about even at that stage.
There are problems with defining it too closely, particularly in the technological space. We did not want to be too prescriptive about particular technologies that determined the nature of digital assets, because that definition is likely to be obsolete within five years or sooner. So we were very keen to leave the technological definitions open.
There is another point, of course, which is that putting more detail in a statute creates on one side at least notional certainty and sometimes real and substantial certainty, but that also invites more debate about the finer-grained notions of a particular definition. We were very keen to leave the development of these rules to the common law so that the law would not be stuck in a position where it was obsolete too soon. The common law is obviously more responsive to new technologies and to different uses of these assets as time goes by, and parties use them in very different ways and behaviour in relation to them changes. So there may well be—I am sure there will be—an argument over exactly where the boundaries of these categories begin and end, but that is less problematic than going through the process of creating a statute that has concretised those boundaries, when those boundaries might be might make no sense in five or 10 years’ time.
The Chair: If they cannot be concretised in statute, presumably they cannot be concretised in common law. What we are ushering in with this third category sounds like a recipe for endless argument in the courts as the law develops and as the technology develops over time. It does not necessarily sound like a recipe for certainty.
Professor Sarah Green: What this Bill aims to do, alongside the reasoning in the report, and what is certain, is the principles: the legal certainty points. We want to be very clear about being able to provide a framework for the courts to look at a particular asset that is used in a particular way, and have very firm first principles, if you like. This is what I have said about independence: is it independent of persons in the legal system? Is it rivalrous, so that if I have it, somebody else cannot?
The Chair: Those principles are not going to be in the Bill, are they?
Professor Sarah Green No, they are not going to be in the Bill, because the Bill is supposed to be a very small unlocking provision which then allows the courts to look at the analysis in the final report of the Law Commission to develop the common law principles. So the principles are definite, but they are, as common law is so good at being, flexible and responsive to different uses and forms of these digital assets.
Q8 Lord Clement-Jones: That is a very useful segue to my question. You have talked about the background, the non-prescriptive approach, and the consequent ability to apply the principles. My question—it may be stringing those three things together, and that is the answer—is this: what will the legal effects of the Bill be? In particular, how will it affect the development of the common law in England and Wales? Are we saying that this in effect is for clarity’s sake, which then allows the courts to apply those principles without any doubt about the nature of the asset?
Professor Sarah Green: For me as Law Commissioner, that was a really interesting element of how this project developed. We started off unsure about whether this was better achieved through legislation or through common law development. We then had two and a half years of talking to interested parties from across the board: technologists, users, legal advisers and the judiciary. It became clear to us across that period of time that the common law would be the best way deal with it, for the reasons that I have given. The common law has always shown itself to be excellent at doing that. The interesting point was that we had reached the position near the end of the end of the project where we realised that that was what we thought was the best way to do it: to deal with it through the common law.
We had a round table with senior members of the judiciary; they were all invited. We would have done that anyway, but in this project we were particularly conscious that we could be seen to be passing the buck, because of course the Law Commission is very often associated with coming up with statutory reforms. We talked through what we proposed to do, so we went through our analytical framework in the final report and said, “This is going to be over to you. What do you think about this?” This was before we published it, while it was still a work in progress.
It was really interesting to me, because it was at that round table that they suggested to us that they would find it very helpful to have the final report as a framework for analysis and a very small unlocking provision. This thing in action and thing in possession dichotomy was so entrenched in the common law that there had been a couple of recent decisions before we started this project. There was a case in the Court of Appeal about a database, and there were arguments made that this was a digital thing. Should it be the object of property rights and how should it be treated? The judge in that case specifically said, “This is very difficult, because factually this looks very different. I feel as if I’m bound by the dichotomy that is there. It would be really good if Parliament could consider this, if the Law Commission could consider this”.
That followed through to a feeling from the senior judiciary that they felt confident that they could deal with these cases—as they should, obviously—but that it would none the less be a helpful fundamental unlocking to have something that gave them that very basic stepping stone into developing the analysis that they could. As I said, I thought that was particularly interesting as the evolution of a Law Commission recommendation.
Lord Clement-Jones: So there is confidence in the judiciary that they can take it forward after that unlocking has taken place.
Professor Sarah Green: Yes, I think so. As I said, the common law has already moved further on than that on its own at the moment, but the issue with that is that parties will always be waiting for the right case to come along to answer the particular question that they have. This Bill will give everybody involved more confidence that a good result will be reached if certain characteristics exist.
Q9 Lord Clement-Jones: You mentioned a number of other jurisdictions’ case law, mainly. Does the Bill adopt a different approach to some of those common law jurisdictions? I am also thinking of our own jurisdiction here, because some of us worked on the Electronic Trade Documents Act, which has an entirely different approach. You categorise trade documents as in possession, and I just wondered whether jurisdictions had taken a different approach, and, indeed, why we do not simply categorise digital assets as being in possession.
Professor Sarah Green: The Electronic Trade Documents Act took that approach simply because electronic trade documents are a new version of something that already exists that the law is very familiar with. They are a subset of digital assets. As part of that Act we were keen to key those documents straight into the law of possession so that there was continuity, so they were treated in exactly the same way as the law had always treated electronic trade documents.
The slight difficulty with digital assets more broadly is that some are completely new, so the law has no conventional equivalent to look at. So that was another thing that came out of consultation. None of this is written down, so it is down to my memory, but at the beginning we probably more inclined to say, “Actually, these things, for the reasons that I have given—independence, rivalrousness, total transferability and divestibility—are more like things in possession, so we should just treat them as things in possession”.
Again, as we consulted—the majority of consultees completely agree with this—given that these things are brand new and some are simply nothing that the law has encountered before, it became clear that it might be cleaner to have this third category so that we can start from scratch where necessary.
As I have mentioned, there was a difficulty in some lawyers’ minds about there being an equivalence between conventional possession, something I can hold in my hand, and something that I have completely exclusive control over but is none the less in digital form: I control it and, you might say, possess it in a completely different way. The Law Commission has the privilege of being able to come up with these solutions, and does not have to do it in the same incremental way that the common law does, so we thought after all our consultation that that seemed like a cleaner way of doing it, and avoiding the difficulties that some parties still have with seeing digital things as being possessable.
Q10 Lord Bassam of Brighton: Referring back to the Electronic Trade Documents Act, does this Bill in any way qualify or call into question some of the conclusions that that Act has brought out in terms of improving the quality of trading through electronic means?
Professor Sarah Green: No. All these things are going in the same direction, in the sense of what we are really after. At the Law Commission, we would have done them together if we had had the resources to do it at the same time.
Lord Bassam of Brighton: That is what I wondered.
Professor Sarah Green: The reason they are split was really just down to resources. We wanted to get electronic trade documents. It was the easier one because, as I said, we were dealing with something that was an exact digital equivalent of something that already existed. So it was an easier win, in one sense.
Lord Bassam of Brighton: And tangible.
Professor Sarah Green: Yes.
Lord Clement-Jones: You would not have come to a different conclusion.
Professor Sarah Green: No. What we were after with the Electronic Trade Documents Act and broader digital assets was a legal equivalence. So where something in digital form emulates conventional tangible things—rivalrousness, independence, divestibility—it should be treated by the law in exactly the same way, because those are the legally salient principles. Tangibility is neither here nor there. There is an argument about whether digital things are tangible, but I just do not think that is helpful. So in both projects we extrapolated the legally salient features of these things and said that, whether it is a digital asset or an electronic trade document, where it emulates the conventional thing in possession the legal system should treat it in the same way. So they reach the conclusion in a slightly different way, because one is equivalence with possession and one is control, but they are both driving towards the same conclusion, which is equivalence.
Lord Clement-Jones: How does that compare with legislation in other common law jurisdictions, on the point of this Bill?
Professor Sarah Green: There is nothing directly comparable. Article 12 of the US Uniform Commercial Code does not say the same thing, but it has the same effect: it talks about the transfer of property rights in digital assets. It is not a legal system, but UNIDROIT has principles on private law in relation to digital assets, and principles 2 and 3 bring about the same substantive effect of this Bill. The Dubai International Financial Centre has followed the Law Commission’s final report principles and released its own set of principles, which are incredibly similar to what is suggested in that final report, and they very definitely endorse the third category.
Q11 Lord Shamash: Has there been any litigation on this in the States—Lord Clement-Jones just touched on this—because the States is where you would expect it, as it is ahead of us in that sense with bitcoin, blockchain and all the rest of it. Are you aware of any?
Professor Sarah Green: Yes, there has been some litigation.
Lord Shamash: What has happened there? It does not have the legislation as such. It is its version of our common law. I was coming to the question of whether all this is necessary, so I am keen to know.
Professor Sarah Green: It is very difficult to compare with the States, because it is different; it does not have a national set of legislative principles. What is interesting is that the last major case a couple of years ago was the Celsius case, which was on bankruptcy and involved crypto assets. The judge who decided that case made the point that in trying to establish the principles to apply to that insolvency question—of course, that comes with all the proprietary questions that we have been talking about—it was very difficult because there was very little material for him to work with or to refer to. This was before the latest version of Article 12, I think. In any event, he referred to the Law Commission paper and said that at the time that was the only thing that he could find as guidance to those principles, and he followed the direction of travel in that paper.
I certainly started this project thinking that the US was ahead of us on this, and in some ways it is—there are certain states, Wyoming for example, which have legislated in very great detail, not on this specific issue but on blockchain and other related digital points—but on this issue I do not think it is that far ahead of us. We worked very closely with the authors of the US Uniform Commercial Code when we were formulating these principles, and we all agreed on the outcome that we wanted, and we all wanted to get to the same place. It is more neck and neck now, but it has certainly referred to our work in the past.
Lord Shamash: So that we do not reinvent the wheel, presumably there has been a definition. Has the States tried to define more accurately what digital assets are?
Professor Sarah Green: The basic principles that I have set out today are the same ones that it follows, and they are the same ones that you will see. They are slightly different words, but the principles of those legally salient features of emulating, conventional, tangible assets are what you will find in the UCC and, as I said, in the UNIDROIT principles on digital assets. Transferable records are certainly what UNIDROIT would refer to, but what is important is the principles that apply to those assets.
Q12 Lord Bassam of Brighton: How will the Bill affect England and Wales as a jurisdiction where property disputes are litigated? I have a supplementary question going round my head about electronic trade documents. It was argued that that particular piece of legislation put the UK, as a jurisdiction, well ahead of others. It was a sort of field leader. Does this Bill feed into that and assist in that process?
Lord Ponsonby of Shulbrede: Legal certainty is important to international businesses when choosing which jurisdiction should govern their contracts. However, at present, there is a question mark in our law about whether the courts can and should recognise a further category of personal property, hence the Bill. This Bill aims to address this question and provide greater certainty in the law. This supports our efforts to remain a pre-eminent jurisdiction with English and Welsh law, the global law of choice. This Bill will also give English and Welsh courts the tools to develop our world-leading common law, allowing it to evolve and keep pace with innovation. This will help to keep the Courts of England and Wales as a leading place to litigate these disputes.
Lord Bassam of Brighton: That is very reassuring.
Lord Ponsonby of Shulbrede: That is why we are doing it.
The Chair: If your objective was legal certainty, you might look to Singapore and say that it has been decisive there. It has decided that these things are things in action. There is lots of law on things in action, everyone knows what they are, and we can motor ahead. In England and Wales, however, we are being told, “There might be this third category, which it’s open to the courts to develop if they wish. Here are some ideas that they might want to take into account in our final report. We appreciate that the landscape’s going to be changing all the time as technology develops, so start arguing”. The solution does not sound as certain as they found in Singapore.
Professor Sarah Green: What was the source of the certainty in Singapore?
The Chair: You are the expert and I certainly am not. I might have it wrong, but I understood that you said at the start that in Singapore the courts had decided that these digital assets are things in action. In other words, it plumped for an existing category and it would shoehorn them in. On the face of it, that sounds like legal certainty. If it comes up in an insolvency or an inheritance dispute, someone has bequeathed their things in action to somebody, you know where you are in Singapore, presumably, because these things are things in action. It might be much more debatable in this jurisdiction, even after this Bill.
Professor Sarah Green: We have indications already in this jurisdiction, in a very recent judgment, that they are a third thing.
I do not believe that the outcome of a case that decides that these things are things in action, which is the case in Singapore, will be sufficient to shut down the argument. Obviously, it would be different, or potentially different, and it would not exactly shut down the argument, but it might discourage it if it were in some statutory form. That is not the case in Singapore. We have the outcome of one case, which is not the way an English court has very recently decided the same point.
If we had to leave it to common law development and so wait for the right question to come along, the real problem—this is in the Law Commission final report, and it is one of the main reasons why the Bill is drafted as it is—is that there is a major conceptual problem with regarding these things as things in action. There is a natural tendency, and certainly a historical tendency, as I said at the start, to put them in things in action because they are not intangible and they do not look like the things we are used to dealing with as possessable.
The problem there is that they are different as a matter of nature rather than degree from things in action. That is the really important point. Why is that? For all the points that I have talked about before, they have this independent existence. If I have a debt with somebody, that is totally dependent on legal recognition. If I have a digitised security on a distributed ledger, that is not because that exists in the world.
Why is that important legally, and why is this a problem for regarding them as things in action? It is how the law then treats those things. If I have a thing in action, a debt or a pure contractual right, that thing cannot be taken away from me without my consent and without a legal process. That is the important thing.
If it is independent and has an independent existence in the world—as these cases show, they are nearly all about the same thing—if you have your wallet hacked, or somehow you get that digital asset taken from you without your consent, as we refer to in the Law Commission report, it is involuntarily alienated. I know that is not very snappy, but that is the key difference: you cannot involuntarily alienate a true thing in action, because it relies on the legal system for its enforcement, recognition and movement.
A physical thing in the world that has this independent existence is not so reliant, so it can be taken from you without your consent. So to treat digital assets that have those features—I could hack into somebody else’s wallet and take their digital asset without their consent—the law needs to respond to that factual situation. It is not the same as the thing in action. That is why I think that they do not belong in things in action.
The Chair: That is very helpful.
Q13 Lord Clement-Jones: Just a quick question, or maybe not so quick. I had to learn as a young articled clerk how to assign a chose in action. If you are asked, “Could you transfer this asset, whatever it is, in a legal way?”, you are faced with a dilemma, are you not? Do you hand it over? Do you have an assignment? Do you have a deed of gift? Does this not create uncertainty for those who actually own these assets, because they are any one of three and they have to decide how to transfer them? Is that not going to be quite ambiguous to this third class of assets?
Professor Sarah Green: That is less problematic. The idea was that once this third category was in existence the courts could decide on a factual case by case basis the best way to transfer a particular asset. So I take that point that there could be argument about that, but that is far less problematic than these things being classified erroneously as a thing in action, which, were it to be a thing in action—I have explained why, factually, that is impossible—is far more problematic than trying to shoehorn them into a category where the legal treatment is not just open to question but is actually inappropriate.
The Chair: That is very clear. Thank you.
Q14 Lord Shamash: You have had extensive consultation through the Commission. We have a couple of questions we want to ask on this. What would you characterise as the main objections to the Bill as a result of all the evidence you have taken? What has come back to you? Are people are really pushing back against the idea of the Bill?
Professor Sarah Green: Those pushing back have certainly been in the minority. I have already mentioned them, but to reiterate, they are based on a misunderstanding. In some cases, it is a misunderstanding that this is all about cryptocurrency and not about mainstream digital assets. So there might be some policy argument for not intervening, although I still do not understand why we would not want a property interest in something that was not being used in a good way, because the law can then still deal with it. So there is that.
There is the elision that I have already mentioned between things in action and things in possession, and a misunderstanding that what the Bill is not trying to do is to say that because a right is represented by a thing in possession, that means there cannot also be things in action in relation to it. Of course there can. I have a watch. It is the thing in possession. If you buy it from me, you still have a thing in action in relation to it, and that will continue with digital assets. We are not replacing one with the other.
Finally, this is the last headline, there is a feeling that the Bill is somehow driving the use and adoption of digital assets in certain ways, and there is a concern that it will encourage X, Y and Z behaviour. The point to note is that this Bill is a response to commercial behaviour that is already happening, and we are trying to make sure that the law is well suited to situations that will arise as a result of that.
Lord Shamash: But things are already happening. There is an argument here that the law is unnecessary, and what you should do is allow the common law to evolve, in the way it has done for centuries, to deal with the issues that we are confronted with, such as the definition. We have touched on a number of things. I just wondered what your response is to that. Is it necessary? Can we carry on without it? Do we need it?
Professor Sarah Green: In a very sort of lawyer’s answer, it depends on what you mean by necessary. As I have said, the common law has already moved a long way since we started the project, and the idea of the Bill is to allow that to continue in just a more focused way. I do not think we will be in a position where the law will not recognise property rights without it, but it will be a lot cleaner and it will give a better foundation. As I have said, it is the judiciary that asked for it, so it is not absolutely necessary, but it is incredibly important and will just make the process a better one.
Lord Shamash: It keys into what Lord Ponsonby was saying about making sure that this country is the place it is for people to come and get the issues about digitisation, whether it is from Dubai, Argentina or wherever it is. We would be a forum, a convenience really, for everybody. The legal industry contributes enormously to this country, and we would not want to do anything to diminish that. But this would help it. People from Dubai would come here to get the things decided rather than hanging around in wherever.
Professor Sarah Green: On top of what I have just said, it would be incredibly important symbolically, yes.
Q15 The Chair: If there is nothing more on that, I would like to go on to the question of retroactivity, or whether the Bill might have been drafted differently to give it a declaratory effect. You say in your supplementary report that the draft Bill does not have retrospective effect, and there is nothing to displace the presumption that it will operate only from the date of its entry into force. Might that be one distinction with the common law, because, as I understand it, when the common law is declared by a judge, at least normally, it is declared as it has always been? That, at any rate, is the legal fiction.
I wonder whether that is a significant distinction in the context of this case. What if the Bill passes, the first case that comes before the courts concerns a fact situation prior to the entry into force of the Bill, and counsel stands up and argues, “I know all about this Bill, but of course Parliament does not act without a reason, and we now know that, for the future, there is a third category”. Counsel’s submission will be that there was no third category at the time with which we are concerned. So you will get into a detailed argument simply because the Bill was not given a declaratory effect, as the development of the common law might have been able to do.
By superimposing this statute on a common law, which sounds as though it is going in this direction anyway, might you open up a difficulty that would not have existed if it was not being done by legislation?
Professor Sarah Green: One reason for that is that we were quite conscious by this stage in the Law Commission project and in the evolution of the common law that the Bill would not be doing anything that would go against the grain of what had already happened before it. The common law has very recently taken the step itself of recognising the potential for a third category. So in the sense of the common law looking back and thinking that this is how it has always been, I do not think that the Bill would create any perceived fork in that direction.
The Chair: Is that not the equivalent of saying that there is no point in the Bill, because if the common law is clearly going to declare that this third category exists, you do not need the Bill to do it? If the common law is not going to do that, do you not risk creating a distinction between cases that arise prior to entry into force and cases that arise afterwards? As we all know, these temporal questions can be extremely difficult and time-consuming to resolve.
Professor Sarah Green: The cases that we have had so far were not at the highest level in court terms, and they did not deal with the question as a matter of ratios. They are not set up in contradistinction to each other, so there are bound to be those arguments made. The way that the Bill is open-textured and facilitative rather than mandatory or directional, which is also quite important, opens the way for a particular form or path of reasoning. That was one of the things that we considered when we were thinking about retroactivity, and we thought that was the safer way to proceed.
The Chair: Just to summarise, can you explain why it is important that the Bill should not take declaratory form? Why is it important that it should operate only from the moment of its entry into force?
Professor Sarah Green: We did not want to create any obvious and bright-line distinction. As I said, we were very conscious at this point in the project that the common law had moved on a lot more, certainly than I had expected it to, and I think the whole team had expected it to, and we did not want to create any sort of obvious divide between the way the common law had developed based on our reasoning in the final report and this Bill as being anything that was distinct from that as a process. It is really important to us that these two things are seen as parts of the same project and have the same objective.
Lord Clement-Jones: Chair, I must apologise. I have just been reminded I need to declare my interests. I am chair of the council of Queen Mary University of London, chair of the board of Trust Alliance Group, and an adviser to DLA Piper on AI policy and regulation.
Q16 Lord Holmes of Richmond: The Bill will apply to things whether or not they are digital or electronic in nature, so what things that are neither electronic nor digital in nature might apply, and what things that are electronic but not digital might the Bill apply to? Without prejudging, I will start with you, Professor Green.
Professor Sarah Green: “Electronic” and “digital” are not mutually exclusive. We use the word “electronic” simply because it is used in a lot of legislation already, such as the Electronic Communications Act and the Electronic Trade Documents Act. A digital thing is used to refer to electronic things and technological things in general, but actually it is quite specific. So we did not want to restrict it to digital. An example of something in the future, something on the horizon that is not digital, is quantum computing. We will soon enter a realm of technology where “digital” is too limited. The term “electronic” is totally separate because it refers to the way things are communicated from one to another. Electronic is the means; it is continuous. Digital technology is discontinuous.
Lord Holmes of Richmond: With either of those categories, what did you consider the Bill might capture that you did not want it to capture because of the sense that it goes broader than those words or classifications?
Professor Sarah Green: We were quite concerned to make sure that the Bill captured everything. Rather than restricting the potential bucket of things that might then go through the filter of the independence and rivalrousness criteria, we were keen to make sure that those criteria were the driving force of things that were covered rather than not covered. We were keen to make sure that nothing was left out by that initial definition, which is why we used digital and electronic as a suggestive gate and not something that cut that down.
Lord Shamash: Please forgive me if this is a really naive question, but are emails digital or electronic?
Professor Sarah Green: They are both.
Lord Shamash: They are both, okay.
The Chair: Are they things?
Professor Sarah Green: They are definitely things.
Lord Shamash: My wife asked me to ask this question: “What happens when you die, and there is one particular email that I want to see because that’s telling me, by code, that you have 500 tonnes of gold buried at the bottom of the garden, and I need to see that email?” Can I pass that on? What would happen to that email? Who does it actually belong to? It is both digital and electronic. Do you see my problem? I am trying to really grasp this in my head. I am sure everybody else understands it, but I do not, and I wonder if you could help me with this.
Professor Sarah Green: Emails are pure information and are protected by other areas of the law, but you do not need to have property rights in them. What you would require in that situation is not the sort of property rights that we are talking about today, which are important. That is not to say that the law does not protect them, but this Bill would give you the type of property rights that would protect you if somebody involuntarily alienates something from you. It dictates the remedies that you can get if and when that happens or if there is an insolvency.
So if I hold a digital asset of yours and I become insolvent, the question then is that if you have a property right in the thing that I hold, you are a secured creditor, which is far better for you in that situation. If you do not have a property right, and all you have is their contractual right, because you asked me to look after that digital asset for you, you are an unsecured creditor, which is much worse news for you. So the sorts of property rights we are talking about here are for very specific situations that are not covered by other areas of law where you would really want to have a property right. In the sort of situation you are talking about, you do not need that proprietary protection, certainly on the facts as you gave them to me.
Q17 Viscount Stansgate: Lord Shamash raised the question of emails. What about the photographs on your phone? You could have those taken away from you by Apple or whoever owns own the phone, or the iCloud. What is the position there? Are you protected by existing common law in some way?
Professor Sarah Green: Yes, you are protected by the law but not necessarily property law. This is the point, and this is why digital assets and the characteristics that I outlined at the beginning are so important. The Bill is very deliberately designed not to apply to everything that is in digital form and everything that might be regarded as a digital asset. There are lots of digital things which, by their nature, are shareable and duplicable, like photos. You could send me a photo, but you would still have the photo. Google Documents is another example. These examples are not independent, do not have rivalrousness and are not fully divestible. The value of those assets is that they can be shared and used by many people at once.
The difficulty is where you have a digital asset that is designed to get around the double-spend problem, so there is only one of them—for example, an NFT that, say, represents 500 tonnes of gold. It matters very much that there is only one of them. It does not matter very much that there is only one photo, but that is not to say that the law will not protect your interests, whether it is confidential information, contractual rights, or intellectual property.
Viscount Stansgate: If you have access to them and access is withdrawn and you are not able to access the photos on your phone, that is a material damage to you. Anyway, you are saying the Bill does not apply to things like digital photographs.
Professor Sarah Green: It only applies to digital assets that have the characteristics that I have set out. Emails tend not to have those characteristics, because when you send an email you retain a copy of it on your own system. You could send it to 500 people, and they would all have the exact same copy of the email you have. The sorts of assets we are talking about here are singular, exclusive and unique, which is why they need proprietary protection.
The Chair: I think you saying that, just as there is no proprietary quality in a Word document because it can be widely shared, there is no proprietary document in an email or a photograph unless it has been made into a non-fungible token and rendered unique. It does not have the necessary quality of rivalrousness, I think you call it. Is that right?
Professor Sarah Green: Yes.
The Chair: So we are not here concerned with property law. We might be concerned with other areas of law.
Professor Sarah Green: Yes. Of course, those things are protected by different areas of the law, but not by this.
The Chair: Just to be clear, you said that the Bill is only concerned with this sort of property or that sort of property, and the Bill, as I understand it, applies to absolutely any kind of thing. All the Bill does is say that the courts are not to be inhibited by the need to classify a thing as a thing in possession or a thing in action. I can see that your consultation paper has various proposals for how the third category should be defined, but I do not think there is any of that in the Bill, is there?
Professor Sarah Green: No, there is not any of that in the Bill. As I said, the Bill is very focused on that unlocking point. Putting any more than that in statute, apart from anything else, gives more hostages to fortune.
The Chair: It would be a nightmare, would it not?
Professor Sarah Green: It is true that it would be very difficult to draft, but that was not the reason we shied away from it. It was more about the very speedy development of technology and the different ways in which parties respond to that technology. Trying to predict that and put it in statutory form was also, we thought, not worth the candle in the sense that we concluded that the common law was the better way to deal with individual situations.
Lord Shamash: We should have you back in 10 years’ time as a post-legislative investigation to see how it all went.
Professor Sarah Green: That would be nice.
Lord Shamash: Feel free. I am inviting you. Forget the Chair, I am inviting you.
Lord Holmes of Richmond: Just to finish this point, Professor Green, what potential did you consider for things that have previously been able to be fitted within the two classifications currently to then, if the Bill becomes an Act, be classified in the third category, and does that matter?
Professor Sarah Green: Do you mean whether something could move?
Lord Holmes of Richmond: Indeed.
Professor Sarah Green: If the guidance in the final report is followed, it is very unlikely that anything could move from the historical things in action category to the third thing. That would be problematic for the reasons I have already outlined, as they are conceptually different as a matter of nature rather than degree. It is entirely possible—I am talking here across jurisdiction and thinking of all the cases that I am aware of—that something could move from things in possession to the third category simply because those things may well have been analysed as things in possession historically, and now there is another category that they could go in.
I would hope that the jurisdictions that have seen things in action as a residual category until now might see what we do with this and think, “Actually, they don’t belong in things in action. They should probably go in the third category”. Obviously, I am thinking of the Australian judgment and the Singapore judgment that I referred to earlier, but that is aspirational on my part.
Lord Holmes of Richmond: Finally, if things did move from the first category, would that be problematic from your point of view in terms of both certainty and consistency across the common law family?
Professor Sarah Green: If they move from things in possession?
Lord Holmes of Richmond: Yes.
Professor Sarah Green: No, I do not foresee that being a problem at all because as we have said, the Bill does not dictate what the consequences of that classification would be, and that would happen in the usual incremental, common law, analogical way.
Lord Holmes of Richmond: Thank you. Minister, do you wish to say anything on this?
Lord Ponsonby of Shulbrede: No, I have nothing to add.
Q18 Viscount Stansgate: I would like to end with a short question. The Bill does not apply to Northern Ireland. Should it, and could it be amended to do so? Naturally, this question is for the Minister.
Lord Ponsonby of Shulbrede: The Law Commission can only make recommendations regarding England and Wales, and it is not within the Law Commission’s remit to recommend outside England and Wales. In addition, personal property law is transferred in Northern Ireland. As such, the report on digital assets did not address the law of Northern Ireland. However, my officials have been in contact with the Northern Ireland Executive to discuss whether the Bill should or can be extended to Northern Ireland, and I will keep the committee updated on this matter.
The Chair: We are very grateful to you both for being so patient with us and for answering our questions so carefully. It has been a very valuable first evidence session for us. With that, I would like to bring the public part of the proceedings to a close and thank you both very much for attending.
