16
Examination of witnesses
Professor Burkhard Schafer, Matt Green and Jonny Fry.
Q28 The Chair: Welcome to this resumed session of the Special Public Bill Committee on the Property (Digital Assets etc) Bill. On our panel we have Professor Schafer, Mr Fry and Mr Green. Before we go any further, I would like you to introduce yourselves and say briefly what the nature of your interest is in this topic. Maybe, professor, you would like to go first.
Professor Burkhard Schafer: Thank you. I was director of the SCRIPT Centre for IT and IP law at the University of Edinburgh. I have been working on the regulation of the digital economy for the past 30 years. Currently, I am part of the DECaDe research project, or the Centre for the Decentralised Digital Economy. I was PI on Creative Informatics, a knowledge transfer project in Edinburgh to train up our creative industry for the digital age.
The Chair: Thank you. We saw that DECaDe contributed a response to the Law Commission consultation. Were you responsible for that?
Professor Burkhard Schafer: I co-ordinated that, yes.
The Chair: Thank you.
Jonny Fry: Good morning. I sit on a number of boards looking at and using blockchain technology and digital assets. I also head up the digital assets strategy for one of the five clearing banks in this country. You obviously have Lloyds, NatWest, Barclays and HSBC; then there is a company called ClearBank that is very interested in looking at digital assets, not just at the crypto side, which is relatively small at about £3 trillion, but at the £2.2 quadrillion of equities, bonds, real estate and derivatives, and therefore the need for clarity around that. Finally, I run a weekly analysis, and have been doing so since March 2018, looking at who, how, where and why the technology is being used and digital assets. As I say, crypto is a very small part of this. It is more the real world that impacts all of us on an ongoing basis.
Matt Green: Thank you for having me today. I wear two hats. I am a lawyer. I am the head of blockchain digital assets at the law firm Lawrence Stephens. Years ago I was responsible for the case of AA v Persons Unknown, which has probably been spoken about in these hearings. It was a case I worked on and was very fortunate to be a part of. I am also the chair of the working group on blockchain digital assets at techUK. I am here more wearing my second hat, but I also come with a lawyer’s brain.
The Chair: Do you speak for techUK?
Matt Green: I do.
Q29 The Chair: Right. Perhaps I could kick off. We have heard a bit about this from Mr Fry, but could you briefly describe the types of assets that will be principally affected by this Bill? How are they used by businesses in the UK? To what extent do they add value to the UK economy? Do not feel that you all have to answer each question. Who would like to take that one first?
Jonny Fry: I am very happy to take that question. First, I would like to remind the wider audience that when people talk about digital assets, the majority of the time they immediately think of bitcoin. When they think of bitcoin, they think of all the challenges of that particular sector but, depending on the price of bitcoin, that sector is about £3 trillion. I know that sounds like a reasonable number, but if you equate it to just the real estate in the UK, that is £8.7 trillion. If you look at the funds industry, according to PwC, that is £145 trillion. The big daddy is the derivatives market, used by the majority of companies to hedge their exposure as a form of insurance, and that is £1.2 quadrillion. The Brits cannot agree with the Americans how many zeroes that has. It is a lot. We think it is 24; the Americans think it is 18.
Why are digital assets important? They will impact on every current asset class. They will also impact on data. Those people walking around with Fitbits and Apple Watches will be able to monetise their data. They will be able to monetise their travel and shopping habits, which historically have been controlled by Silicon Valley-type companies. It will give that ability to individuals.
My final point is that this is really important for the UK, because 80% of all international transactions are carried out using English and Welsh law, so the UK has a duty to have proper clarification. Fortunately, the law is ahead of the regulation. The regulators have been dragging their feet. If you want to do anything with a digital asset, it is typically stored on a blockchain or a DLT, and if you do that you need to be a virtual asset service provider.
The Chair: DLT is distributed ledger technology.
Jonny Fry: You need to be a VASP, and the FCA has regulated or authorised only 14% of applications. There is no point having digital assets if you have no way of buying and selling them. More importantly, there is the income—the coupons, the dividends, the distributions and the interest. This Bill will give more clarity as to digital assets and their property rights, but hopefully it will encourage the regulators to stop being focused on crypto and look at the bigger economy.
I will give you one final example. Many of you will have pension funds and individual savings accounts—i.e. funds. The UK is the second biggest market in the world. At the moment you can buy and sell a fund once a day, and the price is made by the same asset management company that manages your money. In a digitised version, you can buy and sell 24 hours a day, seven days a week. Independent market-makers come up with the price and, instead of receiving your interest, coupons and dividends every six months, there are already some funds where you can receive them every month. Some asset managers are saying, “We will calculate it hourly”.
This will have a massive impact on the banking sector. Why would you leave your money in a bank when you can put it with the world’s best treasury managers—someone like Fidelity, abrdn or BlackRock? It will be safer there and you can potentially calculate your interest on an hourly basis, but you have to pay it with a digital asset. In this country, we have e-money licences—electronic money. This is proposing to have digital money. Digital money is where I put your money in an account and it is backed, hopefully, by a central bank, gold or real estate—something that you understand and is tangible.
Forgive me, but I think we will go back to the barter economy: a bushel of wheat for a bucket of eels. “I know what this is; it is backed by something I understand, and you want this”. Now we will overlay this programmability—a smart contract—to swap it one for one. That has a massive impact on the SMEs, and 63% of people in this country work for an SME. If SMEs can get paid immediately, you will get faster velocity of money, greater economic growth and improved productivity. The City wants delivery versus payment. It wants T+0 settlement: “I give you the stock and want to be paid at the same time”. That is what digital assets and digital money will give you: much more clarity and much more transparency.
The Chair: Thank you. You started by referring to bitcoin, and I entirely get your point that this is a very small proportion of what we are talking about when we think about this Bill, but it has none the less attracted a great deal of comment. Do you say that bitcoin specifically adds value to the UK economy and, if so, how?
Jonny Fry: With respect, we are focusing on the wrong thing here. Bitcoin is a very small—
The Chair: No, you made that point. I asked you a very specific question about bitcoin. Maybe you prefer not to answer it, but I was just interested to see what your answer was.
Jonny Fry: More important is the technology behind bitcoin. It has done a tremendous service to have this debate, because that technology can now be harnessed for use in all sorts of different ways that will have a much greater impact on assets, voting, healthcare and all sorts of things. Whether bitcoin goes up or down to a great extent is irrelevant.
The Chair: That leads on quite neatly to a question from Lord Shamash.
Q30 Lord Shamash: To what extent is digital asset technology developed in the UK, as opposed to used in the UK? In other words, are we inventing and creating it here but it is being used externally?
Jonny Fry: Currently, 4% of the developers globally are based in the UK, so it is relatively small. The biggest area is the USA. Given the recent success of Donald Trump, we will see that the shift goes to America. That is another thing we need to be really mindful of.
If you go back to the reality, London accounts for 50% of the daily FX turnover. The foreign exchange markets turn over about £7.6 trillion a day and we do 50%. The next nearest competitor is New York at 18%. The reason for that is historical: you have America here and Asia there, and we were in the middle. If something trades 24 hours a day, seven days a week, it could be in the Isle of Sheppey, Manhattan or the Maldives. It does not need to be in London.
Lord Shamash: What will be the impact of passing or not passing this Bill on what you have just set out in terms of competition with the US?
Jonny Fry: If you do not pass it, it sends a huge warning flag, “Why not?” It is really important that this is passed to give clarity.
Lord Shamash: All three of you are nodding. You probably cannot see the other two nodding, but they are in agreement.
Matt Green: We are, because it sends a certain message. Jonny and I, who have known each for other for several years, talk about this often. We need to be sending the right signals into the ether and into the world as a jurisdiction. We are at a stage where this Bill has been proposed, so there is equal benefit in passing it, potentially in an amended way but having some sort of legislation to push ahead and show confidence. In the same way, if we withdraw it, that is a poor signal to the world. It would show that we are not going to take this seriously. That is slightly different from the common-law position of how we treat property. I can come to that later and I am sure you have heard that this morning. At a legislative level, if we pull out now—I know this may be an unpopular thing to say—it seems as though we are not taking this seriously. We are between a rock and a hard place. We need to do this, but to do it in the right way.
The Chair: Before we go on to the next question, Professor Schafer, is there anything you would like to add?
Professor Burkhard Schafer: That is very much the feedback that I received from talking to developers and some of the larger blockchain companies. They looked at the US and in particular at the recent UCC Article 12, which is more detailed than what the committee here suggests. It had huge industry support, by and large, from what we heard. They looked at the UK and thought there is now movement, and that was very welcome. If this were not to happen now, it would be seen as indicating a divergence between the US approach and the UK approach, and that would be risky, to say the least. It might not help us to get percentages off the Americans, but it might position us quite well within Europe.
Q31 Lord Clement-Jones: We had some discussion about this in our previous session. Is there real uncertainty about how these assets are treated under the current law? How does the uncertainty affect businesses developing or using such assets? That seems to be in contention to some degree.
Matt Green: I am very happy to take this as a starting point.
Jonny Fry: Can I just go back one point because I think this might be helpful? I have been regulated as an individual since 1986. In all my career I have been in the regulated space. For the first time I am aware of, we are regulating technology; we are not regulating the outcome of technology. This is really important to your point, Lord Clement-Jones. We need clarity because we need to encourage the regulators to stop regulating, whether it be blockchain, potentially whether it is going to be other IoT devices or big data, and we need to regulate what has been the outcome. One of the great things about English law is that you operate within the spirit, as opposed to in America: you have the law; if you break it, there are consequences, and there is no flexibility. The regulators have been fantastic with having things like sandboxes, which have been copied all over the world.
On regulating technology, I come back to my point about a VASP. If you store information or transmit information on a DLT, distributed ledger technology, or a blockchain, you need to be a virtual asset service provider. Of the virtual service asset providers that have applied, only 14% have been successful.
The Chair: Mr Fry, I am sorry to interrupt you. We are short on time, and Lord Clement-Jones asked a very specific question about whether there is real uncertainty currently in the law. We understand the point you all made about it being important to be seen to do something, but does this Bill address a real problem of uncertainty? I think, Mr Green, you were going to say something.
Matt Green: The position at common law has been quite clear since 2019. A UK Jurisdiction Taskforce in November 2019 said that cryptocurrencies could be property. We had AA v Persons Unknown in December, and then we had a case called Osbourne about NFTs, and recently a case called D’Aloia about whether Tether is property. At common law, strictly, it is not really needed. However, the legislation is helpful inasmuch as we are just looking at cryptocurrencies at this point.
What happens in the future? What happens if we need to provide property rights on a specific object of something that we have not imagined yet? At common law, we are safe. So far, having spoken to some of the decision-makers in the building of this Bill, my understanding is that some of the judiciary were nervous about deviating from the common law—i.e. Ainsworth, things in action and tangible things. The legislation is designed to be a door ajar to allow decision-makers, the judiciary, policymakers, et cetera, to allow objects to be the subject matter of property rights. It gives a level of confidence to the judiciary so that it does not feel so nervous. My view is that it is there, historically, as we have it in common law. Going forward, this piece of legislation, subject to some amends that I would recommend, is actually a really good thing and would provide clarity.
Professor Burkhard Schafer: I have a very similar impression. This is not a scientific study. I have not published after peer review, but I have spoken about it when I was called as a witness with quite a number of our partners in our research projects. The general opinion was that the law is clear but we are not confident enough that it is clear, almost, and that particularly affected smaller law firms. They thought they knew what the law was, but they were worried about putting their name on the paper for their client. They clearly felt that if they would gain this confidence, this might make the process cheaper and give more actionable advice to clients. It was also a certain—
Lord Clement-Jones: Let me just stop you there. People are not quite confident enough, but what they are not quite confident enough about is whether there is this third form of asset, basically. We have heard that the common law at the moment could easily scoop up digital assets into choses in action, and so on and so forth. You are saying that it is pretty clear from common-law cases that there are these three forms of assets; it is just that people are not quite confident enough to state that.
Professor Burkhard Schafer: Yes, and to say that to their client. That was one form of uncertainty, absolutely, specifically for smaller law firms dealing with succession cases. It was not uncertainty but lack of confidence in their own judgment, almost. Then there is the computer side, the programming side. That echoes some of the things other people have said. We have the paradigmatic case, and they understand these, but now they ask: is it worth investing in trying to bring other forms of digital assets into that environment? What exactly do we have to do? What affordances do we have to programme into these assets to qualify? Here the Bill also helps by telling them, “Yes, this is something we encourage and want”, and it creates a space for innovation on the computing side because it removes uncertainty there.
Lord Clement-Jones: You are confident that the common law can keep developing in how it deals with digital assets once this Bill has gone through.
Professor Burkhard Schafer: In principle, yes. The one concern I have—and I think it was also mentioned by some other respondents to the consultation—is that it requires cases to be litigated, and that sometimes selects cases in a problematic way. Certain types of cases will not reach the courts for numerous reasons. In particular, that is a problem when an innovator tries to grant property rights. They want the client to buy something, so there will not be a conflict, but they do not know if they can do it.
Imagine that you want to be a competitor to Amazon and think you have found a way to transfer ownership in an e-book, rather than just a licence. Your customers are happy and you are happy. There will not be a case. But you want some form of ability to say, “We are certain none the less that it is owned”. In Scotland, we could have a declaratory judgment. The courts could pronounce on the legal status independent of adversarial litigation. I do not think that is possible in England, but I am not an expert in English law so I should probably withdraw this comment quickly.
My concern would be that we might not always get the right cases. Once they are in front of the judges, I am very confident that the common law can deal with it. The question is whether there will be a pipeline of interesting cases. It might require strategic litigation just to tease out some of these issues.
Q32 Lord Cryer: What would be the effect of the Bill on the businesses and entrepreneurs that you have worked with? Jump in in any order.
Matt Green: From the techUK side, I do not get the sense that, broadly, businesses are particularly concerned about whether these assets are property rights. Having spoken to individuals, other issues are at play. The immediate impact of digital assets or new kinds of assets being property is not really on their minds. They want to know the regulatory framework and whether things are security tokens, for instance—whether they can deal with them in a certain way. They want to know whether coders have liability. We saw the case of Tulip Trading earlier in the year, which ended up being discontinued, where there was a potential liability for coders. These are some of the bigger issues that the industry certainly feels need to be reconciled and dealt with more than property. The others might have different views.
Professor Burkhard Schafer: It was pretty much the same when we had town-hall meetings with our partners. There was no major concern about it. They were happy about it but not too worried. The most obvious beneficial effect would be on start-up tech companies because it gives them a target to work towards, too. I would hope to see some more experimentation being encouraged as a consequence of that.
As to whether there is any evidence on that, we are working with one of the blockchain providers in Edinburgh. It funds one of our research centres. We do some more experimental things in terms of supply chain assurance in particular—on organic salmon, for instance. Yes, there would be an even greater willingness to have that type of project.
Jonny Fry: I know of a number of companies that have moved out of the UK because of the lack of clarity, from a legal point of view and a regulatory point of view. In the global environment, unfortunately, national boundaries increasingly are breaking down. People can pretend they are in one country, but the computer shows they are in a different country.
The Chair: Where have they moved?
Jonny Fry: That is actually the good thing: at the moment there is no one centre in the world dominating this space.
Matt Green: I would say it is the UAE. A lot of people I know in my circles are going there. They think “It is not clear enough here and way easier in the UAE, so let’s go over there". Whether that is a long-term plan—
Jonny Fry: And Singapore to some extent.
Matt Green: Singapore to some extent, yes. Certainly, in the short term, they are saying, “Right, I can start my business in the UAE. I don’t need to be here”. There is too much uncertainty, which I suppose is leading it.
The Chair: Can I just butt in for a moment with a question to Mr Green? You say that some of them are going to Singapore. As we have been told by other witnesses, the Singapore courts have not gone the same way as we are proposing to go. They have been prepared to look at the concept of a thing in action as sufficiently broad to encompass these sorts of digital assets. It may be that what you are saying is “At least they provided certainty”. We might be going for a different sort of certainty, but it is still worth providing it. Is that what you are saying?
Matt Green: Yes, but these are different things. People are not leaving this jurisdiction and setting up in the UAE because they are not able to understand whether things are property. It is more a regulatory issue. We are confusing the points to some extent.
The Chair: So it is not, in a sense, very relevant to this Bill.
Matt Green: Precisely.
The Chair: There will be many other reasons why people might relocate to the UAE or Singapore—
Matt Green: The sunshine.
The Chair: —that have absolutely nothing to do with arguments between lawyers. The sunshine, quite.
Lord Cryer: Is there any way that you could quantify the potential impact of this Bill on the technology sector?
Matt Green: Certainly, from what I have seen at techUK, in this jurisdiction, because of our long history of providing financial, legal and insurance services, the majority of the attention has been drawn towards TradFi, traditional finance, where we are looking to service businesses as and when they come into this industry. A handful of really decent companies are providing custodial services for digital assets, for instance, but the main focus seems to be on the service provider—what would be support services generally.
Lord Cryer: I was going to ask about the financial services sector.
Matt Green: Again, it seems that traditional finance—the term is TradFi—is moving into this space. It is almost as if they do not want to be left behind. Again, I do not know whether this Bill affects them in the same way that a regulatory framework would. I would say that a regulatory framework is far more precise and impactful than this. The Bill is a general indication that the jurisdiction is taking this seriously and, as I say, it gives the judiciary a door ajar, to kick open as and when it needs to.
Q33 Viscount Stansgate: Are there any other sectors that might be affected by this Bill that you can tell us about?
Jonny Fry: The biggest business sector in the UK is the healthcare sector, so I would point to that. It is roughly 12% of GDP and is bigger than financial services. It impacts all of us at some stage. Unfortunately, we all fall ill. This is not necessarily just about the assets that we think of now. It is about giving some certainty and encouraging people to invest and hold assets in different ways. We have examples of how it is being used in the entertainment and agricultural sectors and in supply chains. Digital assets are being used in many different ways and if we had greater legal clarity, that ought to help the regulators. It will also reaffirm the UK’s position as, rightly or wrongly, people rely on English and Welsh law, and that is very important—if nothing else, it is for the Commonwealth. The UK is not fantastic at everything, but it is really good at the law and financial services. We need to try to do as much as we can to protect that.
Viscount Stansgate: When you say health services, can you give me an example? Is the development of personalised medicine and everything that goes with it an area that might be affected by this, because the nature of the treatment you might be given is intangible?
Matt Green: This is to some extent problematic, as I see it. I will come on to it when we get to the question talking about harmful effects. The way that it is drafted is currently very open-ended and it may affect certain kinds of assets that we do not anticipate. While that could be a good thing, if they have not been invented or contemplated yet, the way that it is drafted may include certain industries or assets that might not be contemplated. As drafted, for instance, it may be that data gets swept up in this in some definition, so we need to be careful as to how the judiciary or decision-makers use this law to then provide property rights. We just need to be careful.
At the moment, this Bill is drafted inasmuch as to open a good floodgate, and yet we have to have gatekeepers, which seems to be decision-makers and the judiciary. So long as we keep it that way and it is open enough to allow future, not-currently-anticipated assets through, and so long as it is filtered later to some extent by the judiciary and decision-makers, we are okay. I think there is a question later about what we anticipate being harmful consequences and how it might be changed, so I will wait for that.
Professor Burkhard Schafer: To name a specific industry that we worked with a lot, the creative and heritage sector jumped on NFTs. I found that very regrettable because it was not delivering for that sector what it hoped to get. The technology was not right. The law was not right. It was not right at all, but it definitely had a very strong need to have something in the digital space that replaced traditional property. It was not the right technology and not at the right time. Quite a lot of the hype has now gone from that bubble, but that is because the technology was not right for it. With that Bill, as we just heard, because of the floodgates—or the window— being opened a bit more, that opens the way to get something better. The desire within the creative sector is tremendous for something like that.
The Chair: Thank you very much. That is very useful.
Q34 Lord Holmes of Richmond: Good morning. Will this Bill affect England and Wales as a place for digital asset technology development and for litigation of those assets, Professor Schafer?
Professor Burkhard Schafer: I am not sure on the litigation side. Ideally, laws do not get litigated a lot. For me, not litigating is a success by and large. I do not know enough about the English system to say something confidently on that. I would definitely say, with regard to the programming sector, that there should be the ability to try out something more small-scale as a sandbox approach combined with this. There are lots of interesting proposals out there already that need the next step to move from abstract prototyping or academic research into industry applications. That last step will be facilitated by this Bill.
Jonny Fry: I will not comment on the law, but from a commercial point of view most definitely, mainly because it will give certainty. We have already seen an example of two AI bots purchasing a digital asset, carrying out a transaction and doing a trade. That has already happened without anyone realising until after the event. That process will get faster and faster. As we see more digital assets, we will see mass customisation, as Larry Fink, CEO of the world’s biggest asset management company, said, and much more transparency. That is really important from a regulatory point of view but also from a consumer point of view. Digital assets allow that. Any clarification around that has to be a really positive thing.
Lord Holmes of Richmond: Thank you.
Matt Green: I will take the litigation point. Currently, I would say that we are the leading jurisdiction for litigating digital assets. When I speak to friends in the US and Singapore, to some extent they are a little jealous that we have this excellent level of case law behind us. We are able to seek orders against persons unknown in ways that other jurisdictions cannot. This Bill bolsters that. It encourages further litigation—should it be necessary, of course—and allows us as a jurisdiction to be a home for these kinds of cases. At the start of the year, we had huge cases involving the recovery of bitcoin, and who Satoshi was. That was here—and what a privilege that was. We were able to ventilate some major points concerning this technology and do that under our roof. So we are already there, but we are now in a position to cement the long-term success of litigation to some extent in the UK by pushing through a Bill like this.
Lord Holmes of Richmond: I have a final question for all of you; please give just a one-sentence answer. You have all talked about clarity and certainty. Do you see that clarity and certainty coming from this Bill or a digital assets Bill?
Professor Burkhard Schafer: I think this Bill is almost there, and I would have some small suggestions as to how it could increase the certainty a little, but, basically, yes.
Jonny Fry: It is all part of the nature of the process. We struggle to know the answers in this field because it is moving so quickly. We saw tremendous success with the blockchain Bill last year. This Bill is welcome because it moves us along that spectrum.
Matt Green: It provides us with clarity inasmuch as it allows more decision-making. Actually, it does not really clarify anything; it just says that other things could be property. I do not think clarity is necessarily the correct word, but it is necessary for us to push ahead with future-proofing ourselves. It is the right direction.
Lord Holmes of Richmond: Thank you very much.
Lord Clement-Jones: I just wanted to come back, although it may not be right on point. Jonny, you talked about the direction of travel in terms of AI-driven bots effectively trading autonomously. Is that a direction of travel? Is it desirable as a direction of travel, perhaps as a result of the clarity created by this Bill?
Jonny Fry: Let me give you another example. Siemens has equipment in Asia: as units are produced off the production line using a digital asset, it is being paid in real time from Asia to Germany. It is not having to wait three or four business days or to incur lots of costs and counterparty risk. These things are happening now. Are we comfortable with an AI driving your portfolio? Having been in portfolio management for many years, the human brain has a capacity. It cannot work 24/7 and there is a limit to its amount of knowledge. Sixty per cent of funds, allegedly, are still using a fax. How can an AI bot find a bit of paper and decide whether that fund, bond or equity is actually any good? It has to be controlled, but it is a welcome advance and it comes back to the whole thing about transparency. That is important.
Lord Clement-Jones: But you can foresee an era when there is no meaningful human involvement, effectively, in these trades.
Jonny Fry: Over 70% of all trades done on the majority of stock markets are already driven by algorithm and we live with that. We are going off topic here to talk about AI, but the thing about digital assets is that they will impact all of us. Having any clarity and, more than anything, being able to have the debate is really important as a topic, because it is here. I suppose that is the main thing I want to suggest. It is happening here now; it is not something going to happen.
Q35 Lord Sandhurst: It is clear that you are all in favour of this Bill, broadly speaking. However, just before you we heard from the City of London Law Society, and in particular its financial law committee. They are not enthusiasts for it. They think it will create uncertainty and expense, particularly when it comes to looking at security over assets—mortgages or however you are going to do it. You all think it is a good thing having the Bill. Do you have any sympathy with the view which I just expounded? Do you think there are any harmful consequences—things that we should be looking to ameliorate?
Matt Green: I put a whole thing down in writing because this is quite important. We may come back to the point on what the law society said. There may be some harmful consequences with the current wording. I understand that it says “will not be deprived”. I think that is the wording of the Bill. As I was explaining outside before this—
The Chair: It says “is not prevented from being”.
Matt Green: “Is not prevented”.
The Chair: “A thing … is not prevented from being the object of personal property rights merely because”, et cetera.
Matt Green: “Is” should be “may”, in my view, and the reason is as follows: “is” means that anyone outside or previous to decision-makers cannot object to being deprived of legal status. It creates a farcical loop, to some extent. If you are saying it cannot be deprived, in essence you are saying that it is until proven otherwise. In that sense, before a decision is made, anything could be property. When you get to that point, data could be property. There are issues pre-determination of a court that anything could be property on that basis. It is a double negative. The status quo would become that you cannot say it is property, therefore it is until a third party comes in and proves otherwise.
I will give you an example with a bit of case law that dealt with the recovery of crypto assets in a case called Fetch.ai. Defendant 1 was persons unknown who stole from somebody. Defendant 2 was a party that ended up with the traced funds. The third party ended up with the funds but were bona fide purchasers. We had to rely on that because it was at that point precedent. Those individuals did not have to prove that they were bona fide purchasers; they just were. When I served documents on behalf of my client, a victim, they said, “We’re bona fide purchasers, so none of this applies to us”. So we had to have a mini-farcical loop trial to say, “Well, you’re not bona fide. You’re not innocent”, and it just ended up going round and round. In the same way, if this is “things cannot be deprived” or “is not deprived”, it is for a third party to have to prove that it is not. That can be quite dangerous.
Lord Sandhurst: It says “is not prevented”. It means either side can argue that it is or is not.
Matt Green: But previous to a decision or a determination being made.
Lord Sandhurst: It does not say that it is until it is proved otherwise. It just says it is not prevented.
Matt Green: But it is the word “is” that I had issue with. “Is not prevented” is a double negative.
The Chair: It is purely permissive, is it not? It allows the courts to do something that some of them might have worried they might not be allowed to do. That is the result.
Matt Green: That is exactly the point. A court has to make that decision and prior to that, everything could be. Someone could say, “It’s property until a judge tells me it’s not”. It could get to a place whereby we live in that world of uncertainty where someone could argue, for instance, that data is property until a final determination by a judge is made. At what point do we stop asking a judge to make the decisions as to whether things are property?
Lord Sandhurst: Can I ask the professor next?
The Chair: Just before we do that, this is obviously an important point coming from you, Mr Green. I cannot say you have persuaded me at this stage, but, if you would like to come back referencing the case you referred to and making your argument in the context of the current wording of the Bill, I promise we will have a look at it.
Matt Green: Yes; that is very kind, thank you.
Lord Sandhurst: Professor Schafer?
Professor Burkhard Schafer: On your precise question, that is outside my field of competence. I have a mortgage; that is about as far as my understanding goes.
Lord Sandhurst: You have an asset.
Professor Burkhard Schafer: I have an asset, yes. The only thing I would say, though, is that I am not sure to what extent the increase or decrease of certainty has to do with the property Bill or what will happen afterwards. My understanding would be that this merely enables banks to decide that they can take this risk to consider crypto as a security, but it does not force anyone to do that. My feeling here would be that nothing too bad could happen, simply because this is only the first step and then it pushes the ball, so to speak, to the relevant sector—the sectoral regulators as well. It enables a discussion but does not foreclose it. That would be my feeling, but that is a bit off the cuff.
Jonny Fry: My concern would be that if the digital asset is deemed to be unique—say that I have digitised this pen and it is this pen that is unique. If I have an identical pen—
Lord Sandhurst: You mean the particular thing is unique, not the particular class of things.
Jonny Fry: Let me give you an example of a central bank digital currency. I put £10 in a central bank digital currency then you put in £10, and we ask Mr Green or an independent custodian to look after it for us. When I get my £10 of digital currency back, I do not expect to get my unique £10; I expect to get £10 of the asset back.
Lord Sandhurst: The value.
Jonny Fry: That is how securities work and how custodians commingle. They have omnibus accounts. If this means that if you put in £10-worth of a digital fund—a digital equity or property, or whatever you have digitised, i.e. a digital asset—you expect to get that back, it runs a coach and horses through the current financial system. It will mean that you have to have individual, separate accounts for every single client and asset to ensure that they get that unique digital asset back. We need to be mindful of that because I am not sure we really want to do that.
Lord Sandhurst: That is not what the Bill says, is it?
Jonny Fry: My concern is that there perhaps needs to be a bit of clarity. I will give a different example. The UK law on proceeds of crime that came into force earlier this year says that the law enforcement agencies may seize and destroy a digital asset. In the blockchain money market fund, all the assets are just invested in US Treasury securities. The paper version has more legal protection than the digital version because the police can come along to seize and destroy a digital asset, which is what it is. Having been an asset manager, I do not know how they would destroy that asset. They would have to go to BlackRock and say, “Please can you destroy it?” It is an unintended consequence of that thing. I am concerned that we may well see something like that, unless there is a bit more clarity on that.
Lord Sandhurst: If there are two routes, the courts will look for the less harmful one, will they not?
Jonny Fry: Yes, but under the UK’s law on proceeds of crime, you do not need to go to court to seize and destroy the asset. That is my point.
Lord Sandhurst: Do you have additions that you would like to see made?
The Chair: I think this point is the witnesses’ chance, in the minutes we have left, to address the government Minister who is taking the Bill through the Lords. He is also a member of this committee.
Q36 Lord Ponsonby of Shulbrede: Do you think the Bill can be improved, and, if so, how?
Matt Green: I just have one word. I took it from the website. I apologise if I confused “is” and “will”, but there needs to be a softening of the language to “may” so that until we get to the point where a decision-maker is able to make a decision, it is less certain. I know we keep going back to that word, but it is helpful to be less certain until a decision is made by a decision-maker. So I would change the word “is” to “may”.
The Chair: To “may not be prevented”.
Matt Green: “May not be prevented”.
Professor Burkhard Schafer: For me, the contrast to a certain extent is with UCC Article 12, which is what the Americans have been doing. That is very prescriptive and detailed; I do not think we want to go in that direction. I prefer the more open-ended approach that has been taken, but it removes quite a lot of the original context of this discussion. It no longer says that, in deciding whether something qualifies as property, the conditions that the commission initially discussed—rivalrousness and control—have to be taken into account. It might go a bit too far to strip out the context, especially given the reluctance of some of our judges to go to travaux préparatoires, the background of the Act. Lots of people who I spoke to from the industry side were really impressed by the consultation. They felt that it had a high level of technical competence. The commission really understood how these things work and they were very happy. Now they see something that loses that to a large extent.
One thing one could do is that in making the decisions, the court may consider some of the original benchmark criteria such as rivalrousness, control and so on, or, to be even weaker, look for some good blueprints such as in the Contracts Act 1990 that says “without prejudice to any practice of the courts”. They may consider in this case an academic paper that was officially communicated. There should be something to remind people that what is at stake here are the technical affordances of the digital asset: the way it behaves and the way it is programmed.
The courts may, for instance, consider any guidance or documents provided by UKJT, the soon-to-be-created expert group. They may consider relevant industry standards—something that directs industry towards what sort of evidence we would have to create and what sort of argument we should make in court to convince the judge that this falls under that third category, while emphasising that it is a question of technical affordances. It is not an economic, environmental or ethical question; it is really about how the digital asset behaves, how it is programme and what level of control it gives. I would probably add “The courts may consider” and then a wish list.
Matt Green: Are you talking about the indicia in the commission paper? It was “This is what it may look like” rather than hard criteria.
Professor Burkhard Schafer: Yes, exactly: “Something like this will be the things that will play a role”. This is the argument you can make, and as a programmer or a developer, I would then be prepared for that and know that I have to demonstrate certain types of affordances at least to make this argument. I might not win it on that ground, but I now know what I have to do.
Jonny Fry: I would like to reconfirm that the Bill will not change the nature of the actual asset in the way that it is treated, from a legal point of view. The asset is the asset. If we go back to a fund, an equity or a bond, that does not change. Just because it is available in a digital format, the rights should not be influenced because, whatever the medium, the way in which it is moved around or stored, the asset is still the asset. I see that very much as the mechanism. The digital thing is only there because it can then be used, and traded and managed, more efficiently. I would like to see some sort of clarification on that basis.
Lord Sandhurst: Just listening to you, we are learning as we go along. If something is already there, such as an investment trust or whatever it is, but it decides to move on to a blockchain asset, the fundamental assets are the same with the existing rights. Surely, this Bill is aimed at things that are not, so to speak, a new way of dealing with an existing recognised form of property, but with new forms of property that we have not yet contemplated. Am I right or am I wrong? The Minister may wish to clarify this.
Jonny Fry: This is the problem. When you talk about this subject, it is not education; it is a sort of re-education. A digital asset encompasses the spectrum of assets that are held, stored and traded digitally. If we are talking about crypto assets, that is a subclass, but we are now talking about the digitisation of assets that are much more tangible and real. Just because they are now being exchanged digitally, it should not impact on the underlying asset and its rights, the way they are stored and things like that.
Lord Sandhurst: That is what I thought. I have my property rights; it is just that they are being stored not on a piece of paper but somewhere else.
Jonny Fry: But that is my point. Now, because they are stored somewhere else, you have fewer rights.
Lord Sandhurst: Do I?
The Chair: No, keep going. One last question.
Lord Sandhurst: I do not understand that.
Jonny Fry: To be fair, that is mainly because of the Proceeds of Crime Act. It says that, if they are held on a DLT or blockchain, law enforcement can come and seize them without a court order. If they are not stored that way, it cannot do that; it has to go through the courts.
The Chair: Thank you all very much. There is a lot to think about in this two-clause Bill—both what is and what is not in the Bill, as you have indicated to us. We are really grateful for your time. Thank you so much for coming along.
