12
Examination of witnesses
Matthew Hoyle and Adam Temple.
Q50 The Chair: Welcome back to this meeting of the Special Public Bill Committee on the Property (Digital Assets etc) Bill. We will resume our evidence session with two members of the Bar, Matthew Hoyle and Adam Temple. I do not know if either of you have any particular interests that you wish to declare, in terms of any written submissions you might have presented to the Law Commission or anything else.
Adam Temple: Yes, we both were authors on the Joint Commercial Bar Association and Chancery Bar Association submission to the Law Commission, and we are both practising barristers and, therefore, have engaged in various things connected with crypto in that context.
The Chair: Anything you want to add, Mr Hoyle?
Matthew Hoyle: No, that is pretty comprehensive.
Q51 The Chair: We will go straight into the questions. They are very similar to the questions we asked the first panel, and you had the advantage of sitting through that. The first question, one of the central ones, is: what useful purpose or purposes, if any, do you think would be achieved by the enactment of this Bill?
Adam Temple: I think it was fairly clear from this morning’s session and maybe more generally that this has come down to almost an argument about labels, this debate between the narrow view of a thing in action and a wider view. What this Bill seems to be doing is perhaps prejudging some of that debate. I know the Law Commission says it is not intended to do so and that it could still be found that a digital asset is a thing in action, but it is setting up this idea that those two categories are not comprehensive and, as we heard from Professor Stevens, that presupposes the narrow definition of a thing in action. If that is what Parliament wants to do then that is a benefit, but if you take a view that that is misjudging the label, it is potentially harmful.
The Chair: In your view, is it a good thing that there should be a third category of assets—I will avoid the incomprehensible Latin—or do you think that it is perfectly possible to shoehorn all types of property into one of the two existing or classic categories, the thing in possession and the thing in action?
Adam Temple: It is clearly possible to do either of those two things. It comes down to one’s conception of that label. If you have the Australian view, the Singaporean view or the Professor Stevens view, you say that the definition of thing in action is anything that is not a thing in possession, in which case there is no problem putting all of these new ideas into that category if you decide that they have property rights.
I have to say that from my perhaps law school conception of these things, I have always understood a thing in action to be, on the narrower view, a right against a person enforceable in court. There may be some edge cases. Some of the Australian cases refer to things such as gilts, which you could not enforce in court. They were still expectations from a counterparty, even if you could not enforce them in court. That is still, I think, within at least the spirit of the narrower conception rather than the wider conception.
If you get into the wider conception, you just say, “If it is property and it is not in possession, then it is a chose in action”. I do not know how significant the problem is, but it is one of those situations in which the law would be using labels that no longer fit what is in the tin because it would not be “in action”, in the sense that you have no action against a third party for the specific right that you are trying to enforce. You would have other actions against people who steal it from you and so on, but the label would no longer fit what is inside the category.
The Chair: You said the Bill prejudges the issue, but one person’s prejudging is perhaps another person’s provision of certainty. Do you think there might be any advantage in terms of reducing the complexity and expense of litigation in this jurisdiction to the Bill?
Adam Temple: The starting point is that the Law Commission says it is not doing that. The Law Commission says it is not prejudging whether these digital assets are category A, category B or a third category. They would say that is not what they are intending to do. That is something that the common law can do.
My concern is that, in a sense, by the back door, this is prejudging it. One of those is a question of construction, in the sense that if you read it as saying a thing that is digital in nature is not prevented from being the object of personal property rights merely because it is neither A nor B, then it might be read as saying it is neither A nor B.
The Chair: Is not one of the points of this to reduce the complexity and expense of litigation? If the Bill makes it more difficult—some would say effectively impossible—to argue that there is no third category, then does that not simplify the process of litigation, or are you saying it makes it even more complicated? Maybe, Mr Hoyle, you would like to come in on that.
Matthew Hoyle: It might be useful to hear what a judge has said about this after a full trial on the merits, “The Law Commission’s draft Property (Digital Assets) Bill does not seek to say whether crypto assets, or certain classes of them, are property. It simply clarifies that something can be property that is neither a chose in action nor a chose in possession”. Assuming the Bill became law, it is not clear what the judge would be expected to do, given that Parliament would have spoken but would not have resolved the types of concerns that Professor Grower and Professor Stevens raise.
The Chair: The judge does not agree with Mr Temple that this Bill prejudges anything.
Matthew Hoyle: That judge in particular did not. Another judge might say, “This is a clear statutory steer”. What this Bill certainly does not do, I do not think, is on its face clearly resolve that question. It leaves open the question of whether an asset is a chose in action, a chose in possession, or something else. As the judge has said, he had to go through a full argument on this question and eventually came down on the side that it was a third thing, but he did not see the Bill as providing any certainty at all. Certainly, if I were asked to litigate this question, I would be saying that the Bill does not decide the point, it merely gives the option, and it is for the court to decide. That question could easily go all the way to the Supreme Court.
The Chair: Am I summarising right that you both disagree with Professor Gullifer that this Bill avoids the spectre of a dichotomy where only two categories of property are involved, if I have correctly summarised that, and that you both disagree with Professor Fox, who says that it will remove some litigation uncertainty? I do not hear much agreement with either of those propositions.
Adam Temple: The stated purpose of the Bill is, as we have heard, essentially to remove the ability to rely on Lord Justice Fry in the Colonial Bank case. It is fair to say that it probably would remove that paragraph from one’s skeleton argument. You would not be able to say that it is prevented from being a property right because it is neither A nor B. It would do that one thing.
Now, as to whether that would lead to a different result in any case I am pretty doubtful, because I would have to persuade a court, first, that Lord Justice Fry was binding on it in some way, and, secondly, that the court could not force it into the chose in action box in the way that the Australian and Singapore courts have. It seems incredibly unlikely to me that in any particular case it would lead to a different result.
The backdrop to all of that is that there might be a case, let us say, where this complicated matters, but the whole ethos of the Law Commission report is to trust the judges to get it right. I do not understand why this point is something where we cannot trust the judges to get it right, but everything else we can.
The Chair: You do not think it would make much difference?
Adam Temple: I do not think it would make much difference.
Q52 Lord Cryer: You have touched on this already. Will there be any harmful consequences arising from this Bill, and what will they be?
Adam Temple: The classic phrase now is the unknown unknowns. If this Bill does just achieve the very limited purpose for which it is stated—that is, to remove reliance on that one dictum—then it should not have any massive negative consequences. In fact, if, as most people seem to agree, it is merely stating what the law already is, then it should do nothing. I query whether it is worth having a Bill that does that.
The problem with any statute is that it will give rise to argument. I am not necessarily saying that the argument I started with is the correct analysis of this Bill, but it would be open to someone to argue that it is predetermining that a digital asset is neither A nor B. More generally, one just does not know what people will try to force into these words over time. The risk is not quantifiable but that, in a sense, is the very risk that I think you can be concerned about.
Matthew Hoyle: As we have heard from the members of the previous panel, obviously what we are all focusing on when we look at this Bill generally is crypto assets. However, as Professor Gullifer said, the Bill in theory goes much wider than that and relates to all things. What is a thing? Parliament is a thing that is not the building in which we sit. It is a separate institution from that; “things” can encompass anything. Indeed, it seemed Professor Gullifer was saying that the purpose of this Bill is to be open-ended.
Open-ended law reform, playing around with what are pretty fundamental concepts of the common law, which have been developed over millennia and which are assumed to fit together, can have massively unforeseen consequences in contexts people did not foresee. The last major reform of English property law was 100 years ago now, the Law of Property Act 1925. That is a voluminous Act that was based on decades of legal thinking, and even then it generates problems. Literally yesterday, the Supreme Court had to decide an issue arising from the drafting of the 1925 Act that nobody has foreseen in 50 years. The unexpected consequences are unknown.
Lord Sandhurst: Looking at possible benefits, Sarah Smith, on behalf of the Financial Law Committee of the City of London Law Society, argued that this new definition, or additional definition, will be helpful when it comes to designing, if I can use that word loosely, new forms of security for new types of things—I use the word “things” neutrally—that are being created that are not susceptible to bailment, or are not easily susceptible to the concept of a charge or other forms of security. Do you see that as an advantage? That is the opposite of a disadvantage, but it is helpful to know whether there are any pluses.
Matthew Hoyle: Adam and I are litigators, and our experience is principally in the litigation space, the dispute space, rather than—
Lord Sandhurst: You might have to litigate about a protection of rights.
Matthew Hoyle: What I was going to say that is thus far, litigators have not seen issues of a transactional nature with crypto assets and other kinds of assets throwing up problems. The market appears to be carrying on pretty well, so far as I can tell. Obviously, you have had Sarah Smith’s evidence and other written evidence on that.
As Rob said, essentially all the cases that we see on this thus far, and for six or seven years now, are fraud cases, which I do not think this Bill would have any impact on one way or another. It may be an advantage, and you have heard the evidence of people better qualified to speak to that, but certainly the evidence from litigators is that there are not lots of cases where securities are collapsing because of misunderstandings.
Adam Temple: From my perspective, some of these ideas or questions show the chameleon-like nature of this Bill. On the one hand we are told it does nothing, really—it removes reliance on one line from an 1895 case—and in another breath we are told it will assist in putting us at the forefront of crypto.
The Chair: Just on—sorry, keep going.
Adam Temple: I was just going to say that that is, in a sense, the nature of the unknown unknowns and where they will lead you, because it shows people projecting on to it beyond the conception of the Law Commission.
The Chair: Thank you very much. Lord Stansgate has to go shortly but he would like to get a question in first.
Q53 Viscount Stansgate: Very quickly, can you tell us in your view whether this Bill will be likely to affect, and if so how, the attractiveness of London as a place to do business and to deal with disputes arising out of digital assets?
Adam Temple: In a sense I will piggyback on Matthew’s answer from a moment ago. Because we are not the transactional lawyers, we do not tend to be involved in the drafting of the contract and, at that stage, whether people will choose English law or not. In terms of litigation, I do not think—certainly to date—that the litigation we have seen would be driven by questions that are addressed specifically by the Bill. It is mainly because you have a UK-based person who wants to use an English court. Potentially, if you are writing a contract this could be something you think about, whether positively or negatively; it depends on your view of what it does.
Matthew Hoyle: Certainly, in terms of litigation, the reason that people come here if they are coming here to litigate their crypto fraud disputes, which they almost all are, is because we have a respected judiciary, we have a sophisticated legal sector, and we have pretty powerful court orders in the forms of freezing injunctions that travel around the world. I do not think any of those things would be affected at all, whether this Bill passes or not. Those things will remain the same.
One thing I will say on top of that, though, is the most recent issue, which Professor Sheehan touched on, in the case of D’Aloia, the question for the judge was: how easy is it for a victim of fraud to get their crypto back? The answer appears to be “quite hard”, in terms of identifying what happened to your crypto, if that is even possible. That is the big issue in the crypto fraud litigation sphere. Again, this Bill will not address that at all. I do not think it will have any impact on that question.
Viscount Stansgate: Thank you very much.
The Chair: Just following on from that, can you give us some sense from your position on the front line of how difficult it would be? If there is to be a third category of property and this Bill, in effect, gives the green light to it, how long would it take and how difficult would it be to work out the characteristics of this type of property, the remedies that exist in relation to it, what things fall into it, and what things do not? Is this something that could be relatively easily done by a few robust judgments, or is it a huge area of work that will keep those of us who are members of the Bar potentially occupied for years to come?
Matthew Hoyle: It depends how creative your lawyers are, is one cynical answer to that. It depends on the way the court approached it. If the Supreme Court simply said that the category of chose in action is too narrow on its traditional understanding but we will leave that as it is and we will say that these third things are just an expanded form of chose in action, in which case basically all the rules that normally apply to choses in action will apply to these third things, that would be relatively simple.
Alternatively, the courts could say that the third thing is totally different or a hybrid of the two. As I say, the Law of Property Act was passed 100 years ago and we are still arguing about its provisions today, and we will be doing so, no doubt, into the future. It depends, but there is a potential for a lot of litigation arising out of a third thing.
The Chair: Could that potential be reduced if Parliament were to legislate in much more specific terms?
Matthew Hoyle: I think that would be correct, yes.
Adam Temple: Yes.
Lord Shamash: Sorry, Mr Temple, did you want to—
Adam Temple: I was just going to say that there are so many different areas where questions of property come up. I do a lot of financial services work, and I did a quick search through the Financial Services and Markets Act on the word “property”, and you get it in a variety of different contexts.
It may be that we get to a position where the answer is that they are objects of personal property rights for some purposes but not necessarily for all, because they do not have the features that you need to have for it to be—the obvious question is conversion, although people probably agree they are not.
The Chair: Dangerous territory even for Parliament to step into because there are so many imponderables?
Adam Temple: There are so many areas where it comes up that it would be quite complicated. We may just get a nice blanket answer that says, “They are property wherever the rules are capable of applying”, or something.
Matthew Hoyle: The definition of “property” in the 1925 Act is, “It means this unless the context demands otherwise”, which is a very lawyer’s answer. There are specific statutory rules already relating to FiSMA and relating to the proceeds of crime. Who knows how this Bill interacts with those? I think the courts would give a pretty sensible answer, but specific legislation has already been passed to deal with certain issues arising from crypto assets and it is unclear how this Bill takes account of that.
Q54 Lord Shamash: As you know, the Bill applies to things that are digital or electronic in nature. I was going to ask you what you understood, both of you, about “thing”, but I would like specifically to come back to the point I raised in the first session, which Professor Stevens responded to, about truncating the wording in this legislation.
It should say simply, “A thing, including a thing that is digital or electronic in nature, is not prevented from being the object of personal property rights”, full stop. Forget about the rest: “merely because it is a possession or in action”. Is that workable? It will be much easier, and we do not get into this debate. It just says that something, including electronic or digital, is capable of being property, full stop, end of it. What is your response to that? I got a positive response from Professor Stevens, who is still sitting in the back there. Will I get one from you?
Adam Temple: It would be cast entirely in the negative and therefore, in a sense, it would give you no answer at all. What this act is doing—or at least what the Law Commission says it is doing and on its face it does—is address that one dictum from Lord Justice Fry, who says, in essence, that if it is neither A nor B it cannot be property. I am just wondering where it would leave you, with an entirely negative sentence.
Matthew Hoyle: I would understand such a short Act probably to be interpreted as a statutory confirmation that the concept of “things in action” should be understood more widely than the traditional understanding, which seems to be causing so many problems. The purpose of this Bill was to deal with not only crypto assets but, as Professor Gullifer has said, carbon credits or milk quotas, things that the courts have already sort of said are things in action, but maybe not on the definition you adopt. A shorter Bill that reduced the amount of language lawyers could latch on to could be a good thing, but, as Adam says—
Lord Shamash: Ultimately then you would leave it to the case law to develop over a period of time, which is what will happen anyway, but it would be much easier if we go down a narrower path, which is what I am suggesting. It is just an idea. I am not saying that I am hung up on it.
Matthew Hoyle: That is my instinctive reaction but, as I say, it is on the hoof, as we say in court.
Q55 The Chair: Before we go on to the last couple of questions, you mentioned the dictum of Justice Fry from, I think, 1895. What I am picking up from both of you is that it is still a live issue in the courts as to whether that dictum is correct and whether it is necessary—as they appear minded to do in some other jurisdictions—to shoehorn everything either into a thing in possession or a thing in action. Of course, one of the declared objectives of the Bill is to save people from having to address that argument. Is that correct, or is the position—particularly after the case law of the last few years—that no one takes the dictum very seriously?
Adam Temple: One of the issues we have thus far is that no one has tried to, I do not think, in all honesty. You see a case such as D’Aloia, where you have someone saying, “I want my crypto back”, and you have an exchange that lives on crypto. They both want to say it is property. Most of the cases other than that have been applications for injunctions in a similar context: someone who wants their crypto back against an exchange. I am not aware of it having been pushed, certainly in the English context, that it is not property.
I do not think you could say confidently that someone whose business was on the line might not pursue the argument. They would have to get through both that argument, though, and the second argument that the Australian and Singaporean courts are wrong to put it into the second category. Where we are right now, it would be an uphill argument even on the first stage because you have Mr Justice Bryan addressing it very directly in AA v Persons Unknown, and you have the Court of Appeal in the Tulip Trading case relying on AA. I think it is fair to say that the Court of Appeal does not directly cite Colonial, and you can have arguments about whether that is per incuriam—that is, not with the full possession of all the relevant case law—but that would probably be wrong because they had obviously read AA v Persons Unknown, which referred back to Colonial Bank. It should not surprise you that people are capable of arguing quite a wide variety of points.
Matthew Hoyle: At least on the Bill as presently drafted, if you get past the first stage you are still in the second stage: what are these things, and are they things in action or not? That question will not be resolved and that is in many senses the meatier question, as Adam said.
Lord Shamash: If you take that out of the legislation, you do not have to have that argument.
Lord Clement-Jones: Can I ask my “thing” question?
The Chair: Yes, quickly ask your “thing” question.
Q56 Lord Clement-Jones: I have a particular example of what might or might not be a thing, and your view would be extremely useful. If, for instance, I leave in my letter of wishes or my will the right to access the password on my computer and all the other passwords that give access to my emails, the music on the computer and whatever digital content there is, is that a chose in action, is it this third way or is it nothing at all?
Matthew Hoyle: Well, it is a thing, clearly. Sorry, I will rephrase that. Your password is a thing. Does anyone have a right to that thing? I am not a testamentary lawyer. I am not a chancery lawyer who deals with that stuff. I would assume the answer is no.
Lord Clement-Jones: Use any alibi you want.
Matthew Hoyle: The answer to that is no, at the moment you do not have a right to get hold of someone’s password. Could it be seen as a third thing under this Bill? Potentially, but the court might say that if that is right, that may render all information property, and English law to date has taken a fairly robust view that that is not the case. For various different reasons to do with fiduciary obligations and so on, the English courts say that information is not property unless it meets one of the specific categories of intellectual property that Rob has mentioned, or, for example, confidential information has its own form of protection. We are talking about very narrow categories of information.
There is no general principle that information is property and a lot of English law, as it is now, is predicated on that assumption. My instinct would be that a court would shrink away from a finding that could be understood to say all information is capable of being property of some kind, and they would say that this Bill is clearly more narrowly targeted at crypto and then potentially the kinds of assets that Professor Gullifer mentioned.
Q57 Lord Sandhurst: I want to ask you both about retrospectivity. The Law Commission has said that the Bill will have effect only from the date of its entry into force. First, in two parts, is it correct that if the subject matter of the Bill had been left to common law, the courts would have declared the law as it has always been? Let us deal with that question first.
Adam Temple: The answer to that is very straightforward. Yes. It is the declaratory theory of law. Everybody recognises it now as a fiction that the judges do not change the law, but once the judges say that the law is X, it is treated as always having been X.
Matthew Hoyle: Just to add on to that, it may not be regarded in that way in other jurisdictions that deal with English legal right in relation to third things, but the same would be true if the legislation was retrospective.
Lord Sandhurst: Yes. Are there advantages in the Bill having prospective-only effect, or would it be better for it to be declaratory and retrospective?
Adam Temple: This comes back to whether it is doing anything, because if it is not doing anything then it does not make any difference.
Lord Sandhurst: The Law Commission is saying this is prospective only, as opposed to the common law. Which would you prefer in practice?
Adam Temple: There is a line of thought that says that this Bill, if it becomes law, may impact on some settled understandings of things like collateral arrangements over digital assets. That settled understanding, as I have been informed because it is not my own understanding, is that they are treated as chose in action in the same way as bonds and shares. The concern from that perspective is that if this is changing something, it could upset arrangements around things like those collateral arrangements so that their contracts, which were on one basis, would be falsified. Now, of course that understanding may be wrong anyway, depending on the current case law.
Lord Sandhurst: If it is prospective only, it is implicit that these others—
Adam Temple: There would be, no doubt, arguments about what it does to those pre-existing contracts, but what it would allow you to do, if you were of the mind that it was changing the law from your current understanding, is enter into contracts from now—or from whenever the Act comes into force—knowing that is dealing with a new world. That presupposes certain things about this actually changing the law, but from the perspective of someone who thinks it is changing the law you would want it to be prospective only so that things you have previously done are not falsified by a retrospective law.
Matthew Hoyle: I agree with what Adam has said. I would only add to that that the power of Parliament to legislative retrospectively, undoubted as it is, one would think should be exercised with particular caution even if one cannot immediately foresee any problems it would cause, because it can cause significant problems if there are unforeseen consequences. As Adam mentioned, there may be existing arrangements that may be disturbed by a retrospective Bill of this nature. I think most people think that is not the case, but you would not only get into arguments about “Is that attractive for business?” but, potentially, human rights arguments about people having their property retrospectively taken away from them and having acted in accordance with the law as it stood.
Generally, retrospective legislation is introduced to deal with a specific problem, a specific court case that has overturned a settled expectation. The thing about this Bill in general is that it is not being brought forward to deal with—well, one 1895 court case, but it is not being brought forward to deal with any particular, surprising judicial decision, which is the normal subject of retrospective legislation.
Lord Sandhurst: I take it you two would both leave it as a prospective-only statute?
Adam Temple: I think so. There is one further point you might find interesting in this context. The Dubai International Financial Centre, as I think you have been told, has introduced legislation that is not dissimilar to this, although it says that a digital asset is intangible property. The case that came before the court was concerned with issues that pre-dated that Act. Justice Michael Black KC had to then work out what to do without the Act and, I think, more or less reached the same conclusion anyway, which goes to show that in reality, I suspect, if this is seen as clarificatory, the courts will understand that. It would be surprising if they reached a very different conclusion after the Act than without.
Matthew Hoyle: I would also say there has been some concern raised that if this Act is seen as declaratory in one sense, it might be understood as saying that the law was different beforehand. It is unlikely that a court would reach that conclusion. We have several declaratory provisions in English law—for example, in the Land Registration Act 2002—which was understood, in effect, to declare what was already the case. The courts did not see that as a statutory direction that they had to treat the law as having been different beforehand. If the courts understand—as they inevitably will, given the Law Commission report and these proceedings in Parliament—what the nature of this Bill is, I think it is very unlikely that they would read it as a statutory instruction to treat the law as having been different previously, which was not the case because they clearly do recognise crypto as property.
Lord Shamash: Can I just ask one point? There is a great deal of difference from the Land Registration Act. The stuff we are dealing with now is moving so fast. I just wonder whether the declaratory route is the only route because retrospectivity would be a nightmare. Things are changing every moment and I just wondered—I think this is what Lord Sandhurst is touching on.
Adam Temple: It depends, I suppose, how you see a declaration. If it is saying the law has always been X, then that would be seen as potentially retrospective, if someone took a view that the law had been different previously.
The Chair: This is fascinating. Mr Hoyle, if there is something you want to add, please do, but otherwise we have to go on to our last question.
Matthew Hoyle: Extremely quickly, my sense is that prospective is better in a fast-moving area with lots of money on the line.
The Chair: We are very fortunate to have on this committee Lord Ponsonby, who is the Minister who will take this Bill—indeed, is taking this Bill—through the House of Lords. Lord Ponsonby, would you like to ask the last question?
Q58 Lord Ponsonby: It is a simple question. Do you think the current version of the Bill could be improved, and if so, how?
Adam Temple: Assuming it is going to go ahead in some form like this, my inclination would be to delete the words in parentheses. It would leave a slight oddity with the title, but the point I was getting at earlier in terms of construction is that by including those words in parentheses it might be read as saying that a thing that is digital or electronic in nature is neither A nor B. If you get rid of those words, all you have is a statement that a thing is not prevented from being an object of personal property merely because it is neither A nor B. I think it would remove an argument that it is predetermining that question.
The other thing—and I do not know whether anyone has commented on it—is that the Long Title of the Bill reflects, I think, the previous version of Clause 1, which was talking about capability, which is no longer there in Clause 1. The other issue I have with the Long Title is that it says it is making provision about the types of things that are capable of being objects, and I am not sure that is what this Bill is doing. It does not tell you what types of things are capable of being—
The Chair: Well, it does not stop you making the point, which, if I may say so, seemed to me quite a cogent one. What about you, Mr Hoyle?
Matthew Hoyle: Either Adam’s suggestion, dealing with the more specific text of the Bill, or Rob and Lord Shamash’s suggestions—those are what I would suggest. On the Bill as drafted, I would say, as I have already said, some consideration might be given to other statutes that already engage with crypto assets or with property and how this Bill is supposed to interact with those. That is quite a large task and potentially not one that can be accommodated within this Bill, but if there an area of future litigation risk from this Bill that is what I would think it would be.
The Chair: We are extremely grateful to you both. You obviously have very busy practices from which you have taken a morning to come and talk to us. We will think carefully about what you have said. At this point we release you, with our thanks.
