Written Evidence by Digital Pound Foundation (DAE0026)

The Digital Pound Foundation (DPF) is a not-for-profit organisation that was incorporated on 22 June 2021 to work with a variety of stakeholders and participants towards the implementation of a well-designed digital Pound, in both publicly and privately issued forms, and an effective, diverse and competitive ecosystem for new forms of digital money. 

The DPF’s goal is to act as a catalyst among stakeholders across the public and private sectors, including academia to explore and articulate the case for a well-conceived digital Pound, in both publicly and privately issued forms. Beginning with a programme of research, advocacy and multi-stakeholder engagement, our work will progress through to regulatory engagement and industry testing, via support for practical sandbox experiments, proofs-of-concept, and pilot work, as needed. The DPF will support and complement other projects and associations having similar objectives, including the Bank of England’s consultation framework and Engagement and Technology Forums, existing industry associations, and private sector initiatives. 

Our intention is to create an inclusive, well-functioning forum for collaboration that looks at the implementation of a digital Pound from a holistic perspective, addressing narrow questions, such as the design, implementation and successful adoption of central bank digital currency (CBDC), and the wider impact of a digital Pound, in both publicly and privately issued forms and on the UK’s economy and society. We will advocate and provide constructive input on vital considerations such as privacy, financial inclusion and technology inclusion, and will consider the digital Pound’s role in enabling the UK’s transition to a digital economy and underpinning a more efficient, sustainable payments and financial markets infrastructure. 

Specific Responses

These responses are being provided by the DPF through its Policy, Legal and Regulatory Working Group.

1. Please could you summarise your view on the Bill in fewer than 300 words?

The DPF is very supportive of the Bill as it aims to remove any residual uncertainty that digital assets can be the objects of personal property rights under English law. This clarification will help support the development of a UK digital pound.

However, we think the Bill, short as it is, could be amended (see response to question 4) to ensure that it achieves this certainty but in a manner which will avoid any potential risks associated with the current drafting and approach. These risks are detailed in response to question 3. In summary:

1. The Law Commission's Supplemental Report stated that "the Bill is not strictly necessary because it almost certainly confirms what the common law says". However, this is not strictly true because the Law Commission goes further and recommends that the Bill establish a third category of personal property to provide certainty for digital assets businesses. We are concerned it may have the opposite effect – the UK market may face a (potentially extended) period of legal uncertainty whilst the courts establish a new body of rules and remedies for digital assets as "third category" personal property. 
2. The creation of a third category of personal property for digital assets is inconsistent with other common law jurisdictions (e.g. Australia, Singapore and New Zealand) and could therefore make the UK digital assets industry less competitive internationally. 
3. We have noticed recent case law in the UK where a stablecoin was, in effect, treated as non-fungible. See D'Aloia v Persons Unknown [2024] EWHC 2342 (Ch). The treatment of a stablecoin as non-fungible undermines an important characteristic of stablecoins: if they are to be treated in a similar way to money, stablecoins must be fungible. The judge intimated that this (orbiter) finding was influenced by the Law Commission’s work.

2. Do you think that the Bill, in its current form, is necessary and effective?

We are very supportive of the Bill insofar as it removes any residual uncertainty that digital assets can be the objects of personal property rights under English law. We think it is necessary to help put beyond any doubt that digital assets can be property under English law.

However, we would prefer that the Bill leave to the courts what type of property digital assets should be and it should be open to the courts to treat digital money, for example, stablecoins, as choses in action rather than a new "quasi-tangible" type of property. The current draft wording of the Bill seeks instead to create a new, third category of personal property which could have a number of unintended consequences. We have outlined our reasons for this in response to question 3.

We think these issues can be addressed with minor amendments to the Bill, which would then enable the Bill to achieve its critical aims in removing any residual uncertainty that digital assets can be the objects of personal property rights under English law, without introducing issues that might impede the development of a digital pound.

3. Would the Bill have any negative or unexpected consequences?

The Law Commission's Supplemental Report made clear that it is intended to establish a third category of personal property. We are concerned that this approach will lead to unintended, adverse consequences. Instead, we think the Bill should be tweaked so that it confirms digital assets can be the objects of personal property rights without creating a new third category of property. This way, the industry would take all the benefit of the Bill without any of the risks that might be introduced as currently drafted.

The issues associated with creating a new third category of property are:

1. What rules and remedies apply to any new third category of personal property? We are concerned that, following the enactment of the Bill, there will be a period of years where it is not clear what rules and remedies will apply to digital assets. For example, what remedies does a person have if their digital assets are stolen or misappropriated? What steps need to be taken to perfect security over or in relation to digital assets? If digital assets are classified in one of the existing categories of personal property, then the existing rules and remedies apply. If not, then the courts need to develop new rules. Even if the courts develop the rules and remedies by analogy to the rules and remedies applicable to the existing categories of personal property, this will take time. In the meantime, there is a serious risk issue for businesses attempting to innovate in the digital assets industry.
2. This approach will make the UK an international outlier. We are aware of various other common law jurisdictions that are treating digital assets as things in action, such as Singapore, New Zealand and (most recently) Australia. The position in Australia follows extra-judicial commentary by Mr Justice Jackman and the decision in Re Blockchain Tech Pty Ltd [2024] VSC 690, where the judge concluded that Bitcoin is a thing in action (not a thing in possession or some other category of personal property). See paragraph 389 of the judgment:

"As a result, I find that a person’s interest in Bitcoin is property. It is not a chose in possession as it is intangible. It cannot be possessed. It is a chose in action. As I have already said, it is well established in Australia that a chose in action comprises a heterogeneous group of rights which have only one common characteristic in that they do not confer the present possession of a tangible object. That is the case with Bitcoin."

3. We have noticed recent case law in the UK where a stablecoin was treated as non-fungible for the purposes of the "following" analysis, whereby the judge sought to follow an individual USDT into and through a pool of digital assets recorded in an omnibus wallet/address: see D'Aloia. We are concerned that this obiter finding demonstrates the direction of travel the courts may adopt if Parliament confirms (by enacting the Bill as is) the Law Commission’s intention to create a new “quasi tangible” third category for digital assets. Courts may feel restricted from treating digital money as fungible chooses in action. That cannot be the right result for digital money, and would stifle the potential growth of the digital pound. This analysis could also have implications for existing digital assets arrangements that are based on the assumption that digital assets are fungible.

This does not undermine the importance of the Bill in removing any residual uncertainty that digital assets can be the objects of personal property rights under English law. With amendments to address some of these issues, we think the Bill is still an important piece of legislation.

4. How could the Bill be improved? How should it be amended to achieve this?

The Bill should be amended so that it achieves its primary objective of confirming that digital assets can be the objects of personal property rights under English law, but without the express creation of a third category of personal property. This way, the UK would be consistent with other common law jurisdictions and the industry would be able to continue applying the rules and remedies applicable to property today. This, in our view, would be the optimal form of the Bill to achieve the best results for the industry.

Section 1 of the Bill currently reads:

"A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—

(a) a thing in possession, nor

(b) a thing in action."

It should be amended so that, rather than referring to "neither (a) a thing in possession, nor (b) a thing in action" (which necessarily presupposes the need to create a third category of personal property for digital assets), it refers instead simply to the characteristics of personal property (as classically defined). For example, (1) replace the reference to "a thing in possession" with "capable of possession" and (2) replace "thing in action" with "right that may only be claimed or enforced by legal action or proceedings against another person or persons".

These drafting amendments would create the best of both worlds: it would put beyond doubt that digital assets, even if they are not constituted as rights enforceable by way of legal action or proceedings, can be the object of personal property rights, but without requiring the creation of a new category of personal property rights (and introducing the issues associated with that).

With this drafting, the courts would be able to treat digital money and other digital assets as things in action (dispelling the concern raised by the Law Commission that, despite contrary common law decisions, the English courts would interpret things in action narrowly).

If, in fact, the courts nevertheless determine that a third category of personal property is necessary (with all relevant materials and developments, some of which were not available to the Law Commission when preparing its reports or to the draftsman of the explanatory notes to the Bill), the revised drafting of the Bill does not prevent that.

In other words, the Bill (as amended above) would achieve what the explanatory notes to the Bill say: it would remove any residual uncertainty that digital assets can be the objects of personal property rights under English law – but it would leave decisions as to how digital assets should be categorised to the courts.

5. Should the Bill have retroactive effect?

We do not think it is necessary, provided the Bill is amended as we suggest above. This is because the amendment above will simply confirm that digital assets are property, and that point has already been recognised by other common law cases.

6. What implications could the Bill have for the development of this area of common law, both in England and Wales and in other legal jurisdictions?

See above in response to question 3.

19 December 2024

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