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

We support the Bill for the following reasons.

The Bill will enable the common law to develop in a coherent way. It will do this by clarifying that English law recognises a category of property other than things in possession and things in action. This is needed because cryptoassets are intangible assets with features that distinguish them from things in action in the traditional sense2. Putting all intangible things into a single category of things in action risks undermining the coherence of the common law and / or constraining the courts from developing appropriate rules for novel assets.

The Bill will not introduce any new areas of uncertainty. The courts will need to grapple with the distinguishing features of cryptoassets with or without the Bill. It does not necessarily follow that existing rules for things in action necessarily apply to all intangible things by reason of their being categorised as such. Some rules that apply to things in action in the traditional sense are not appropriate for other intangible things. The Bill will not undermine the ability for English law to uphold the commercial intentions of parties in the cryptoasset markets, including in security and custody arrangements.

The Bill will not cause England and Wales to be an outlier among common law jurisdictions. There is authority that suggests English law already recognises more than two categories of property (although there remains residual uncertainty which the Bill would remove). While consistency with other common law jurisdictions is desirable where possible, that should not be the prevailing consideration determining the evolution of English law.

We approve of the targeted drafting of the Bill including the decision not to prescribe the boundaries of any category of property or the consequence of falling within a particular category. These matters are better left to the common law.

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

Recent court judgments, such as that of the High Court in Fabrizio D'Aloia v Persons Unknown,3 do suggest that the common law already recognises more than two categories of property.4 This has cast some doubt as to whether the Bill is necessary. We have some sympathy with this line of thinking. Indeed, in our response to the Law Commission’s Consultation on Digital Assets (dated November 2022)5 we argued that:

Fry LJ’s dictum in Colonial Bank v Whinney6 was not good authority for limiting the scope of personal property generally;

there already exists at least one other category of property under the common law (whether or not it is a sub-category of things in action in a broad sense) containing intangible things that are

not things in action in the traditional sense, such as milk quotas, emission allowances, export quotas, waste management licenses and cryptoassets7;

the legal jurisprudence in relation to these things is underdeveloped and it is inevitable that the common law will need to develop further over time in order to plug that gap; and

statutory intervention was unnecessary.

However, it has become increasingly clear that there is a contrary view as to the authority and implications of statements in Colonial Bank v Whinney among some legal commentators. In particular, certain commentators have suggested that a consequence of Colonial Bank v Whinney is that there are only two categories of property and also that this dichotomy provides certainty as to the legal treatment of all intangible things. Some have inferred that all intangible things are subject to the same legal rules and principles that apply to things in action in the traditional sense. We do not agree with that, but the very fact that this has been raised may inhibit the courts from developing the law in a coherent and principled way. For example, the courts may feel constrained from recognising a legal basis for mechanisms of transfer in relation to cryptoassets that are already widely used in the market. This would undermine the predictability and commercial appeal of English law.

Given this, there is a risk of lingering uncertainty in the market which could take many years to resolve through the evolution of the common law. The proposed Bill will be effective in resolving the issue in a targeted and efficient way. It will provide greater clarity to the market and avoid unnecessary and unproductive debate, in the context of both structuring and disputes. For this reason, there have been requests from the judiciary that Parliament intervene to clarify the position.8

Would the Bill have any negative or unexpected consequences?

We do not believe that the Bill itself would have any negative or unexpected consequences, given the way that it has been drafted.9 We are aware of a number of concerns raised in the market which we do not share such as:

Claim 1: the Bill will inhibit the flexibility of the common law;

Claim 2: as long as all intangible things are classified as things in action there is more certainty as to what legal rules apply to them, whereas the Bill would undermine that;

Claim 3: the Bill would make England and Wales an outlier compared to other common law jurisdictions;

Claim 4: the Bill would create uncertainty as to the boundaries of property or the boundaries of particular categories of property;

Claim 5: the Bill will create or exacerbate uncertainties in establishing custody arrangements in relation to cryptoassets;

Claim 6: the Bill would threaten the effectiveness of existing security agreements in relation to things in action; and

Claim 7: the Bill will subject cryptoasset exchanges and custodians to onerous duties and obligations which they cannot contract out of.

We have outlined below why we disagree with each of these claims.

Claim 1: the Bill will inhibit the flexibility of the common law

Some commentators have suggested that, by removing the Colonial Bank v Whinney dichotomy, the Bill will have the effect of pushing the courts into treating cryptoassets differently from things in action, thereby reducing the flexibility of the common law. In our view, this concern is unjustified and, on the contrary, the Bill will preserve or enhance the flexibility of the common law.

First, the Bill has deliberately been drafted in a way that does not specify the criteria for qualification under any category of property, the number of potential categories available, or the consequences of falling within any category. It is left entirely to the common law to develop the law in this area in a principled way, free from the constraint of the Colonial Bank v Whinney dichotomy. We agree that certain digital assets may be accurately characterised as things in action. The Bill, as it is drafted, will not change that.

Secondly, while we agree that the Bill will likely embolden the courts to recognise certain objects of property as falling outside the two established categories, that will support the current direction of the common law rather than undermine it. See, for example, D'Aloia, in which the High Court decided that USDT was neither a thing in action nor a thing in possession, but rather a distinct form of property not premised on an underlying legal right, and applied existing legal principles accordingly.10

Thirdly, the Bill does not in any way inhibit the courts from drawing analogies with the law applicable to things in action (or other intangible things) where appropriate. It will simply free the courts from any constraint (or perception of any constraint) that they are bound by the limitations of the rules applicable to things in action, even where they are inappropriate.

Claim 2: as long as all intangible things are classified as things in action there is more certainty as to what legal rules apply to them, whereas the Bill would undermine that

Some commentators have suggested that, in the absence of the Bill, there would be a higher degree of certainty as to the legal treatment of cryptoassets on the basis that they would be treated in the same way as other things in action. Some also seem to suggest that it is preferable that all intangible things are treated in the same way. We disagree on both counts.

Regardless of whether the Bill is passed, the legal rules in relation to intangible things that are not things in action in the traditional sense are underdeveloped, and the common law will need to evolve to plug that gap. This is because, in some cases, the rules that apply to things in action in the traditional sense are inappropriate for other intangible things.

For example, while legal rights are capable of being transferred by way of legal assignment or novation, some other forms of intangible property (such as certain cryptoassets) cannot be, because there is no legal person to whom notice can meaningfully be served (in the case of a legal assignment) or with whom a new contract can be formed (in the case of a novation). Likewise, cryptoassets (like things in possession and unlike things in action in the traditional sense) are susceptible to the exclusive control of the holder from time to time, and it is possible to effect a change in exclusive control through a state change in the underlying ledger. A failure of English law to recognise this would be a failure of English law to keep pace with market innovation and could reduce the appeal of using English law to govern novel arrangements.

Given the characteristics of cryptoassets (including their susceptibility to control), there may also be merit in English law developing in a way that enables market participants to create control-based proprietary interests that fall short of ownership, where that reflects the intentions of the parties. For example, allowing for control-based security interests in relation to cryptoassets could potentially facilitate significant efficiencies in collateral management. Similarly, in a cross-border context, some jurisdictions may recognise a bailment-type interest in circumstances where they might not recognise an English law trust. Importantly, we see no reason why the prospect of the law developing to recognise the legal basis for such interests would prevent parties from taking security over cryptoassets by way of charge or establishing a trust over cryptoassets, as we will return to below.

If Colonial Bank v Whinney means that, currently, all intangible property falls within a residual category of things in action, it would nonetheless be necessary for the courts to bifurcate the legal principles applicable to things in action at least between those that consist of things in action in the traditional sense and those that do not, for the reasons just outlined. This is tantamount to acknowledging additional categories of property. That is because the mere act of categorising something as a thing in action would not have as a consequence the application of a consistent set of rules; instead, there would be sub-categories within the larger category of things in action. It is not fruitful to debate the difference between a new category and a sub-category.

Additionally, many of the legal rules that apply in relation to issuances, transfers, collateral arrangements and trust arrangements in relation to particular types of things in action have never turned on their classification as things in action, but rather on some other criteria. For example, the applicability of some rules relating to transferable instruments issued by a legal entity is determined by whether the issuer of such instruments is subject to corporate registration requirements under applicable company legislation, or by whether the instruments are regulated as transferable securities, or by whether the instruments fall within the scope of the legal framework for financial collateral arrangements. Any suggestions that rules applicable to financial instruments currently apply to cryptoassets by default, and that the Bill would undermine this, are therefore highly misleading. We return to the topics of security and trusts below.

We see no merit in classifying things as things in action if that label has limited legal consequence. That undermines the coherence of that single category and, in turn, the common law. We agree with the authors of the UKJT legal statement on cryptoassets and smart contracts that it is neither necessary nor useful to classify cryptoassets (as well as

certain other intangible things) as things in action, and that they are better classified as a different kind of property.11 The Bill will provide certainty on this issue.

Claim 3: the Bill would make England and Wales an outlier compared to other common law jurisdictions

Some commentators have suggested that the Bill would make England and Wales an outlier among common law jurisdictions, given that cryptoassets have been characterised by the courts as things in action in Australia12 and Singapore13.

The first point to note is that the jurisdiction of England and Wales has often led legal developments, and while consistency with other common law jurisdictions is desirable where possible, consistency should not prevail over the principled and coherent evolution of English law.

The second point is that Colonial Bank v Whinney has clearly influenced the reasoning in these decisions. That the courts in these jurisdictions have concluded that cryptoassets are things in action under a residual category for intangible things is not necessarily tantamount to rejecting the idea that it would be preferable to do away with the Colonial Bank v Whinney dichotomy.

The third point is that the courts in England and Wales have already recognised certain cryptoassets as falling outside the category of things in action, most recently in D’Aloia. In that sense, England and Wales may already stand out from other jurisdictions and the Bill will not change that.

Claim 4: the Bill would create uncertainty as to the boundaries of property or the boundaries of particular categories of property

The Bill does not raise any new uncertainties that did not already exist. There is already a degree of uncertainty in relation to exactly where the boundaries of property lie in relation to novel assets and how certain types of property are best characterised. This is because the legal jurisprudence is still underdeveloped in relation to these assets. The labelling of assets as things in action or otherwise does not affect this.

While the Bill will not reduce uncertainty in this area, we consider that there is already sufficient certainty for market participants to structure arrangements in a way that achieves the desired legal outcome. This is in spite of the Colonial Bank v Whinney dichotomy rather than because of it, and the Bill will ameliorate the position. The English courts have a long track record of developing the common law in a considered and predictable way, ensuring that legal principles are applied consistently. This means that commercial parties are generally able to anticipate how the law is likely to be applied in various circumstances, drawing analogies with other areas of law. Furthermore, the judiciary can benefit from persuasive legal analysis already provided by the UK Jurisdiction Taskforce and the Law Commission which, at least until some of the concerns we address in our response were raised, provided a great deal of legal reassurance to the market and guidance to the

judiciary, not only in England and Wales but also in other common law jurisdictions.14 The government has also now asked the UK Jurisdiction Taskforce to produce guidance on the control of cryptoassets.15

Importantly, we would strongly oppose any attempt to define the boundaries of property, or particular categories of property, in statute. Whether or not a thing amounts to an object of property under English law is a highly complex and nuanced question, ill-suited to definition in statute. Defining the parameters of intangible assets, including identifying exactly what the “asset” consists of, can be extremely challenging. The answer may also be different for different types of intangible assets (including different types of cryptoassets). Experience has shown that jurisdictions that do introduce such statutory definitions tend to create undesirable “boundary issues” (meaning legal uncertainty as to whether or not a particular thing falls with the statutory definition). Given the complexity and nuance, it is much more appropriate for these matters to be left to the common law to develop by reference to specific facts and circumstances. The proposed targeted approach will also give the Bill longevity and protect it from becoming quickly outdated, which is particularly important in the rapidly evolving environment.

Claim 5: the Bill will create or exacerbate uncertainties in establishing custody arrangements in relation to cryptoassets

It has been suggested that the Bill could create or exacerbate uncertainties in establishing a valid equitable co-ownership trust over a pool of cryptoassets (for example, an omnibus account or address on a blockchain). This would be highly problematic for many cryptoasset exchanges and custodians as it could mean they need to segregate the relevant cryptoassets into different accounts or addresses in order to create a valid trust in favour of their customers. This would be inconsistent with many current practices and would add cost and operational burden for little discernible commercial benefit. Such a claim also casts unnecessary doubt over existing arrangements that will not be restructured.

Applying existing principles of English law:

there is no doubt that it is possible to create an express co-ownership trust in respect of cryptoassets recorded in an omnibus account or address with appropriate drafting and structuring;

in many cases, the conditions for a valid trust will arise even in the absence of very clear words in relation to the terms of the trust and the subject matter, given the nature of the arrangement and factual circumstances, provided that the terms of the arrangement and the actions of the parties are not inconsistent with that outcome; and even where customer assets are held in the same account as own-account holdings, a court is likely to find that a valid trust has arisen on the basis that no party to those arrangements ascribes importance to one or more specific cryptoassets (i.e. they are

treated by those involved as fungible, whether or not they are factually distinguishable).16

Importantly, these conclusions do not depend on cryptoassets being factually identical or indistinguishable. If certain cryptoassets are distinguishable as a matter of fact, this is inescapable and cannot be changed through legal characterisation (i.e. whether or not they are characterised as things in action or otherwise). The Bill has no bearing on these matters.

Likewise, whether or not the relevant cryptoassets are treated by the parties as fungible is a matter of fact, to be determined by reference to the applicable facts and circumstances, including the contractual arrangements. Again, this is unaffected by the Bill.

Claim 6: the Bill would threaten the effectiveness of existing security agreements in relation to things in action

Some commentators have raised the concern that, by removing the Colonial Bank v Whinney dichotomy, the Bill could result in security agreements taken in respect of “things in action” to be ineffective over cryptoassets and other intangible assets that the courts no longer characterise as things in action.

It is highly unlikely that a security agreement would be drafted to apply generally (and only) to “things in action”. It is far more common for security agreements to describe particular assets or categories of assets in much more specific terms. We struggle to understand why a well advised party would draft a charge in this way and doubt that a party that had not been advised would have the sophistication to draft in this way.

Where this type of drafting has been used, usual rules of contractual interpretation would apply to determine the objective intentions of the parties in the circumstances, and the courts may look past the literal meaning of the words in certain circumstances.

That said, in principle, a security agreement drafted to apply to “things in action” may not be effective in relation to cryptoassets that are not things in action. However, that risk already exists, particularly in light of D’Aloia, and we regard this concern as theoretical as opposed to practical.

Claim 7: the Bill will subject cryptoasset exchanges and custodians to onerous duties and obligations which they cannot contract out of

One concern that has been raised is that the Bill might subject cryptoasset service providers to certain non-derogable obligations, equivalent to those of a bailee or pledgee of tangible assets, such as a duty to take reasonable care to ensure the assets are not lost. There are a number of reasons why we think this concern is misplaced. To begin with, and to the reiterate point made above, the Bill itself does not prescribe the consequences of falling in or out of a particular category of property. That is a matter that is rightly left to the common law (as is currently the case). It is entirely possible that the courts will determine that it is inappropriate to apply possessory concepts akin to those of bailments and pledges to intangible things or to some intangible things, or to apply the concepts

differently, based on a consideration of the particular characteristics of the relevant asset. But even if the courts were to apply such concepts to cryptoassets, there is no reason that this would necessarily subject cryptoasset custodians and exchanges to new duties.

For one, the parties to a contractual relationship remain free to structure their arrangements as they choose (subject to any regulatory restrictions or other private law statutes to the contrary). For example, in relation to tangible assets, a custodian can agree to hold its customers’ assets on the basis of a trust relationship (under which the custodian has a legal interest in the cryptoassets and the beneficiaries have equitable interests) rather than a bailment relationship (under which the bailor retains the legal property). In many cases, this will be the intention of the parties, and that intention can be evidenced in the contractual terms and operational arrangements. The courts may also be ready to infer that this is the intention, particularly where assets are held in omnibus accounts and comingled with other holdings. On the other hand, there may be circumstances in which the parties intend for the customer to retain legal title (and structure their arrangements accordingly). This optionality is currently available for tangible things and that does not prevent contracting parties from establishing a trust over tangible things, where that is the intention. It might be helpful to extend that flexibility to certain intangible things in appropriate circumstances.

Likewise, it is perfectly possible to create a charge or a mortgage over tangible things,17 and there is no reason why that would not also apply to cryptoassets, regardless of whether they are labelled as things in action. The fact that an object of a security interest is susceptible to possession (or control), or in fact under the possession (or control) of the collateral taker, does not prevent the security interest from being characterised as a charge. Again, there may be circumstances in which the market would benefit from the ability to create pledge- type relationships rather than a charge given, for example, the formalities and requirements that arise in relation to the creation and execution of charges and the fact that many cryptoassets fall outside the scope of the existing UK financial collateral regime. Admittedly, there are policy implications to this and the Law Commission itself has said that it would be more appropriate for law reform efforts in this area to be directed at creating a specific statutory regime for cryptoasset collateral arrangements. We expect that the courts are likely to be mindful this, and slow to go down this route as a result.18

Where the parties intend to create a bailment relationship (noting that a pledge is a type of bailment), the bailment relationship can generally be modified by contract,19 subject to usual restrictions on excluding liability (for example under the Unfair Contract Terms Act and consumer protection legislation) as well as any applicable sectoral legislation (for example, under the Financial Services and Markets Act). As outlined by the Supreme Court in Clarke v West Ham Corp20 “[b]ailment is a transfer of possession giving rise to a legal relationship between the bailor and the bailee which is independent of contract, although in practice it is commonly contractual and the terms of the contract will commonly modify its incidents”. While a bailee may owe fiduciary duties to its bailor, these do not derive from the bailment and are not an ordinary incident of the bailment relationship.21 Importantly, a duty of care

can arise in negligence (or by applying principles akin to negligence) regardless of whether there is a bailment relationship, based on the factual circumstances.22

In the decentralised finance markets, there are various arrangements that may not be governed by a contractual relationship. Moreover, there are a significant number of collateral-type arrangements, the legal basis for which is unclear. In such circumstances, it may be that an English court finds that a bailment-type relationship has arisen by operation of law (noting that the burden of proof to show that a bailment relationship has arisen falls on the would-be bailee23) and / or that the collateral taker is subject to certain duties of care or other obligations given the nature of the legal relationship. If an English court were to conclude that, we would expect the conclusion to be based on an application of English law principles and with regard to all factual circumstances, including the factual nature of the relationship. For example, the duties on a pledgor go hand in hand with the rights of a pledgor, including the right to use or sell the assets. It would be absurd to try to obstruct the application and evolution of the law in this way through the artificial Colonial Bank v Whinney dichotomy. In any case, an attempt to do so is unlikely to be effective.

While we do not share the concerns outlined above, we do have slight concerns about some of the government’s messaging around the Bill. In particular, some of the explanatory notes and other communications imply that the main benefit of the Bill is to provide certainty that digital assets that are not things in action in the traditional sense (such as certain cryptoassets) are recognised by English law as property.24 While the Bill does make that clear, it is widely recognised that that is already the position under the common law. Suggesting that this is the main purpose of the Bill could have the effect of undermining existing legal certainty (and indicating that England and Wales is trailing behind other jurisdictions in this regard).

In our view, and with reference to the Law Commission’s final report,25 that is not the primary purpose of the Bill. After all, legislation cannot be used merely to confirm existing law – it must address some mischief. That mischief, as we have outlined above, is the lingering uncertainty cast by Colonial Bank v Whinney, which may be restricting the courts from recognising and responding to the true character of different forms of intangible property. Removing this uncertainty will allow for the courts to develop the law in a coherent and principled way. We therefore agree with the government’s statement that “[t]he Bill is a means of ‘unlocking’ the development of the common law”.26 It would be preferable to put that rationale front and centre in the explanatory notes and other accompanying materials, as these materials may influence how the statute is interpreted.

We also think that it is unhelpful to refer in the accompanying commentary to a single “third category” of property, because it will not necessarily be appropriate to bracket all assets that are neither things in possession nor things in action in a single category of property for all purposes. This view was also expressed by the High Court in D'Aloia.27

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

We support the current drafting of the Bill. Any attempt to define the categories of property could introduce new boundary issues (as to which, see above) and potentially undermine existing legal certainty. In relation to potential concerns that the Bill leaves scope for uncertainty, see sections 3(b) and 3(d) above.

As we have suggested in the past, there may be merit in amending the title of the Bill so as not to refer specifically to digital assets. While the title will not impact the operation of the Bill it may impact how the Bill is perceived. A more neutral title may address any perception that the Bill has the effect of preventing any digital assets from being characterised as things in action, or that the Bill is only relevant in relation to digital assets.

Should the Bill have retroactive effect?

We do not see any issues with the Bill having retroactive effect. As noted in section 3(f) above, the effectiveness of any existing commercial arrangements that refer to “things in action” has already been called into question by recent English case law, including D’Aloia.

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?

As we have outlined above, the Bill will unlock the development of the common law and allow it to develop in a coherent and principled manner. Overriding Colonial Bank v Whinney in England and Wales may also cause courts in other jurisdictions to give less weight to its authority.

20 December 2024