The Chancellor of the High Court has launched a legal statement on the status of Cryptoassets and Smart Contracts. He believes that the statement represents a watershed for English law and the UK’s jurisdictions, as no other jurisdiction has attempted this. The legal statement has been drafted by Lawrence Akka QC, David Quest QC, Matthew Lavy and Sam Goodman and supported by members of the UK Jurisdiction Taskforce, Linklaters LLP and the respondents to a public consultation which included businesses, academics and the wider legal sector.
There is a wide spectrum of types of cryptoasset and cryptocurrencies, many of which are designed to be used as wholesale and retail payment mechanisms. Their legal uncertainty is often cited as the biggest barrier to adoption, investment and development.
Therefore, a clear view of the legal status of cryptoassets under English law was needed to remove uncertainty, as well as making it possible for the regulators to consider what regulatory measures were needed, and for the courts to consider, where appropriate, what remedies might be available for transactions involving the transfer and securitisation of cryptoassets.
Other jurisdictions have addressed the problem differently. In many cases, they have started from the standpoint of regulation and remedies and worked backwards. The objective in the UK Jurisdiction Taskforce has been to start from basic legal principles and work forward to regulation and remedies. A further objective is to provide much-needed market confidence and a degree of legal certainty.
The next step is for the Law Commission to consider whether any legislation might be desirable in this area.
The conclusions of the Legal Statement on cryptoassets
The statement concludes that cryptoassets are, as a matter of English legal principle, to be treated as property. There are two primary reasons for this.
First, the novel features of some cryptoassets, such as intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, and rule by consensus, do not disqualify them from being property.
Secondly, even though they can be regarded as pure information, and it might not be possible to classify them as being things in possession or things in action, this does not disqualify them from being property.
According to the Chancellor, this may have far-reaching consequences. It will affect the treatment of cryptoassets on insolvency and succession, and in cases of fraud, theft or breach of trust.
The legal statement concludes that there can be no bailment over a virtual cryptoasset, which cannot be physically possessed; cryptoassets are not documents of title, documentary intangibles or negotiable instruments. Nonetheless, some types of security can be granted over cryptoassets.
The conclusions of the Legal Statement on smart contracts
A smart contract is performed, at least in part, automatically and without the need for, and in some cases without the possibility of, human intervention.
These features mean that the terms of the smart contract must be recorded in computer-readable code. Many smart contracts are embedded in a networked system that executes and enforces performance using the same techniques as cryptoassets, that is, cryptographic authentication, distributed ledgers, decentralisation, and consensus.
The legal statement concludes that a smart contract is capable of satisfying the basic requirements of an English law legal contract. Those requirements are that two or more parties have reached an agreement, intend to create a legal relationship by doing so, and have each given something of benefit. Whether the requirements are in fact met in any given case will depend on the parties’ words and conduct, just as it does with any other contract.
Contractual obligations may be defined by computer code or the code may merely implement an agreement whose meaning is to be found elsewhere. Either way, the legal statement concludes that a smart contract can be identified, interpreted and enforced using ordinary and well-established
legal principles. In addition, the statement suggests that English law is competent to deal with smart contracts formed between anonymous or pseudonymous parties, and can deal with bilateral smart contracts as well as those structured around decentralised autonomous organisations.
Where a legal rule requires documents to be signed or in writing, such a requirement can in principle be met by using a private key or by a smart contract whose code element is recorded in source code.
