Introduction
On 18 November 2019, the UK Jurisdiction Taskforce published a legal statement on the legal status of cryptoassets and smart contracts. Sir Geoffrey Vos, Chancellor of the High Court of England and Wales , described the Legal Statement in his opening address as “something that no other jurisdiction has attempted.” The Legal Statement is not law, however, and will likely be supplemented by more detailed analysis in the future, as well as, potentially, specific legislation.
In this article, we examine the Legal Statement and provide our observations on the Legal Statement from an Irish law perspective.
Scope
The Legal Statement considers the legal status of cryptoassets, whether or not cryptoassets constitute ‘property’ in law, and whether or not smart contracts should be treated as contracts for legal purposes. Regulation of dealings in cryptoassets and remedies for infringement of rights in cryptoassets and smart contracts were deemed out-of-scope, as were matters of taxation, criminal law, partnership law, data protection, IP rights, consumer protection, settlement finality, regulatory capital, AML and counter-terrorist financing. We may see such issues being dealt with by national or European Union bodies in the near future.
Legal status of cryptoassets
The UKJT found that cryptoassets have “all of the indicia of property”. The fact that cryptoassets are intangible, use cryptographic authentication and distributed transaction ledgers, are decentralised and operate on rules by consensus, does not “disqualify them from being property”. Accordingly, the UKJT concluded that “cryptoassets are therefore to be treated in principle as property”. This is a strong statement. Regarding the private key of a cryptoasset, however, the UKJT concluded that it “is not in itself to be treated as property because it is information.”
Consequences of characterising cryptoassets as ‘property’ in law
Characterising cryptoassets as ‘property’ in law has important consequences for the application of legal rules. These consequences are not considered in the Legal Statement but it will be important for English law, as well as Irish law if cryptoassets are characterised as ‘property’ in Irish law, to consider these consequences.
According to section 10(1) of the Succession Act 1965 in Ireland, the “real and personal estate” of a deceased person shall on his/her death, notwithstanding any testamentary disposition, devolve on and become vested in his/her personal representatives. Are cryptoassets real and/or personal estate and if not, should the 1965 Act be amended to provide for the devolution of cryptoassets upon death? Given that section 4 of the 1965 Act states that the definition of real estate “includes”, rather than being limited to, what is contained therein, it is arguable that the definition of “real estate” is not closed.
According to section 44(1) of the Bankruptcy Act 1988 in Ireland, where a person is adjudicated bankrupt, then, subject to the provisions of the 1988 Act, all “property” belonging to that person shall on the date of adjudication vest in the Official Assignee for the benefit of the bankrupt’s creditors. Given that section 3 of the 1988 Act states that the definition of property “includes”, rather than being limited to, what is contained therein, it is arguable that the definition of “property” is not closed.
The definition of “property” under the Insolvency Act 1986 in England and Wales includes the same things as contained in the definition of “property” in section 3 of the 1988 Act. Having considered the definition of “property” under the 1986 Act, the UKJT concluded that “that definition is very wide indeed” and “since cryptoassets can be property at common law, we have no doubt that they can be property for the purposes of the Insolvency Act [i.e. the 1986 Act].” Since the definition of “property” under the 1986 Act contains the same things as contained in the definition of “property” in the 1988 Act, it is arguable that cryptoassets constitute “property” for the purposes of the 1988 Act in Ireland.
Consideration must also be given to how, if at all, company law will respond to the acquisition and disposal of cryptoassets. Section 238 of the Companies Act 2014 in Ireland provides that subject to section 238(4) and (5) of the 2014 Act, a company shall not enter into an arrangement under which (a) a director of the relevant company or of its holding company, or a person connected with such a director, acquires or is to acquire, one or more “non-cash assets” of the requisite value from the relevant company; or (b) the relevant company acquires or is to acquire, one or more “non-cash assets” of the requisite value from such a director or a person so connected, unless the arrangement is first approved (i) by a resolution of the relevant company in general meeting; and (ii) if the director or connected person is a director of its holding company or a person connected with such a director, by a resolution of the holding company in general meeting.
Under section 238(2) of the 2014 Act, a “non-cash asset” is of the “requisite value” if at the time the arrangement is entered into its value is not less than €5,000 but exceeds €65,000 or 10% of the amount of the relevant company’s relevant assets.
According to the Legal Statement, cryptoassets are intangible assets. They are purely virtual. Therefore, cryptoassets are likely to constitute “non-cash assets” for the purposes of section 238 of the 2014 Act. Cryptoassets are also likely to be of the “requisite value” because the value of some cryptoassets are not less than €5,000 and exceed €65,000, and may even exceed 10% of the amount of the relevant company’s relevant assets.
The problems of ensuring that legal definitions are not outstripped by technological developments is not, of course, a new one, but this admirable Legal Statement, produced by distinguished legal practitioners, provides a timely reminder that lawyers and legislators should be ever willing to react to such developments.
Treatment of smart contracts for legal purposes
Given that smart contracts are automatic and the way in which computer code operate is mechanistic, it has been suggested that smart contracts should be treated differently from conventional contracts. The UKJT disagrees and notes that “English law does not normally require contracts to be in any particular form.” This is also true in Irish law. A contract does not have to be in writing before it can be enforced. In Pernod Richard & Comrie PLC v FII (Fyffes) plc, an oral agreement for a multi-million pound take-over was enforced. The decision was upheld on appeal by the Irish Supreme Court.
Difficulty in interpreting smart contracts does not mean they are not contracts
As identified by the UKJT, “the modern approach to interpretation of commercial contracts is very much focused on the language”. It may be reasonable to assume that a smart contract, existing in code, is not susceptible to the exercise of contractual interpretation because interpretation is about ascribing meaning to natural language and code is not natural language to judges, lawyers or the reasonable person.
The UKJT disagrees and submits that “a smart contract consisting solely of code with no natural language element can in most circumstances be seen as an extreme example of a contract whose language is clear, with the result that there is no justification to depart from it.” Since courts will find code more difficult to interpret than human language, if smart contracts are ultimately found to constitute contracts in the conventional sense under English or indeed Irish law, there will be a need to rely upon extrinsic evidence, expert evidence, and exceptions to the parol evidence rule to aid in the construction of, or explain the circumstances surrounding the conclusion of, smart contracts.
Contracts concluded by anonymous or pseudo-anonymous parties are capable of giving rise to binding legal obligations
The UKJT have “no doubt” that a smart contract between anonymous or pseudo-anonymous parties is capable of giving rise to binding legal obligations because there is no requirement in English law for parties to a contract to know each other’s “real identity”. This statement may, we believe, be stated too strongly in the Legal Statement, as it only provides support for contracts between pseudo-anonymous parties and not anonymous parties.
Moreover, the Legal Statement provides that “many contracts are formed in circumstances in which (at least) one party does not know the real identity of the other party”. The examples provided are an auction sale to the highest bidder and where an agent contracts on behalf of a principal whose identity is unknown. Again, this submission may be stated too strongly in the Legal Statement, as the examples only provide support for the establishment of binding legal obligations where one party to the contract is anonymous and not where both parties are anonymous.
There remains, we believe, some degree of uncertainty regarding whether or not a smart contract concluded between two anonymous parties is capable of giving rise to binding legal obligations.
A statutory signature requirement can be satisfied by using a private key
In the UKJT’s view, a statutory signature requirement is “highly likely” to be capable of being satisfied by using a private key, because an electronic signature intended to authenticate a document will generally satisfy a statutory signature requirement, and a digital signature produced using public-key cryptography is a particular type of electronic signature.
Electronic signing has been permitted in Ireland since 2000. Section 12(1) of the Electronic Commerce Act 2000 in Ireland provides that if by law or otherwise a person or public body is required or permitted to give information in writing, then, subject to certain conditions in section 12(2), the person or public body “may give the information in electronic form, whether as an electronic communication or otherwise”. Section 13(1) of the 2000 Act provides that if by law or otherwise the signature of a person or public body is required or permitted, then, subject to certain conditions in section 13(2), “an electronic signature may be used.”
A statutory ‘in writing’ requirement can be satisfied by smart contracts composed partly or wholly of computer code
The UKJT note that the mere fact that a smart contract is in electronic form does not mean that it cannot satisfy a statutory ‘in writing’ requirement. According to Schedule 1 of the Interpretation Act 1978 in England and Wales, “writing” is defined as including “typing, printing, lithography, photography and other modes of representing or reproducing words in a visible form, and expressions referring to writing are construed accordingly.” The UKJT’s view is that where the relevant code can be said to be representing or reproducing words and made visible on a screen or printout, it is “likely to fulfil” a statutory ‘in writing’ requirement.
According to the Schedule, Part 1 of the Interpretation Act 2005 in Ireland, “writing” is defined more broadly than under the 1978 Act and also includes “any information kept in a non-legible form, whether stored electronically or otherwise, which is capable by any means of being reproduced in a legible form”.
It is arguable that the words “and any information kept in a non-legible form, whether stored electronically or otherwise, which is capable by any means of being reproduced in a legible form ” in the Schedule, Part 1 of the 2005 Act is more capable of providing support for the satisfaction of a statutory ‘in writing’ requirement by smart contracts composed partly or wholly of computer code than the definition of “writing” in Schedule 1 of the 1978 Act because code is, to judges, lawyers and lay persons, in non-legible form but critically, is capable of reproduction in legible form for comprehension by such persons through the assistance of extrinsic evidence, expert evidence or exceptions to the parol evidence rule.
It is arguable, therefore, that a statutory ‘in writing’ requirement can be more easily satisfied by smart contracts composed partly or wholly of computer code under Irish law than under English law.
Conclusion
As the Chancellor noted in the Opening Address, the next step is for the Law Commission of England and Wales to consider “whether any legislation might be desirable in this area”. What action, if any, the Law Commission takes remains to be seen.
Many questions in the Legal Statement were framed and answered on the basis of common law and there is much similarity between the common law of England and Wales and that of Ireland. The authors believe that the common law of both jurisdictions can provide a suitable basis for contracting on distributed ledger technology and resolving resulting disputes.
It is submitted that Ireland should use the Legal Statement as the kick-off point for achieving a degree of legal certainty under Irish law. An Irish consultation exercise could be performed, perhaps going broader in scope than the UK’s exercise to include matters such as taxation and audit treatment. The findings could be presented to the Law Reform Commission of Ireland for review under Irish law and for consideration as to whether or not any Irish legislation, EU Directives or Regulations might be desirable in the areas of cryptoassets and smart contracts.
An Irish consultation exercise could involve various parties, such as the Revenue Commissioners, the Central Bank of Ireland and the Department of Finance. For example, the Department may be interested in the Legal Statement and any similar consultation exercise carried out in Ireland because in March 2018, the Minister for Finance announced the creation of an internal working group and some of the aims of the Intra-Departmental Working Group are to consider Ireland’s IFS2025 Strategy and to foster opportunities in international financial services by building on Ireland’s strengths in technology and financial services.
Having conducted such a review, it is submitted that, depending on the recommendations, the legislative route is the most appropriate course of action for Ireland to take in order to address the legal status of cryptoassets and smart legal contracts. It would be unreasonable to assume that an Irish court, if faced with the same issues and questions as those posed in the Legal Statement, would necessarily conclude that Irish law is identical to the views expressed by the drafters of the Legal Statement in respect of English law.
The Legal Statement is a timely and influential document from an Irish law perspective. It occupies a particular legal status and is perhaps more relevant as a series of well-thought-out arguments than any sort of binding statement of the law. It is not, however, without potential disagreement from an Irish law perspective. Given the similar legal systems and the natural competition between neighbouring economies, it is necessary for Ireland to consider appropriate domestic action.
Pearse Ryan
Dr. Robert Clark
and
Colin Grant all of Arthur Cox, Dublin, Ireland
