Practitioners, companies and investors in cryptoassets and smart contracts will welcome the findings of a leading group of jurists from the UK Jurisdiction Taskforce of the Law Society’s Lawtech Delivery Panel. Following a recent consultation, they have delivered a statement on the legal status of cryptoassets (including cryto-currencies) and smart contracts.
The taskforce considered the questions of whether under English law:
- cryptoassets can properly be treated as property; and
- smart contracts could satisfy the criteria to be treated as enforceable.
In responding to these questions, the Taskforce advances the position that both questions can be answered in the affirmative, subject to meeting certain minimum criteria and with some limited exceptions.
Below is a quotation from the executive summary of the report (the full version of which can be read here):
- Whether English law would treat a particular cryptoasset as property ultimately depends on the nature of the asset, the rules of the system in which it exists, and the purpose for which the question is asked. In general, however:
(a) cryptoassets have all of the indicia of property;
(b) the novel or distinctive features possessed by some cryptoassets—intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus—do not disqualify them from being property;
(c) nor are cryptoassets disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action;
(d) cryptoassets are therefore to be treated in principle as property.
- This is likely to have important consequences for the application of a number of legal rules, including those relating to succession on death, the vesting of property in personal bankruptcy, and the rights of liquidators in corporate insolvency, as well as in cases of fraud, theft or breach of trust.
- Cryptoassets cannot be physically possessed: they are purely “virtual”. Accordingly, as a matter of law they cannot be the object of a bailment, and only some types of security can be granted over them, though we see no obstacle to the granting of other types
of security. They are not documents of title, documentary intangibles or negotiable instruments (though some form of negotiability may arise in future as a result of market custom), nor are they instruments under the Bills of Exchange Act.
- There is a contract in English law when two or more parties have reached an agreement, intend to create a legal relationship by doing so, and have each given something of benefit. A smart contract is capable of satisfying those requirements
just as well as a more traditional or natural language contract, and a smart contract is therefore capable of having contractual force. 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.
- The parties’ contractual obligations may be defined by computer code (in which case there may be little room for “interpretation” in the traditional sense) or the code may merely implement an agreement whose meaning is to be found elsewhere (in which case the code is unimportant from the perspective of defining the agreement). Either way, however, in principle a smart contract can be identified, interpreted and enforced using ordinary and well-established legal principles.
- English law does not struggle with the concept of anonymous or pseudonymous parties contracting; nor with the notion that a contract can be formed between individuals by virtue of them each having agreed to subscribe to a set of rules (as happens, for example, in a club). English law is fully equipped to deal not only with bilateral smart contracts but also those structured around Decentralised Autonomous Organisations (DAOs).
- There are some legal rules which require certain documents to be “signed” or “in writing”. In principle, a statutory “signature” requirement can be met by using a private key which is intended to authenticate a document, and a statutory “in writing” requirement can be met in the case of a smart contract whose code element is recorded in source code (although the analysis may be less straightforward where a smart contract is represented only in object code on a running system).
- As we explain in detail below, English law is well able to deal with technological developments and it has an impressive track record of doing so.”
The findings are sensible and in accordance with well-established legal principles, and will be welcomed as providing further clarity on these issues to operators of crypto businesses, their customers and practitioners alike.