Following the publication of its final report on digital assets last year, on 22 February 2024, the Law Commission of England and Wales launched a consultation on draft legislation confirming the existence of a 'third category' of personal property. The intended effect of the new legislation would be to provide confirmation that digital assets, including crypto-tokens, are capable of being recognised by the law as property.

Background

In the Law Commission's Final Report on Digital Assets, published in June 2023 (see our blog post on the report), the Law Commission noted that there are traditionally two categories of personal property rights: things in possession (i.e., an object that physically exists) and things in action (i.e., legal rights or claims enforceable by action, such as a balance in a bank account). The Law Commission identified that, due to their nature, digital assets do not fall squarely within one of these two existing categories.

Following consultation with several stakeholders, the final report therefore recommended the introduction of legislation to confirm the existence of a 'third category' of personal property rights, which would be capable of accommodating certain digital assets, including crypto-tokens. The draft legislation which is the subject of this current consultation seeks to implement this recommendation.

The draft legislation

The key section of the proposed legislation is as follows:

'A thing (including a thing that is digital in nature) is capable of being an object of personal property rights even though it is neither –

(a) a thing in possession, nor
(b) a thing in action.'1

As anticipated from the final report on digital assets, the Law Commission's proposal seeks to simply confirm:

  • The existence of a third category of thing.
  • That digital assets are capable of being the object of personal property rights (as has been confirmed in recent case law on the point since AA v. Persons Unknown2).
  • In this way, it is explicitly intended to remove any doubt that there are only two categories of property, which was the prevailing view until recently. The Law Commission considers that this approach provides greater certainty and a clear conceptual foundation upon which the law can develop.

Notably, and as set out in its final report, the Law Commission has refrained from defining the exact parameters of third category things and what personal property rights will attach to such things, as it considers these are best developed on an incremental basis through the common law.

The Law Commission notes that the courts have a wealth of case law which they may draw upon to assist in determining whether a thing is capable of attracting personal property rights. Specifically, the Law Commission identifies 'rivalrousness' (i.e., where use of the resource by one person prejudices the ability of others to use it) as one of the most important indicia of property in the context of digital assets. This is because it helps to distinguish certain types of digital assets, such as crypto-tokens, that would be capable of attracting personal property rights, from other digital things, such as digital files, that would not be.

What could fall within the scope of the third category?

While the Law Commission's proposed draft legislation does not define third category things, it interestingly does expressly refer to things that are 'digital in nature' as things that could be capable of attracting property rights. This was not originally part of its recommendation in the final report. The Law Commission's justification for including this wording is that it considers it is helpful because 'things such as crypto-tokens are likely to be the main type of thing that users of the law will be concerned with', and because they were the 'main impetus' for the draft law. It is not clear that this wording is indeed necessary or whether it serves any purpose, given that the legislation is not intended to be restricted to digital things.

Despite not identifying the 'hard boundaries' of third category things, the Law Commission has, in any event, provided examples of what is not included within the category, which it says is often because such things are not rivalrous. These include:

  1. Pure information (distinct from the means by which it is recorded).
  2. Certain digital assets, such as (in most cases)
  • Digital files and records.
  • Email accounts and certain in-game assets.
  • Domain names.

The Law Commission has not clarified in what circumstances the digital assets in (2) would in fact fall within the scope of the third category.

The consequences of being a third category thing

The Law Commission concludes that the common law is likely to develop legal principles specific to third category things, as it has done for things in action and things in possession. As noted in its final report, the Law Commission advises that, where the legal treatment of things in action and things in possession is consistent, the same treatment should be applied to third category things. This would include, for example, the law concerning causes of action and associated remedies.

Where different rules may be required, the Law Commission considers again that the best approach is for the law to develop by analogy with the principles applicable to things in possession or things in action, where appropriate. The common law should then develop on a case-by-case basis, dependent on the nature and characteristics of the thing with which it is concerned. The Law Commission considers that certain legal concepts applicable to things in possession should be developed for third category things – including the good faith purchaser defence.

Conclusion

The Law Commission's draft legislation is a welcome step in the evolving legal landscape for digital assets. While case law has moved towards recognition of a third category of things, this legislation would provide legal certainty and clarity in cases going forward. It also opens up the possibility of other digital assets attracting property rights.

The Law Commission's consultation is seeking stakeholder views on the general approach of the draft bill, the positive impact, and costs or risks. The consultation closes on 22 March 2024.

Footnotes

1 This is the wording from the body of the consultation paper. The appendix includes slightly different wording: 'A thing (including a thing that is digital or electronic in nature) is capable of being the object of personal property rights ...'

2 [2019] EWHC 3556 (Comm).

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