In late July the UK Law Commission (the Commission) released its Digital Assets consultation paper. (At over 500 pages, it is not light bedtime reading!) The consultation paper is relevant to New Zealand, as New Zealand courts often use UK cases as precedents for many areas of the law. A good example is Ruscoe v Cryptopia  NZHC 728 where the New Zealand High Court followed a number of UK cases. The consultation paper is also a demonstration of the increasing importance of cryptocurrencies and other digital assets. Digital assets cannot be ignored. Indeed, the Commission began its report on page 1 with:
“Digital assets are increasingly important in modern society. They are used for an expanding variety of purposes — including as valuable things in themselves, as a means of payment, or to represent or be linked to other things or rights — and in growing volumes. Electronic signatures, cryptography, smart contracts, distributed ledgers and associated technology have broadened the ways in which digital assets can be created, accessed, used and transferred. Such technological development is set only to continue.”
Digital assets are broader than just cryptocurrencies (cryptocurrencies are a subset of digital assets). Digital assets cover, for example, NFTs. Note, the Commission does not expressly use the term “cryptocurrencies”, preferring instead “crypto-tokens”.
Because of the increasing use and importance of digital assets the Commission provisionally recommended the clarification of a number of things in legislation. They include the statutory creation of:
1. A third category of personal property. Currently the law recognises two main types of personal property: things in possession and things in action. Things in possession are tangible (physical) things, which are capable of possession, eg a car or a gold bar. In contrast, things in action are intangible things, which cannot be physically possessed, including intellectual property rights, shares in a company, debts and the ability to sue for contract. A thing in action requires a party against whom a right can be enforced. Digital assets do not fit neatly within one or the other.
2. An innocent acquisition rule. Such a rule would mean that, for example, if someone purchased a stolen NFT, that person would be entitled to keep the NFT if they purchased it not realising it had been stolen. (This is called being a bona fide purchaser for value without notice and is used in other areas of the law). Such a rule is needed because currently the innocent purchaser of an NFT who paid the market rate and had no reason to believe an NFT had been stolen is likely to lose ownership of that NFT. Granted the victim of the NFT theft will lose out, but the effect on innocent purchasers must also be taken into account. The Commission, after weighing the options, has come down in favour of purchasers.
3. A general pro rata shortfall allocation for comingled holdings of crypto-tokens when a custodian becomes insolvent.
The Commission’s recommendations are sensible. They would assist with removing elements of the uncertainty surrounding some legal issues in connection with digital assets in the UK. There are additional issues, however, such as whether custodians should be able to comingle (mix) their customers’ crypto-tokens, however, that is an issue for another day.
Because New Zealand faces similar issues over the legal treatment of digital assets, I think it is important that the New Zealand Government follows the Commission’s consultation on digital assets closely, with a view to making similar legislative change in New Zealand.
BlockchainNZ Executive Council Member
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