Reforms to digital asset laws needed to tackle 'legal minefield'

Law reforms designed to accommodate the growing importance of digital assets in society will provide much-needed clarity to a complex area of law which is currently a ‘legal minefield’ and not widely understood, according to CILEX.

Last year’s Law Commission’s consultation paper on digital assets recommended law reforms that recognised and protected the rights of users of both crypto-tokens and other digital assets, and maximised their potential. The key proposal was to establish a third category of personal property to cover these assets, to be known as ‘data objects’.

In its response to the commission in November, CILEX said digital assets currently sat between personal property laws or fell outside them, causing difficulties for practitioners who lacked clarity on how to handle them. Many have limited exposure to digital assets and there was a “widely held perception that crypto-tokens and currencies were utilised for potentially illegal means, due to the way in which they work and their traceability”.

Reform would, CILEX hoped, go some way to tackling both the knowledge gap and the negative perceptions around this evolving asset class.

Its response highlighted the need to establish a panel of professionals tasked with drawing up non-binding guidance for practitioners. CILEX argued for the inclusion of knowledgeable lay members as well as legal experts and said there should be robust guidance to ensure that legal professionals and the public were aware of “why certain data objects do or do not match criteria to fall within the proposed third personal property category”.

CILEX said any reforms to the law must seek to ensure consistency. In private client work, for example, practitioners reported that different approaches across the market to dealing with inheritable digital assets could “cause further emotional distress to families when handling a loved one’s affairs”.

CILEX agreed with the use of statute to provide “the initial shaping and fundamental principles of digital assets” but considered that common law should “establish effective rules regarding title and/or priority for disputes involving multiple persons with control of a crypto-token”.

Its response said it would not be appropriate for the court to have a discretion in whether to award crypto-tokens as a remedy similar to current money denominations. While appreciative of the Law Commission’s evidence on the use of discretion, it advised against the use of crypto-tokens at the current time given their lack of stability, with “peaks and troughs within the digital currency market proving less predictable than current established monetary exchange rates”.

CILEX President Matthew Huggett said: “The rapid rise in the use and ownership of digital assets means that reform of the law to accommodate them and clarify this often-complex area is much needed.

“This is a young technology and there are disparities in existing guidance as well as a lack of knowledge amongst practitioners. Whilst the work of the Law Commission in this area presents considerable challenges, we hope that reform will provide legal certainty for lawyers, better protections for asset owners and lay strong foundations for the development and adoption of digital assets.”