by David Fox, Professor of Common Law, University of Edinburgh
The England and Wales Law Commission has recently published its final report on Digital Assets (Digital assets – Law Commission).[1] The report comes after an exhaustive study of the way that existing principles of private law in England and Wales would apply to this emerging class of assets. It is of great significance since digital assets are fast becoming mainstream vehicles for carrying out financial transactions as conventional forms of financial securities are adapted to work on blockchain technology. The report acknowledges that private law is as relevant to digital assets as the specialist regimes of financial services regulation that were the main focus of attention in the early days of their development.
The Law Commission report is relevant to Scotland which has an important fintech industry of its own but where the application of fundamental principles of Scots private law to digital assets remains obscure. Any new clarification of the legal rules in Scotland would need to allow for the subtle similarities and differences between English and Scots property law and for the divergent patterns of legal development in each jurisdiction.
Digital assets in English property law
Most of the Law Commission’s Report is concerned with the status of digital assets in English property law. The Commission has concluded that there was now enough case law decided in the English courts and in other cognate jurisdictions to say that some digital assets, properly defined, are already recognised as property in English law.[2] This would include the most familiar kinds of digital asset, such as Bitcoin.
The problem is, however, to differentiate those kinds of digital asset which might make suitable objects of property from those that do not. To speak generally of “digital assets” is only to refer descriptively to a generic group of digital entities. These might include everything from emails and social media postings, to sets of recorded data, to non-fungible tokens, to encrypted tokens like Bitcoin that function as transferable representations of monetary value. Their differences in digital design and functionality mean that they would not all make workable objects of property.
To this end, the Commission identified the characteristics of what it proposes to call a “digital object”.[3] This is its term for those digital assets that satisfy the minimum conditions necessary for them to qualify as workable objects of private property, despite having no tangible or spatial existence.
These characteristics are two-fold. First, the entity must be “rivalrous”, which means that the asset is such that one person’s use of it necessarily competes with the use made of it by another person. Tangible things, such as tables and chairs, are rivalrous by nature. If you are now sitting on the chair at the head of the table then you prevent others from occupying the same place. Digital objects, despite their intangibility, can also be designed to function in a rivalrous way. The power of spending a Bitcoin is rivalrous: if it is in you now then it cannot also be in another person at the same time.
Secondly, a digital object must be capable of “existing separately” from the legal system and from human beings. Tangible things, such as a table and chairs, have this characteristic of independent existence. They would continue to exist even if we imagined a world without law and without human beings. Unlike other kinds of incorporeal property recognised by the law (such as debts, shares in companies and intellectual property rights), digital objects do not consist in legally-constituted networks of rights and obligations binding between persons.
The Law Commission’s recommendations for England and Wales
The Commission’s main recommendation was that the United Kingdom Parliament should enact legislation to confirm the status of digital objects in the English law of property.[4] Any legislation should be light in content and clarificatory in purpose. It should remove any lingering doubts in the existing English case authorities that there was no “third category” of property apart from choses in possession and choses in action into which digital objects should be categorised. (These categories are roughly equivalent to the Scots property law categories of corporeal and incorporeal moveables, respectively.)
Beyond that, it proposed that the legislature should leave it to practitioners and the courts to develop the detailed rules of property law applying to digital objects.[5] In England and Wales, this recommendation has much in its favour. The Commission recognised that a light, functionally-determined description of digital objects is more likely to be technology neutral. It would be more adaptable to future changes in digital practice.
Digital assets in Scots property law
But what of Scotland? The Law Commission deliberately limited its recommendations for reform to England and Wales. Scots property law is distinct from the law of England and Wales, and property is a devolved matter within the law-making competence of the Scottish Parliament.
The case for clarifying the law of digital assets in Scotland depends on certain differences and similarities between English and Scots law. Any legislation that the United Kingdom Parliament might enact for England and Wales could not be directly applied to Scotland. To begin, the fine detail of the categorisations of things in the Scots law of property is different from that in English law. As we have seen, the traditional reasoning is that in English law there are choses in possession and choses in action, while in Scots law there are corporeal and incorporeal things. These terminological differences point to different substantive categorisations of things in the property systems of each jurisdiction that do not map perfectly on to each other.
However, putting aside those differences, the practical need for clarificatory legislation identified by the Law Commission applies just as strongly in Scotland as it does in England and Wales. If anything, the need for digital assets legislation in Scotland is even stronger.
First, Scotland cannot rely on the same steady stream of litigation as the English courts have enjoyed to generate and develop its own common law of property for digital assets. This is the problem faced by any small jurisdiction if it relies on the incremental processes of case law development to reform its law. Although fintech lawyers in Scotland are indeed developing their own understanding of the way existing principles of Scots property law apply to these new classes of asset, their understanding has yet to be tested—and recognised—before the Scottish courts.
Secondly, the problems of categorisation that have caused doubts in English law also have their own parallels in Scotland. “Digital objects”, as the Law Commission would define that term, are not the usual kinds of incorporeal thing already recognised in Scots law. They do not consist in networks of legally constituted relations between persons. They are not like debts, shares or intellectual property. They are incorporeal in a purely descriptive sense, which tells us nothing about how they might behave as objects of private property. Indeed, their behaviour in legal transactions is more like that of the familiar kinds of corporeal thing that exist tangibly in space. They are more like tables and chairs than debts and other incorporeal rights. People assume that they can transfer ownership of digital objects by effecting a change in the cryptographic control over the objects. The analogy is with the owners of corporeal moveables transferring ownership by delivering possession of these moveable things to the transferee. Both methods give outward publicity to an invisible change in legal rights over the things.
What should digital assets legislation for Scotland look like?
Scots law needs clarificatory digital assets legislation that achieves at least two things. To begin, it needs a statement of the minimum characteristics that any digital asset would need if it was to be a legally workable object of a real right. The Law Commission’s definition of “digital object” in terms of rivalrous-ness and independent existence could be usefully borrowed by the Scottish legislation. These tests refer to system-neutral features of any specific object of property. Experience shows that they apply across common law and civil law systems, whatever the differences in emphasis or terminology those systems may exhibit.
Next, the legislation would need to confirm the status of digital objects in the current law of property. It would need to provide that, for the avoidance of doubt, digital objects are moveable things capable of being owned. The approach here would need to be slightly different from that proposed for England and Wales. The Law Commission has proposed that the English legislation would confirm the existence of digital objects in property law even though they fell into neither of the usual categories of chose in action or chose in possession. In Scotland, digital objects would probably be analysed as incorporeals. To that extent, there is not the same immediate problem of categorisation as presents itself in English law. But for the avoidance of doubt, the legislation should go on to provide how ownership in the digital object should be transferred.
The legislation should thus provide that ownership of a digital object is transferred when the owner transfers control of the digital object to another person with the intention of making the other person the owner of it. This rule would have two purposes. One would be to maintain a general alignment between the discoverable location of the asset on the digital blockchain and the legal state of ownership in it. The rule would fulfil the requirement of publicity to third parties, which is important to the transparency of any system of property transfer. Since property transfers bind erga omnes, they must be discoverable to the third parties who rely on them.
The other purpose would be to remove a possible point of confusion. Even if digital objects were incorporeal for the purposes of categorisation in Scots property law, they would not be transferable by assignation, which is the usual method of transferring incorporeals, such as debts. Assignation requires intimation to the debtor or, in the new regime under the Moveable Transactions (Scotland) Act 2023, [6] registration in the Assignations Register. For digital objects, however, the state change in the blockchain would provide the publicity. More fundamentally, many digital objects exist as things in themselves and have no debtor to them. There is no one to whom the transferee could intimate. Bitcoins are one such example.
Conclusion
Fintech lawyers in England have already proved remarkably adaptable in designing the new systems of digital practice. They have made sense of the systems according to existing legal principles. Just as the common law did in the great commercial revolution of the eighteenth century, the English law of digital assets is likely to grow as an iterative process of practitioner experimentation followed by judicial recognition in case law. Between the 1750s and 1780s, Scots-born Lord Mansfield, while Chief Justice of the English King’s Bench, fashioned the English law of paper money and monetary instruments by giving legal force to existing mercantile practice. He would surely have understood the processes of legal development which are now afoot in England and elsewhere in the common law world.
To be sure, practitioners in Scotland are no less adept at handling these new developments. But the chanciness of litigation coming before the Scottish courts makes the case for clarificatory legislation in Scotland much more compelling than in England. If Scots law is to have a system of property law that can keep pace with legal and financial practice, then it needs the Scottish Parliament to enact its own digital assets legislation that works for the distinctive taxonomy of Scots property law.
(The author is a member of the Scottish Government Expert Reference Group on Digital Assets and the advisory panel to the Law Commission project on Digital Assets. The views expressed in this blog are entirely his own.)
[1] Law Commission, Digital Assets: Final report (Law Com No 412, 2023).
[2] Law Commission, Digital Assets: Final report (Law Com No 412, 2023) para 2.17.
[3] Law Commission, Digital Assets: Final report (Law Com No 412, 2023) paras 3.59-3.66, 4.1-4.88.
[4] Law Commission, Digital Assets: Final report (Law Com No 412, 2023) para 2.9.
[5] Law Commission, Digital Assets: Final report (Law Com No 412, 2023) paras 2.12-2.28.
[6] Moveable Transactions (Scotland) Act 2023 s 3(2)(b)(ii).
