New UK guidance issued on Cryptoassets and Smart Contracts
19th November 2019
The Legal Statement on Cryptoassets and Smart Contracts was launched yesterday by Sir Geoffrey Vos, the Chancellor of the High Court and Chair of the UK Jurisdiction Taskforce, a team of industry experts and leading figures from government and the judiciary.
The Legal Statement provides some important clarification, and also how the flexibility of English and Welsh common law system allows it to adapt to new technologies. The clarification includes:
- Cryptoassets, such as Bitcoin, can in principle be treated as items of property. This is in contrast to pure information, which is not usually treated as property. This is because in practice, the cryptoasset’s consensus mechanism ensures that only one person at a time is able to control the cryptoasset (ie double-spending is prevented);
- because cryptoassets cannot typically be physically possessed, many principles relating to physical property will not apply, such as bailment or conversion (although these may be relevant if the cryptoasset is linked to a real-world asset);
- a blockchain may amount to evidence of title to a cryptoasset, but it will not be definitive record of legal rights, and it will not bind the Court when deciding ownership of a cryptoasset;
- cryptoassets will be subject to most of the normal legal principles and requirements relating to interests in property (eg: granting a mortgage or other security), and for the transfer of the asset to another person (eg: on death, divorce or insolvency);
- the normal rules of contract law will apply to smart contracts, which will be fact-specific in each case. In principle they are capable of creating binding obligations between the parties (although the term is very broad and potentially covers a multitude of different applications); and
- established principles of contract interpretation and enforcement will apply to smart contracts whether they are partly or entirely written in natural language, in computer code or are recorded on the Blockchain.
Chris Pulham, a partner and member of Rosenblatt Limited’s New Technology Working Group attended the launch of the Legal Statement and comments:
“This guidance provides much needed direction and certainty for our Fintech and other Blockchain clients and demonstrates that English law is well able to adapt. The truly international reach of this technology means that further legislation will be necessary to provide a consistent enforcement ecosystem for cryptoassets across major jurisdictions.”
The Legal Statement explains that the legal rules which determine whether the laws of England and Wales would apply to a particular cryptoasset are complex. It is generally acceptable for parties to a transaction to agree which country’s law will apply to their relationship, but this is not clearly the case if the transaction affects other people, as they will not have agreed to this principle (or to any other rules regarding the cryptoasset).
For example, a cryptoasset may be treated as “located” in a particular jurisdiction if it has some form of central control in that country, but if the cryptoasset is decentralised (such as Bitcoin), that does not make much sense.
There is still much uncertainty regarding these key issues which the Legal Statement anticipates would be best resolved by legislation following international cooperation.