Law Commission: Digital assets require new third category of personal property

The Law Commission of England and Wales has suggested the creation of a new third category of personal property as part of reform of the law relating to digital assets.

Digital assets – which include crypto-tokens and non-fungible tokens (NFTs) – are used for an increasing variety of purposes in modern society, such as for investment and for making payments.

Currently, the law in England and Wales provides for rights over personal property via choses in action or choses in possession. While digital assets have been governed by these rules until now, the Law Commission feels digital assets now require a new distinct category of chose to address “residual uncertainty and complexity”.

“Because digital assets are not tangible and differ significantly from physical assets, and from rights-based assets like debts and financial securities, they do not fit within traditional categories of personal property,” said the Law Commission.

Nonetheless, the Commission argues that the flexibility of common law can accommodate a distinct category of personal property to better recognise and protect their unique features. The Commission also recommends legislation to confirm the existence of this category and remove any uncertainty.

Implications on estate planning

Today’s Wills and Probate previously reported on the avoidance of disputes over digital assets after death, with John Lambe of Forbes Solicitors noting in 2021 that “it is imperative that individuals review the information and assets held in online accounts and take advice about and consider how they should be administered following death”.

Yet, a Populus survey commissioned in June 2020 by the Law Society found that just 26% of respondents know what happens to their digital assets after they die. Of those surveyed who have a will, an overwhelming 93% had not included any digital assets in their will.

In any case, there is no doubt that the proposed reforms put forward by the Law Commission, should they be adopted by the government, are of note when providing for the succession to digital assets.

“Testators may need to consider whether the definition of personal chattels or possessions used in their will encompasses digital assets,” said John Lambe, adding:

“Precedent clauses relating to personal possessions often adopt the statutory definition in section 55(1)(x) of the Administration of Estates Act 1925 (as amended).

This definition will not include digital assets that, by their nature, are intangible.

Those drafting Wills to include digital assets may need to consider amending personal chattels legacies to include intangible assets held digitally.”

The Law Commission’s recommendations in full

1. Legislation to confirmthe existence of a distinct third category of personal property under the law which can better recognise, accommodate and protect the unique features of digital assets. The report does not set out clear boundaries for this third category, arguing instead that common law is the best vehicle to determine which objects can fit within it. This will allow for a nuanced approach to recognising that things such as crypto-tokens, export quotas or different types of carbon emissions allowance can be objects of personal property rights.

1. Creation of a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding advice to courts on complex legal issues relating to digital assets.
2. Creation of a bespoke legal framework that better facilitates the entering into, operation and enforcement of collateral arrangements relating to crypto-tokens and crypto-assets.
3. Statutory law reform to clarify whether certain digital assets fall within the scope of the Financial Collateral Arrangements (No 2) Regulations 2003.

Professor Sarah Green, Law Commissioner for Commercial and Common Law, said:

“The use and importance of digital assets has grown significantly in the law few years. The flexibility of the common law means that the legal system in England and Wales is well placed to adapt to this rapid growth.

Our recommendations for reform and development of the law therefore seek to solidify the legal foundation for digital assets. We also aim to ensure that the private law in England and Wales remains a dynamic, globally competitive and flexible tool that enables further technological innovation.”

Justice Minister, Mike Freer, said:

“We must ensure our law remains equipped to meet the complexities of these technologies well into the future, and we will carefully consider these findings as we look to further strengthen the future of our globally-renowned legal system.”