Consultation on Distributed Ledger Technologies Cryptoassets and Smart Contracts
What is the legal status of cryptoassets and smart contracts?
The UK Jurisdiction Taskforce (UKJT) on 9 May 2019 launched a consultation paper regarding Distributed Ledger Technologies, cryptoassets, and smart contracts. The paper primarily discusses the current legal and investor uncertainty surrounding the use of cryptoassets and smart contracts. This uncertainty is argued to be hindering the development of the technologies and it is hoped that a legal statement made by the UKJT can increase investor and user confidence in the products and promote English law for these technologies.
The legal status of cryptoassets
The crucial issue surrounding the cryptoasset is whether it will be deemed as “property” under English law. As the consultation paper states “if a cryptoasset is not property, it cannot be owned. If it cannot be owned, it cannot be purchased, sold, otherwise transferred in law or rights to it asserted if it is stolen”. As a result the legal classification and concept of a cryptoasset is very important to its future use and investment prospects.
Currently, English law recognises choses in possession, which are physical things, and choses in action, which are legal rights as property. The following question that the consultation asks is if a cryptoasset is acknowledged as a property, will it be a chose in possession or action or another type of property? In order to regulate the law concerning transfers of cryptoassets, cryptoassets must be distinguished and classified under English law.
The legal certainty of smart contracts
The current concerns in relation to smart contracts are whether, like a traditional written contract, they are capable of giving rise to binding legal obligations. The UKJT state that, “mainstream investors still need to be convinced that their legal rights can be protected when they … enter into smart contracts”.
The UKJT is conscious though that there are some parties who enter into smart contracts specifically because of the lack of legal framework which enforces rights. Therefore, if smart contracts are deemed to give rise to binding legal obligations, it will be crucial for the parties to the smart contract to be conscious of the situations which could lead to these obligations. This raises the following secondary questions:
- How would an English court apply general principles of contractual interpretation to a smart contract written wholly or in part in computer code?
- Would an English court look beyond the mere outcome of the running of any computer code that is part of a smart contract in determining the agreement between the parties?
- Would a smart contract between anonymous parties give rise to binding legal obligations?
- Would there be a statutory requirement for a signature?
- Would a smart contract fulfil an “in writing” requirement?
Why is this important?
The consultation addresses key issues concerning the use of smart contracts and cryptoassets and will assist the UKJT to release an authoritative legal statement which “will either demonstrate that English private law already provides sufficiently certain foundations in relation to the relevant issues, or will highlight particular areas of uncertainty that may be ripe for further clarificatory steps to be taken”.
Any practical tips?
Keep watching! Future announcements and publications issued by the Government on these topics should clarify the legal status of cryptoassets and smart contracts. To the extent existing principles of English law do not address all of the necessary matters, specific legislation to embrace its new technologies will be needed.