Legal status of cryptoassets, distributed ledger technology and smart contracts| Consultation on what needs clarifying

The LawTech Delivery Panel's UK Jurisdiction Taskforce (UKJT) has launched a public consultation to help shape its work on the status of cryptoassets, distributed ledger technology (DLT) and smart contracts under English law.

The consultation

Value, assets and legal rights and obligations are increasingly being structured on blockchains or other DLT. However, the legal status of these digital constructs is often unclear, leading to questions about whether they can be legally owned, transferred or used as collateral, and whether any legal rights relating to them can be enforced. This is particularly the case where the "thing" only exists in digital form, and not outside the specific blockchain network that created them.

It is the UKJT's view that "perceived legal uncertainty is the reason for some lack of confidence" and that "mainstream investors still need to be convinced that their legal rights can be protected when they trade in cryptoassets and enter into smart contracts". The UKJT is therefore planning to prepare an authoritative "legal statement" on the status of cryptoassets and smart contracts under English law. The intention is to demonstrate whether English law already provides sufficient certainty with respect to these digital constructs and the rights relating to them, or whether any particular areas of the law need to be clarified or updated.

The consultation is not yet seeking to discuss the content of the envisaged legal statement, but rather is focused on whether the UKJT is asking the right questions. A draft list of questions has been published for comment, looking at areas of uncertainty, including:

• the legal status of cryptoassets and the "private keys" used to prove ownership of them, such as whether they should be characterised as personal property, and if so, what category of property;
• the implications for the enforceability of contracts based on DLT;
• the circumstances in which a DLT system is capable of amounting to a register for the purposes of evidencing, constituting and transferring title to assets;
• the circumstances under which smart contracts written partly or entirely in computer code should give rise to binding legal obligations; and
• whether a smart contract between anonymous or pseudo-anonymous parties is permissible.

Comments are invited on whether the questions cover the main issues which need to be addressed, and whether any additional or alternative questions should be added.

The LawTech Delivery Panel and the UKJT

As previously reported, the Law Society created an industry-led and government-supported LawTech Delivery Panel in October 2018. The Panel's overarching objective is to promote the use of technology in the UK's legal sector, including addressing “challenges related to regulation, investment and funding, education and skills, legal framework, commercial disputes resolution and ethics". This consultation is a clear step forward in meeting a variety of these aims.

The UKJT is one of the six taskforces of the LawTech Delivery Panel, tasked with demonstrating that English law can be a state-of-the-art foundation for the development of DLT, smart contracts and associated technologies.

Consultation deadline and next steps

To respond to the consultation about whether the right questions are being asked:

• complete the consultation response form or email UKJT@justice.gov.uk, by 21 June 2019; or
• register via the same form to attend the 4 June public event in London.

Alternatively, please contact one of our experts (details below).

Once the consultation is closed and the responses analysed, the UKJT intends to release its legal statement in late summer. It is not yet clear whether the UKJT will also consult on the content of the legal statement. However, the statement will enable consideration of whether any additional steps are needed (which would include recommendations for legislative change).

Osborne Clarke Comment

The UKJT believes that the lack of legal certainty around these concepts is seriously hampering uptake, and our experience of the market suggests that many businesses share that sentiment. As such, the consultation and a definitive statement as to the status and validity of cryptoassets and smart contracts are to be welcomed.

While the stated objective for this work is to encourage the use of technology by the UK legal sector, there is a wider benefit to be gained from this project. The reach and strength of English law and the English courts as a preferred choice for governing international business is well known and long established. This consultation shows the UK government and legal sector's commitment to ensuring that English law remains a solid foundation for the next generation of business, potentially conducted with smart contracts, financed by cryptoassets and underpinned by DLT.