New bill and case law clarify path forward for digital assets in the UK

The UK Parliament unveiled the Property (Digital Assets etc) Bill on 11 September for its first reading in the House of Lords, with the bill aiming to remove restrictions keeping digital assets from being recognised as personal property.  

The following day, a decision in the ongoing D'Aloia v Persons Unknown case was handed down providing further clarification on the availability of equitable remedies and defences applicable to cryptoassets.  

Both these developments potentially will have a broad impact on the digital assets and the wider financial services industry. 

What does the bill change?

The bill is succinct yet significant, clarifying what types of things can be personal property rights and can benefit from personal property rights and protections at law.  

As things stand there are only two types of property in English law: things in possession (typically, tangible items such as furniture or cars) and things in action (property that cannot be physically possessed but can only be claimed or enforced through a court action, such as debts or shares).

The bill would establish that something may be capable of attracting property rights even if it does not fit into either category. It acknowledges the emergence of new types of assets, such as cryptoassets and non-fungible tokens. The proposed legislation is a direct response to the Law Commission recommendations in its final report on digital assets, with the bill's explanatory notes detailing that it seeks to provide "clarity and greater legal certainty"' regarding the treatment of these assets.

However, the bill does not address the legal implications associated with this recognition, such as what the courts will use as evidence of ownership of these assets. Further development will, therefore, be left to the courts as legal issues arise in this area. 

New case law on digital assets

The bill comes at a timely moment, even half a decade after the landmark decision in AA v Persons Unknown – in which Mr Justice Bryan recognised that bitcoins were property – the issue of whether "digital representations of value" constitute property has remained a hot topic.

This was highlighted in the recent decision of D'Aloia, in which Richard Farnhill, sitting as a deputy High Court judge, dedicated 67 paragraphs of his judgement to debate whether or not Tether's USDT, a blockchain-enabled platform designed to facilitate the use of fiat currencies in a digital manner, is property. 

The D'Aloia decision was notable for two further reasons. It affirmed that equitable principles apply to digital assets. And it highlighted the impact of Bitkub failing to comply with its anti-money laundering (AML) obligations.

Equitable remedies 

The decision in D'Aloia provided a comprehensive summary of the application of existing legal principles, including tracing (that is, whether any identified stolen property can be recovered from the current possessor), constructive trusts and unjust enrichment. 

On the facts, much of the judge's comments were obiter (meaning non-binding), but Mr Justice Farnhill made clear that, in his view:

• Digital assets are property, and the relevant equitable proprietary remedies are available in principle.
• The tracing of digital assets is possible, and the stolen assets could have been identified.
• A constructive trust in favour of a victim can arise in respect of the receipt of stolen digital assets, such trusts arising from the date of rescission.
• It is possible to be "unjustly enriched" by receipt of digital assets in certain circumstances.
• The equitable defences of being a "good faith" purchaser for value, change in position and ministerial receipt are all available in principle.

However, in this particular case, those points were not substantiated by the facts. Specifically, the claimant failed to prove that their digital assets ended up in the Bitkub wallet, meaning there was no proof there were any assets that could be the subject of the relevant claim.

Despite this, the judgment stands as a thorough assessment of the current state of the law and serves as a valuable guide for victims of fraud looking to pursue similar claims in the future.

Impact of AML non-compliance

The second point, relevant to both digital asset platforms and financial institutions who face claims in respect of funds deposited in their accounts, was the significant focus on Bitkub's failure to comply with its own AML policies and procedures.

Although the judge noted there was no evidence of Bitkub breaching Thai AML regulations, he found that it had failed to comply with its own documented AML compliance processes and procedures. 

As a result, had the claimant proven that the relevant USDT in the Bitkub account had come from the fraud, Bitkub would not have been able to rely on any of the equitable defences to the claims. Bitkub was aware of suspicious activity on the account and should have conducted further investigations before processing additional transactions. It failed to evaluate properly the risk over the account, to monitor that risk, or to impose the relevant withdrawal limits to that account. Consequently, the judge considered that Bitkub was not entitled to rely on any good-faith-based defences.

While the judge's comments are non-binding, they serve as a timely reminder to digital-asset platforms and financial services providers that compliance with AML policies and procedures is not just a regulatory matter. Failing to implement proper monitoring processes and controls can have significant legal consequences in the event of a dispute over fraudulent payments.

Mandatory reimbursement rules

Importantly, as of 7 October 2024, new mandatory reimbursement rules, introduced by the Payments Systems Regulator (PSR) last June, have taken effect. In short, these rules will require payment service providers to reimburse customers who fall victim to authorised push payment fraud (that is, where a fraudster tricks someone into sending a payment to an account outside their control) where the payment takes place over the Faster Payments system.

This real-time payments system is one of the ways money can be sent electronically in the UK – and means that any money sent is received in near real time. The implementation of these new rules emphasises the necessity for strong compliance and investment in fraud prevention within the industry.

The PSR has introduced mandatory reimbursement for UK authorised push payment fraud from the 7 October – with firms grappling with a range of new rules and guidance from the payments regulator in the countdown to this deadline.

Osborne Clarke comment

The Property (Digital Assets etc) Bill will provide market participants with greater clarity and certainty regarding the legal status of digital assets in England and Wales, boosting confidence that the UK government recognises the importance of ensuring the law keeps pace with technological developments.

However, as the Law Commission concluded, major statutory reform is unlikely to resolve all issues related to the law surrounding digital assets. Further developments will be left to the common law, meaning uncertainty will remain in some areas until relevant issues come before the courts, which could take time.

Based on recent case law, such as D'Aloia, we know that focus on AML compliance is critical from both a regulatory perspective – the Financial Conduct Authority – and in terms of the impact on available legal defences.

The UK government has yet to set out its proposed timing for the implementation of the bill, but we will continue to monitor its progress.

In the meantime, if you have any questions about the matters raised in this Insight, please get in touch with one of our experts.

Emily Greatrix, a Trainee Solicitor with Osborne Clarke, contributed to this Insight.