Earlier this year, the UK Jurisdiction Taskforce (UKJT), part of the LawTech Delivery Panel, published its Consultation Paper to consider what it described as "the perceived legal uncertainty" relating to cryptoassets and smart contracts under English Law. Following responses from a broad range of stakeholders, the UKJT issued its legal statement on 18 November 2019, providing much needed clarity on the status of these disruptive technologies under English law.
The legal statement, led by Chancellor of the High Court, Sir Geoffrey Vos, reached two key conclusions (as further described below): (i) cryptoassets (including virtual or crypto-currencies) can be treated in principle as property, and (ii) smart contracts are capable of satisfying the conditions of forming contracts under English law, and are therefore enforceable by English Courts.
Cryptoassets as property
The legal statement draws on common law to outline the necessary characteristics of property, concluding that property must "be definable, identifiable by third parties, capable in its nature of assumption by third parties, have some degree of permanence or stability" as well as having certainty, control and assignability.
The UKJT acknowledge that cryptoassets can vary greatly in both their nature and the purpose for which they are issued on the blockchain. For example, depending on characteristics of the token and the rights given to a tokenholder, a cryptoasset may be a utility token (a type of digital voucher to access goods or services) or a security token (a digital form of a traditional security). However, in broad terms, the UKJT believes that cryptoassets do hold all the legal indicia of property and should therefore be treated as property under English law, regardless of their novel features (such as intangibility, decentralisation, and use of a distributed transaction ledger to record their existence). Such an approach is consistent with HMRC's treatment of taxing cryptoassets for individuals as a property and therefore subject to capital gains tax (see our summary of HMRC's policy paper here).
Characterising cryptoassets as property is significant from a legal perspective as proprietary rights, unlike personal rights, are recognised against the whole world and are capable of being used as a security. It also has important implications for the legal rules that apply in cases of insolvency, theft and breach of trust. However, as cryptoassets are purely "virtual" in nature, the UKJT makes it clear that they cannot be the object of bailment and only certain types of securities (such as liens or pledges) can be granted over them. They are also not documents of title, nor are they documentary intangibles or negotiable instruments. Also, the UKJT considers that only some types of security can be granted over cryptoassets such as a mortgage or equitable charge but not a lien which can only be created over tangible property that can be subject to physical possession.
A smart contract is an agreement between parties in the form of a computer code on how a set of procedures or processes will operate. It is conditional on an event happening in the form of a specific input, as a result of which, a specific output will occur. A frequently cited example of a smart contract is a vending machine or juke box where the software in the machine enables the transfer of an output (e.g. chocolate or music) on the occurrence of an input (e.g. correct payment).
As noted in our recent report entitled Blockchains uncut: risks, rewards and regulation, a smart contract may constitute a legal contract under English law, provided the key elements of a contract are met: offer, acceptance, intention to create legal relations and consideration. This position is supported in the legal statement, which adds that English law does not normally require contracts to be in any specific form.
The UKJT emphasises that the defining feature of a smart contract is its "automaticity", (i.e. it is performed automatically and without the need of human intervention). It recognises that such a characteristic may remove the need for a party to promise performance or resort to the law to enforce a promise by their counterparty. However, this alone is not a sufficient reason for treating smart contracts differently to traditional contracts. There is still a risk that performance of the contract is affected by an event external to the code, (e.g. a system failure or corruption of additional data from the outside world that is fed into them), which could lead to disputes that are capable of adjudication. In such circumstances, being able to revert to a natural language contract between the parties that deals with such circumstances is helpful. We therefore recommend parties construct agreements relating to smart contracts as a combination of the relevant smart contract code and a natural language contract (incorporating the smart contract by reference in the natural language contract).
The legal statement also states (in principle) that use of a private key to authenticate a document would satisfy a statutory signature requirement, and that a smart contract recorded in source code would satisfy a legal requirement for a document to be in writing., regardless of whether an expert is required to translate the code into comprehensible language.
Click here to download the full legal statement.