Legal treatment of cryptoassets (also often called virtual assets) is a new frontier for lawyers. Guidance on the development of international thinking can, however, be taken from the just published UK Jurisdiction Taskforce’s Legal Statement on the Status of Cryptoassets and Smart Contracts.
Who needs to read it? Why?
Participants in crypto markets, or those looking ahead to the creation of new classes of rights and assets based on blockchain/distributed ledger technology will be interested in the Legal Statement.
In the words of by Sir Geoffrey Vos, Chancellor of the High Court in the United Kingdom, in the foreword:
In legal terms, cryptoassets and smart contracts undoubtedly represent the future.
I hope that the Legal Statement will go a long way towards providing much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial services industry.
What is a cryptoasset?
According to the Legal Statement, cryptoassets implement commercial applications using cryptographic techniques. Most applications involve dealings in assets of some kind, which must be represented digitally within the system.
A cryptoasset is ultimately defined by reference to the rules of the system in which it exists.
Functionally, it is typically represented by a pair of data parameters, one public (in that it is disclosed to all participants in the system or to the world at large) and one private. The public parameter contains or references encoded information about the asset, such as its ownership, value and transaction history. The private parameter—the private key—permits transfers or other dealings in the cryptoasset to be cryptographically authenticated by digital signature. Knowledge of the private key confers practical control over the asset; it should therefore be kept secret by the holder. More complex cryptoassets may operate with multiple private keys (multisig), with control of the asset shared or divided between the holders.
What is a smart contract?
The Legal Statement does not try to formulate a precise definition of smart contracts. Instead, it looks at the features they share, including “automaticity”. A smart contract is performed, at least in part, automatically and without the need for, and in some cases without the possibility of, human intervention. This requires the terms of the contract to be recorded in computer-readable form, i.e. in code. Smart contracts can be embedded in a networked system that executes and enforces performance using similar techniques (cryptographic authentication, distributed ledgers, decentralisation, consensus) to other cryptoassets.
What does the Legal Statement say?
The Legal Statement looks at the legal treatment of cryptoassets as “property” and then at the legal issues involved in smart contracts and distills some key legal principles:
- Whether English law would treat a particular cryptoasset as property ultimately depends on the nature of the asset, the rules of the system in which it exists, and the purpose for which the question is asked.
- In general, however, cryptoassets have all of the indicia of property.
- The novel or distinctive features possessed by some cryptoassets—intangibility, cryptographic authentication, use of a distributed transaction ledger, decentralisation, rule by consensus—do not disqualify them from being property.
- Cryptoassets cannot be physically possessed: they are purely “virtual”. Accordingly, as a matter of law they cannot be the object of a bailment, and only some types of security can be granted over them.
- Smart contracts can meet the test for a contract in English law i.e. when two or more parties have reached an agreement, intend to create a legal relationship by doing so, and have each given something of benefit.
- Whether the requirements are in fact met in any given case will depend on the parties’ words and conduct, just as it does with any other contract. The parties’ contractual obligations may be defined by computer code (in which case there may be little room for ‘interpretation’ in the traditional sense) or the code may merely implement an agreement whose meaning is to be found elsewhere (in which case the code is unimportant from the perspective of defining the agreement).
- Either way, however, in principle a smart contract can be identified, interpreted and enforced using ordinary and well-established legal principles.
- English law does not struggle with the concept of anonymous or pseudonymous parties contracting; nor with the notion that a contract can be formed between individuals by virtue of them each having agreed to subscribe to a set of rules (as happens, for example, in a club).
- English law is fully equipped to deal not only with bilateral smart contracts, but also those structured around Decentralised Autonomous Organisations (DAOs).
- There are some legal rules that require certain documents to be ‘signed’ or ‘in writing’. In principle, a statutory ‘signature’ requirement can be met by using a private key which is intended to authenticate a document, and a statutory ‘in writing’ requirement can be met in the case of a smart contract whose code element is recorded in source code (although the analysis may be less straightforward where a smart contract is represented only in object code on a running system).
These points are developed further in the full Statement.
The Legal Statement shows the United Kingdom working hard to assert its traditional role as one of the key legal systems for international commerce – demonstrating that English law is flexible enough to cope with rapid technological change.
New Zealand law, with its common law origins, and modern statutes, is also well placed to cope with cryptoassets and smart contracts.
If you have any questions in relation to the Legal Statement, crypto-assets or smart contracts generally, please contact one of our experts.
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