Law Commission of England and Wales Proposes a New Class of Property for Cryptos and NFTs

TL; DR

The Law Commission of England and Wales has provisionally proposed to reform the law around digital assets and to introduce a new class of personal property termed “data objects”.?

Traditionally, English law divides property into real property (interests in land) and personal property. In terms of personal property, the English common law further divides it into two separate categories: chose in possession (for tangible things) and chose in action (for legal rights). Following the 19th Century case?Colonial Bank v Whinney, all personal property must be either a chose in possession or a chose in action. Under this binary categorisation, a third indeterminate category could not have existed.?

Now, acknowledging that some digital assets are objectively and functionally different from both chose in possession and chose in action, the Law Commission concurs with the view of the UK Jurisdiction Taskforce that?Colonial Bank v Whinney?is not a good authority for restricting the range of personal property categories.

Therefore, the Law Commission provisionally proposes to explicitly recognise a “third” category of personal property distinct from chose in possession and chose in action, and the Law Commission names the third category “data objects”.

According to the proposal, to fall within the sui generis category of “data objects”, the thing must:

1. be composed of data represented in an electronic medium, including in the form of computer code, electronic, digital or analogue signals;
2. exist independently of persons and exist independently of the legal system; and
3. be rivalrous (i.e. use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time).

It is expected that the new category would allow for a more nuanced understanding of innovative, nascent, and distinctive objects of property rights.

Concerning crypto-tokens, the Law Commission provisionally concludes that they are, in general, capable of satisfying the above criteria and are thus “data objects”. In particular, the Law Commission has recognised that NFT is a crypto-token that is capable of attracting personal property rights in itself. As such, one may demarcate the boundary of the rights associated with NFTs and determine where they would overlap or conflict with intellectual property rights and other contractual rights.

Overall, the Law Commission apprehends the great potential of NFTs in redefining intellectual property rights and states that:

“NFTs will take a leading, exploratory role in establishing property rights in data objects in mainstream and retail use. Beyond that, perhaps the most radical legal development that NFTs could bring about is a change in how the market, market participants, and the legal system operate and transact with respect to intellectual property rights.”

The Law Commission's consultation paper on digital assets covering the above changes (>500 pages long) may be accessed below:

Online submissions of responses to a consultation are invited and will be open until 4 November 2022.

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