Crypto Assets – Property or not?

Sick of people calling everything in crypto a Ponzi scheme. Some crypto projects are pump and dump schemes, while others are pyramid schemes. Others are just standard issue fraud. Others are just middlemen skimming of the top. Stop glossing over the diversity in the industry. Pat Dennis, Twitter, 25 April 2022.

Without taking quite such a negative view, it is certainly true that crypto assets, from bitcoin to NFTs, need to be treated with extreme care. The FCA warned in 2021 that “consumers who invest in crypto assets should expect to lose all their money” due to lack of consumer protection, price volatility and product complexity.

Some bold spirits have gone so far as to suggest that the decentralised nature of crypto assets takes them out of the legal system altogether. Others have questioned whether crypto assets are property. If they are, how are disputes about ownership to be resolved? Can they be pledged as security or have liens extended over them?

The 2019 Legal Statement on Crypto Assets and Smart Contracts published by the UK Delivery Taskforce, chaired by Sir Geoffrey Vos, Chancellor of the High Court went a long way to asserting legal principles in this area.

The Taskforce identified the following key features in classing something as property: whether it is definable, identifiable by third parties, capable of assumption by third parties, and having some degree of permanence.

Having decided that crypto assets possessed the above characteristics, they next considered whether there was anything preventing crypto assets from being property, for example, whether they constituted “pure information.”  The Taskforce concluded that there was not. The private key which allowed crypto assets to be dealt in might be pure information, but the underlying asset could (and in most cases would) be property.

They noted, however, that crypto assets were intangible. Accordingly, any property rights which depended on “taking possession” of the item in question could not be exercised against crypto assets. This means that they cannot be the subject of a pledge or lien, nor can they be stolen, although someone who wrongfully hijacked someone’s crypto wallet would undoubtedly commit a number of other offences.

Importantly, the Taskforce stressed the importance of being able to demonstrate legitimate control of the private key which allows dealings with specific assets to be recorded on the chain. They identified this the core means of showing ownership in a decentralised system.

Access to the private key is, in terms of crypto assets, rather more than nine points of the law.

In AA v. Persons Unknown [2019] EWHC 3556 (Comm) an insurance company was granted leave to pursue a tracing remedy against 96 Bitcoins, paid out as part of a ransomware settlement, and found to have arrived in a third party’s wallet, the third party not necessarily having had any connection to the ransomware attack. The Court cited the Taskforce’s work as having persuasive authority and subsequent cases have followed suit.

Crypto assets status as property therefore seems to be assured. Furthermore, the Taskforce have now produced the Digital Dispute Resolution Rules, which are intended to be incorporated into agreements with respect to crypto assets to, in their own words, “provide for specialised arbitrators and a specialised arbitration procedure, with the possibility of on-chain enforcement of an arbitrated outcome.”

The developing area of law is one to watch, but the flexibility of common law seems more than up to coping with crypto for the foreseeable future.

Susan Hall, Partner – Intellectual Property, Clarke Willmott

May 2022