At the Guildhall this morning, the Lord Chief Justice, the Advocate General, the Chancellor and others launched the “Legal statement on cryptoassets and smart contracts” (“the Legal Statement”) on behalf of the UK Jurisdiction Taskforce (“UKJT”).
The UKJT is one of six taskforces set up by the LawTech Delivery Panel, a body established by the UK Government, the Judiciary and the Law Society of England and Wales with the overarching objective of promoting the use of technology in the UK legal sector. As a next step, the Law Commission will consider whether there is scope for legislation in this field.
The objective of the Legal Statement, as explained by the Chancellor, “is to provide the best possible answers to the critical legal questions under English law”. As the authors say:
“We focus on those aspects of cryptoassets and smart contracts that are potentially novel and distinctive and discuss the extent to which we consider that general legal principles apply” (i.e. the law “as is”).
The Legal Statement is not a treatise, an academic paper, a regulatory blueprint or an expression of anyone’s views as to how the law should develop in future. It contains the following summary of its conclusions:
15. 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:
(a) cryptoassets have all of the indicia of property;
(b) 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;
(c) nor are cryptoassets disqualified from being property as pure information, or because they might not be classifiable either as things in possession or as things in action;
(d) cryptoassets are therefore to be treated in principle as property.
16. This is likely to have important consequences for the application of a number of legal rules, including those relating to succession on death, the vesting of property in personal bankruptcy, and the rights of liquidators in corporate insolvency, as well as in cases of fraud, theft or breach of trust.
17. 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, though we see no obstacle to the granting of other types of security. They are not documents of title, documentary intangibles or negotiable instruments (though some form of negotiability may arise in future as a result of market custom), nor are they instruments under the Bills of Exchange Act.
18. There is a contract in English law 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. A smart contract is capable of satisfying those requirements just as well as a more traditional or natural language contract, and a smart contract is therefore capable of having contractual force. 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.
19. 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.
20. 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).
21. There are some legal rules which 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).”
Pending judicial authority, the opinions expressed in the Legal Statement are, rather like passages from textbooks, likely to be a useful starting point for litigators and others when undertaking any legal analysis of a transaction involving cryptoassets or smart contracts. Given the pedigree of the Legal Statement, courts may well find those opinions persuasive (albeit that they have no formal status).