The Law Commission of England and Wales, an independent law reform consultancy originally commissioned by parliament, has proposed a new ownership category to encompass digital assets such as bitcoin in a 549 page proposal.
How could this change the way the UK interacts with and recognizes bitcoin, and why was this needed?
Reform the legal structure
In the UK, there are currently two recognized forms of ownership: things in possessionand things in action.
Goods belonging to the category of things in possession simply refers to tangible objects that can be held or touched, such as a gold bar, while property is classified as a thing in action is a concept or idea that is confirmed by legal actions or proceedings.
However, bitcoin cannot meet any of these criteria. Bitcoin cannot be physically owned, and legal action cannot dictate the existence of bitcoin. Thus, the Law Commission proposed the addition of data objects as a form of property.
Data objects consist of data represented on an electronic medium. This designation can include computer code, as well as electronic or analog systems. In addition, data objects must exist independently of people and the legal system, which means that the data subject must be separable from individual and legal rights.
In addition, the data object must also be “rival”, which means that two people cannot simultaneously use the same data object. While two people cannot use the same computer to write a book at the same time, those people also cannot spend the same unspent transaction output (UTXO), or bitcoin.
Not only does the Law Commission outline this new understanding of ownership, but the proposal also proposes how it should be applied.
Own data objects
The Law Commission states that the owner of a data object must have “control” of the asset.
Control is categorized as being able to exclude others from ownership (private keys), being able to execute its use (expenditure control), ability to identify itself as capable of the previously mentioned criteria.
Indeed, the Law Commission goes further in establishing a framework for operating as a trustee, but more importantly, the importance of taking custody of one’s own data objector private keys.
In fact, the proposal cautions against current practices plaguing the entire ecosystem regarding incentives for staking or providing a custodian with access to private keys in return for return.
“In addition, the Custodian could use the tokens and rights for direct or indirect participation in transaction and block validation activities to support the operation of Proof of Stake consensus-based crypto token networks,” reads -on in the proposal. “No general principle of common law would prevent the depositary from retaining for its own benefit any part – or even all – of the income generated by such activities.”
Further, the Law Commission details that risk to consumers can become elevated due to events “where a custodian initiates insolvency proceedings and users are considered unsecured creditors”, resulting in the indefinite freeze of funds by the custodian.
Thus, the Law Commission says it hopes self-custody will remain an essential foundation of data objects through its proposed framework:
“Indeed, the disintermediation of traditional communication and payment systems and the ability to control exclusive access to one’s own data objects (which may persist across transactions in a modified form) is one of the fundamental principles of decentralized crypto-token systems.”
In conclusion
The Law Commission’s 549-page proposal is embedded with prominent Bitcoin phraseology such as “not your keys, not your coins”, quotes numerous thought leaders across the ecosystem, and empathetically offers a vision rigorous and philosophical approach to the evolution of property.
As the UK seeks to strengthen its presence within the bitcoin and digital asset ecosystem, this proposal aims to mark a stepping stone for the future of digital assets.