In recent years, digital assets, including cryptocurrencies such as Bitcoin, have grown in significance and there are a number of legal challenges involved in accommodating them within any system. The term “digital assets” is usually understood to be an umbrella term referring to secured digital representations of value which can be transferred, stored or traded electronically by the use of distributed ledger technology (DLT) or a similar technology. The Law Commission of England and Wales (LCEW) has been conducting two significant law reform projects in this area, ie electronic trade documents and digital assets, concerning substantive law aspects of digital assets to ensure that the law of England and Wales gives legal recognition and protection to digital assets and facilitates innovation. Given that the LCEW can only make recommendations for the law of England and Wales, the scope of both law reform projects is limited to that jurisdiction. However, as the work of the Centre for Commercial Law (CCL) has identified, some of the law reform proposals of the LCEW in the electronic trade documents project have a UK-wide impact and therefore would have a knock-on effect in the jurisdictions of the UK beyond England and Wales, including Scotland (see Burcu Yüksel Ripley and Alisdair MacPherson, CCL’s response to the Law Commission of England and Wales Consultation on Digital Assets: Electronic Trade Documents). The situation would likely be comparable regarding the digital assets project (see Burcu Yüksel Ripley, Alisdair MacPherson and Donna McKenzie Skene, CCL’s response to the Law Commission of England and Wales Call for Evidence on Digital Assets).
In parallel to these developments in England and Wales, the Scottish Government has established an Expert Reference Group on Digital Assets to assess digital assets in the law of Scotland. As part of its work, the Expert Reference Group has recently consulted on extending the electronic trade documents law reform proposal of the LCEW to Scotland and on the legal status of digital assets under Scots private law. This blog article considers the law reform developments in England and Wales concerning digital assets and makes suggestions for Scotland.
Scottish Perspectives on Electronic Trade Documents Law Reform
The law reform project of the LCEW on electronic trade documents started in 2021 with a very targeted purpose of enabling the legal recognition of certain trade documents in electronic form. The current law, which is heavily based on paper-based trade practices and does not adequately accommodate the use of electronic trade documents, has already been considered far from suitable to address the needs of today’s international trade landscape. This has become much more apparent in the COVID-19 pandemic with severe disruptions of export-import transactions due to the COVID-19 measures in place. The possibility of paper documents being exchanged among or presented to parties in a timely manner in a physical format has been adversely affected by the reduced availability of courier and postal services to deliver those documents and/or the non-availability of staff in business branches and offices to receive, check and process those documents (see generally Burcu Yüksel Ripley, Transition to Paperless Trade to Mitigate COVID-19 Impact on International Trade, Aberdeen Law School Blog, CCL Blog Series on Commercial Law and COVID-19, 2020). Against this background and following a public consultation, the LCEW published, on 16 March 2022, a Report and Draft Bill on Electronic Trade Documents to remove legal barriers for certain electronic trade documents by giving them the same legal effects as their paper counterparts, which would unlock significant potential for international trade with increased efficiency, resilience, and financial and environmental benefits. The draft Bill was listed in the legislative programme for the new UK Parliamentary term in the Queen’s Speech on 10 May 2022.
The draft Bill currently extends to England and Wales only (see section 7(1) of the draft Bill produced by the LCEW). There are, however, compelling reasons for Scotland to participate in the law reform concerning electronic trade documents proposed by the LCEW, as identified in Alisdair MacPherson and Burcu Yüksel Ripley’s response (on behalf of the CCL) to the Scottish Government Expert Reference Group’s Consultation on Digital Assets in Scots Private Law:
- Scotland defines itself as a trading nation with a strong and productive economy characterised by diverse businesses which are becoming increasingly more international. This is reflected in “Scotland: A Trading Nation”, a plan of the Scottish Government for growing Scotland’s exports, which is strongly aligned with Scotland’s National Performance Framework localising and implementing UN Sustainable Development Goals. Participating in the law reform of electronic trade documents would be a very positive step in this context and contribute favourably to Scotland’s outlook in international trade.
- There is a pressing need for law reform in the UK in this area to facilitate the use of technology in trade, provide legal certainty and predictability regarding the legal status of electronic trade documents, and give these documents the legal recognition that their paper counterparts have. This will significantly help speed up the overdue transition to paperless trade, which will better safeguard and maintain the global flow of information relating to the trade in goods and build resilience to shocks such as COVID-19. This is particularly important for Scotland given all the challenges that Scotland’s international trade in goods has been facing first due to Brexit and the transition to the EU-UK Trade and Cooperation Agreement, then the COVID-19 pandemic, and more recently the war in Ukraine as identified by the State of Economy: May 2022 published by the Chief Economist Directorate of the Scottish Government.
- Some of the Acts which will be affected by proposed law reform, such as the Bills of Exchange Act 1882 and the Carriage of Goods by Sea Act 1992, are also applicable in Scotland. If Scotland does not participate in the proposed law reform, that would result in divergence of the application of provisions within the legislation – despite the fact that the Acts are generally applicable in both England and Wales and Scotland. Such a result is not desirable as it would potentially cause confusion and complications, divergence in trade practices in the UK, and, depending on the circumstances, intra-UK conflict of laws issues. In a broader international context, it might result in parties in international trade choosing the law of England and Wales to govern their transactions over Scots law and this may happen even in cases where Scots law would otherwise apply to the transactions in question.
- There are no significant obstacles to applying the proposed Electronic Trade Documents Bill in Scotland. With adequate training in the trade sector as well as the legal sector on the application and implications of the Bill, the Bill can be applied in Scotland smoothly.
In light of the above considerations, there is a compelling case for Scotland to participate in the electronic trade documents reform and other commentators have also written positively about extending such reform to Scotland. To achieve this, stakeholders should be encouraged to make representations directly to the UK Government and to provide comments and other evidence once the Bill has been brought before the UK Parliament. The Scottish Government should express its support for the Bill’s applicability to Scotland. It is important for Scotland’s international trade that the Bill brought before the UK Parliament applies to Scotland and the Scottish Parliament should provide the necessary resolution for devolution matters.
Scottish Perspectives on Digital Assets Law Reform
The law reform project of the LCEW on digital assets started in 2021 and is currently at the stage of pre-consultation. In this project, the LCEW aims to make recommendations for reform to ensure that the law of England and Wales can accommodate digital assets including cryptoassets. The Commission takes the view that while the law of England and Wales is flexible enough to accommodate digital assets, there are certain aspects of the law, such as possession which, under the current law, relates to physical things, that need to be reformed to ensure legal recognition and protection for digital assets. The LCEW published, on 30 April 2021, a call for evidence aiming to gather views and evidence about the ways that digital assets are being used, treated and dealt with by stakeholders and market participants and the potential legal consequences of digital assets being “possessable”. Following this call for evidence, an interim update was published on 24 November 2021 on the scope and details of the project, which is going to be followed by a public consultation.
In Scotland, there is neither legislation nor reported cases concerning digital assets including cryptoassets. Although digital assets vary widely in their characteristics and functions, the CCL’s response to the Scottish Government Expert Reference Group’s Consultation has identified that it is likely that digital assets would be, in principle, considered property and classified as a special type of incorporeal moveable property in Scots law:
- The recognition of digital assets as property is pivotal and will allow for them to be treated along with other property not only within property law itself, but in adjacent areas where digital assets are of relevance such as succession, family law, secured transactions, insolvency, diligence, trusts and delict (for an assessment of cryptocurrencies in this context under Scots law, see Amy Held, Alisdair MacPherson, and Burcu Yüksel Ripley, ‘United Kingdom (UK) Report for the International Academy of Comparative Law’s General Report on Cryptocurrencies: The Impossible Domestic Law Regime?’ (Asunción 2022 General Congress, Topic IX.C, forthcoming).
- Given that digital assets are not land or a right in relation to land, they are moveable property (rather than heritable property) in Scots law. Although certain aspects of digital assets may resemble corporeal moveable property, tangibility/intangibility (almost always) determines whether property is to be corporeal or incorporeal respectively and intangible property can be equated to incorporeal property in Scots law. Digital assets can therefore be identified under the category of incorporeal moveable property. This is a relatively flexible category in Scots law and already accommodates a number of different types of intangibles, beyond simply claim rights. These other types of incorporeal moveables include shares and intellectual property that are transferred using registration or assignation alone (depending on the particular asset) instead of by assignation with intimation (as is the case for claim rights).
- Digital assets are not “goods” within the meaning of s 61(1) of the Sale of Goods Act 1979. As the CCL response to the Law Commission of England and Wales Call for Evidence on Digital Assets has identified, digital assets currently do not fit into the definition of goods in the Act. They cannot be considered as personal chattels as they do not satisfy the tangibility criterion for this purpose. The same is true in relation to Scotland as they are not corporeal moveables, with the definition providing that “goods” includes all corporeal moveables except money. In contrast to digital assets generally, some types of digital assets, such as stablecoins and Central Bank Digital Currencies, could be considered more akin to money.
Due to the above considerations, Scots law seems capable of accommodating digital assets, particularly due to the flexibility and expansiveness of its understanding of the meaning of property and property law. However, the absence of legislation and case-law creates a degree of uncertainty which could impact upon the use of digital assets in Scotland and will affect decision-making of commercial parties. This could be alleviated through either the enactment of bespoke legislation in the area or through the appearance of case law. Regarding the latter, it may take a considerable period of time until there is a sufficient number of cases to provide clarity regarding various aspects of digital assets from Scottish courts, given that Scotland is a small jurisdiction and many disputes are settled or resolved out of court. Legislating in this area may therefore be a more effective way to provide legal certainty and predictability regarding the status of digital assets in Scots law and to ensure that the system supports and facilitates innovation in the digital space.
If there is to be legislation dealing with digital assets, it will be necessary to provide a definition of “digital assets” which is precise enough to capture the particular assets that are intended to be covered by legislation and also technologically neutral to accommodate innovation that may give rise to equivalent assets in the future. This will not be an easy task. However, as the CCL’s response to the Scottish Government Expert Reference Group’s Consultation has suggested, material in the draft Electronic Trade Documents Bill and other sources (such as the definition of cryptoassets in the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511) inserted Reg 14A into the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692)) may be of assistance in constructing a definition for digital assets. Given the difficulties around formulating a definition and specifying particular rules to apply to all digital assets, Scotland can take a relatively light-touch approach to legislation by giving some general provisions for clarity and leaving further details and application in various contexts to the courts.
The legislation could specify clearly that digital assets are, in principle, property for the purposes of Scots law and that they are a special type of incorporeal moveable property. It would be worthwhile for provisions to specify how digital assets are transferred, given that although there is comparability with other types of incorporeal property in some respects, the method of transferring digital assets differs in comparison to such other property. It could be stipulated that a transfer of digital assets may be achieved by a (voluntary) transfer of control (in accordance with the relevant digital asset system being used), which itself may require a definition. Yet the relevant ledger may not always reflect the actual legal position, and this point could also be captured in legislation. Bespoke rules for dealing with digital assets in insolvency law and succession law and certain other areas may also be beneficial. The emergence of digital assets also strengthens the argument for reform in other respects. The current form of diligence that will usually be applicable to digital assets is adjudication for debt, as the default diligence in Scots law; however, it is highly unsuited to dealing with digital assets and is not attractive for creditors. As such, adjudication should finally be replaced with land attachment and residual attachment (which are located in the Bankruptcy and Diligence etc (Scotland) Act 2007 but have still not been brought into force), and the latter could then be used for enforcement in relation to digital assets.
In general, given the commercial nature of the topic and the likely cross-border elements that may exist regarding digital assets and to avoid additional intra-UK conflict of laws complications that may otherwise be created, a significant level of alignment with the English law position would be desirable, subject to the major caveat that the background Scots law within which digital assets are to function must be respected and accommodated. This could be ensured through engagement and close cooperation between the Scottish Government’s Expert Reference Group (and/or the Scottish Law Commission) and the LCEW in relation to LCEW’s projects on digital assets.
Private International Law Considerations
In addition to the intra-UK conflict of laws points noted above justifying alignment between English and Scots laws concerning digital assets and in a broader context on the private international law side, it is also worth mentioning that the LCEW announced on 25 November 2021 the launch of its new project on conflict of laws and emerging technology in the first half of 2022. The LCEW’s separate but interlinked projects on smart contracts, digital assets and electronic trade documents have led to the identification of several private international law issues arising in this context (see generally Burcu Yüksel Ripley, Law Commission of England and Wales’s New Project on Conflict of Laws and Emerging Technology, EAPIL Blog, 2021). In this new project, which is currently at the initiation phase, the LCEW will look at private international law rules as they may apply in the digital context and consider whether law reform is required.
This project also has a UK wide importance as some legislation relevant in this context, such as the Rome I Regulation as retained by the UK (The Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (EU Exit) Regulations 2019 (SI 2019/834) as amended by the Jurisdiction, Judgments and Applicable Law (Amendment) (EU Exit) Regulations (SI 2020/1574), is applicable in all jurisdictions of the UK including Scotland. Therefore, engagement and close cooperation between the Scottish Law Commission and the LCEW is very important for Scotland in the scope of this project as well and should be promoted. The Scottish Government’s Expert Reference Group on Digital Assets and the Law Society of Scotland’s International Private Law Reference Group can also play a key role in this process by providing expert input to the Scottish Law Commission.
The UK is a leading country in the global financial sector and aspires to be amongst the most innovative economies. As a testament to this aspiration, the law projects of the LCEW concerning digital assets are very timely and important.
Scotland should take this opportunity to participate in the electronic trade documents reform proposed by the LCEW which has been already listed in the legislative programme for the new UK parliamentary term. Scots private law and private international law (and perhaps even criminal law too) should be further assessed with a view to accommodating and supporting legitimate innovation regarding digital assets more broadly. Alignment with the English law position to a significant degree would be desirable for Scotland, and engagement and close cooperation between the Scottish Law Commission (fed by expert input provided by the Scottish Government’s Expert Reference Group on Digital Assets and the Law Society of Scotland’s International Private Law Reference Group) and the LCEW would be helpful to ensure that alignment and identify the best way forward for the UK.
*This blog article can be cited as Burcu Yüksel Ripley and Alisdair MacPherson, Digital Assets Law Reform in England and Wales and Prospects for Scotland, Aberdeen Law School Blog, 2022.