In response to the evolving landscape of digital assets, the United Kingdom’s Law Commission (UKLC) has proposed a new category of personal property specifically tailored to cryptocurrencies and other digital assets. Businesses and platforms incorporating Web3 technologies should understand how the proposed law could impact their operations and whether a similar legislative approach is needed in the United States.
The UKLC report, spurred by a mandate from the British government, challenges the conventional classification of private property. It posits that existing legal definitions fail to adequately capture the distinct characteristics of digital assets, which encompass cryptocurrencies and NFTs, among others. The traditional bifurcation of property into “things in possession” (tangible assets like real estate) and “things in action” (intangible rights such as debt or shares of stock) does not fully cater to the unique nature of digital assets.
To address this gap, the UKLC recommends the introduction of a third category termed “digital objects.” This would serve as a legal umbrella for a broad spectrum of digital assets, from cryptocurrencies to digitized instruments like carbon emission credits or export quotas. The inclusion of such a diverse array of assets underscores the nuanced approach the UKLC advocates in recognizing the multifaceted world of digital assets.
The UKLC suggests that an expert panel be created to advise courts on complex legal issues arising from digital assets. The objective behind this proposal is to equip the judiciary with the necessary expertise to adjudicate matters involving these novel forms of property effectively.
The recommendations seek to position the UK as a global epicenter for crypto assets. This goal aligns with the vision expressed by British Prime Minister Rishi Sunak in April 2022, highlighting the nation’s commitment to fostering innovation within the realm of digital assets.
Implications for Crypto Companies
If adopted, the legislation is likely to require crypto operators and emerging technology companies dealing with digital assets to obtain specific licenses to operate within the UK. This move would formalize the legal status of cryptocurrencies, categorizing them as a distinct type of financial asset or security. Consequently, it could lead to greater regulatory scrutiny, necessitating businesses in this space to adapt their operational, compliance, and risk management strategies accordingly.
The proposal also carries considerable tax implications. The UKLC’s document mentions an amendment to self-assessment forms concerning crypto assets. This suggests that from fiscal year 2025-26 onward, UK citizens and companies will be required to declare their digital assets for the first time. The UK treasury has not provided specific figures for anticipated revenues from this new tax category. This development could necessitate changes in financial reporting and tax planning strategies for individuals and businesses dealing in digital assets.
Should the US Follow Suit?
In 2022, the United States took steps to address the unique characteristics and challenges posed by digital asset transactions. The Uniform Commercial Code (UCC), a comprehensive set of laws governing commercial transactions in the US, was amended by a joint committee of the Uniform Law Commission (ULC) and the American Law Institute (ALI). These amendments specifically excluded cryptocurrencies from the electronic money category and introduced the concept of “controllable electronic records” (CERs).
CERs are defined as “records stored in an electronic medium.” This broad definition encompasses not only existing blockchain-backed assets but also future types of digital assets. It includes crypto assets, as well as NFTs, thereby recognizing the diverse nature of digital assets in the modern economy. These changes to the UCC came in response to several states, including Wyoming, Kentucky, Idaho, and Tennessee, passing non-uniform statutes to define and regulate interests in digital assets. Despite the differences in state laws, most state legislatures are expected to adopt the UCC’s proposed amendments, albeit on varying timelines.
Given these developments, some argue that there may be no need for the US to introduce a separate category for digital assets. They contend that such a move could potentially stifle, rather than encourage, growth in the digital economy. There is a widely held belief that the existing legal regime has demonstrated sufficient flexibility to accommodate digital assets. Courts have managed over several years to ascribe proprietary rights to “digital assets of value,” creating a level of certainty in many areas related to digital assets. While there are still gray areas or uncertain aspects, these are often highly complex and nuanced, requiring specific expertise for effective resolution. If US legislators decide to introduce a new category for digital assets, they say, it would be advisable to implement only limited statutory reform. This should be designed to bridge the gaps where common law may fall short, without disrupting the broader legal landscape.
To ensure informed decision-making, it may also be prudent to establish a panel of industry experts. This panel could provide non-binding guidance and assist in navigating the complexities of digital asset regulation. Such an expert-led approach could help balance the need for regulatory clarity with the importance of fostering innovation in the digital economy.
The evolving digital asset landscape has prompted countries worldwide to reassess their legal and regulatory frameworks. The UKLC’s proposal to introduce a “digital objects” category represents a significant step in acknowledging the unique characteristics of digital assets and adapting the law to encompass them.
In contrast, the US has yet to establish a comprehensive regulatory and enforcement framework for digital assets. As it stands, participation in the US digital asset markets necessitates careful consideration of the regulatory status of implicated transactions, be they securities, commodities, or otherwise. This challenge is further complicated by the divergence in international regulatory approaches, necessitating careful analysis of multi-jurisdictional transactions involving digital assets.
To strengthen its digital economy, the US needs robust regulations on cryptocurrencies and digital assets. One solution could be to emulate the UK’s approach and introduce a separate category for digital assets through limited legislative reform. Such a move could position the country as a hub for digital assets, particularly as several states are already debating the legal status of these assets.
As legislation around digital assets continues to develop, stakeholders must remain informed and adapt their strategies accordingly. This will ensure compliance and the optimization of operations in this dynamic and complex market.
Gamma Law is a San Francisco-based Web3 firm supporting select clients in complex and cutting-edge business sectors. We provide our clients with the legal counsel and representation they need to succeed in dynamic business environments, push the boundaries of innovation, and achieve their business objectives, both in the U.S. and internationally. Contact us today to discuss your business needs.