There is a major earthquake happening in the sphere of digital assets, which is expected to create shockwaves that will impact tech not only in the real world but also in the metaverse.
These potentially revolutionary changes appear in an innocuous-looking, if lengthy, consultation paper titled “Digital Assets: Consultation paper,” published by The Law Commission of England and Wales, the public body for reform of the law in the U.K.
What this document proposes is that digital assets are recognized as a new form of personal property, potentially creating an “internet of property,” which could have huge implications for the U.K.’s position as a hub for distributed ledger technology (DLT) and fintech.
Property rights are indispensable to the creation and deployment of capital. A proper legal foundation for ownership of digital assets will have a host of real life ramifications, such as allowing the creation of security over digital assets — meaning they can be used as collateral for loans — providing people or businesses with greater protection in the event of fraud and enabling digital assets to be distributed like other property in the event of insolvency.
The Law Commission’s consultation paper has considered the many opposing views and settled decisively on one option: treating digital assets as a new form of property.
For instance, if somebody takes your NFT, you might want to start a legal action to get it back, seek to prevent the taker from transferring it to another account, report them to the police for theft or take action against somebody who helped them. None of this is possible without clear recognition of digital assets as property. If your NFT is then transferred to an innocent purchaser, should they get to keep it? There is no answer to this without knowing what sort of property is a digital asset.
The entire decentralized finance (DeFi) industry, which includes cryptocurrencies such as bitcoin, is based on transferring crypto assets to other accounts where they may then be deployed in accordance with smart contracts or other sets of rules.
Do these movements count as a sort of legal transfer of the asset or a security arrangement or a form of custody? These questions may seem unimportant when everything is working smoothly, but as soon as something goes wrong, participants will suddenly care about them enormously. They will determine who gets back any remaining assets and whether anybody else — cryptocurrency exchanges, developers and so on — might be liable for any losses. And again, there is no clear answer to any of this until the nature of digital assets as personal property is settled.