Introduction
The second workshop of the University of Aberdeen’s research project ‘Digital Assets in Scots Private Law: Innovating for the Future’, funded by the Royal Society of Edinburgh (RSE), was held on 29 May 2024 at the Law Society of Scotland in Edinburgh. The purpose of this workshop was Mapping the Legal Landscape for Cryptoassets in Scotland, with participants from the judiciary, academia, legal practice, the Scottish Law Commission, the Law Commission of England and Wales, the Scottish Government, and other organisations. This blog article provides an overview of some of the points addressed during the workshop (for further details, please see the workshop report).
Classification and Property
The participants discussed how cryptoassets should be classified within Scots private law. If cryptoassets are property objects, i.e. persons (subjects) can hold property rights in them (including ownership), this means that the wider apparatus arising from property law can be used to determine how these assets are dealt with in private law more broadly, including the law of trusts, family law and insolvency law. The participants were of the view that cryptoassets can be property objects in Scots law. Some assessed that they would likely fall within the category of incorporeal moveable property, albeit that the control of such assets may be considered comparable in some ways to physical possession of corporeal moveables. If they are incorporeal moveables, it was suggested that they are a separate sub-category of such property, as they differ from existing sub-categories such as claim rights, intellectual property and shares.
In terms of what precisely a cryptoasset is in property terms, a participant suggested that it is, at least in part, a specific and exclusive transactional power over data entries on a relevant system that can be transferred from one party to another. However, the rules for the transfer of ownership of such property under Scots law are not wholly certain, including whether a transfer could take place “off-chain”, or if it would necessitate an “on-chain” transaction from transferor to transferee on the system. In addition, it is unknown whether a good faith acquirer from a non-owner would be protected.
At the workshop there was also discussion as to whether cryptoasset systems can be considered complex contractual arrangements (i.e. a “super-contract”), which can determine the precise scope and content of the asset in a property sense.
The participants considered the possibility of legislation confirming the status of cryptoassets in Scots law given that in a small jurisdiction such as Scotland, extraordinary levels of patience may be needed to await the arrival of a suitable body of case law to clarify matters. The lack of clarity could be addressed by relatively short and technology-neutral legislation, which will be more likely to obtain the support needed to pass than more expansive and detailed legislation, given the fast-moving pace of change and the difficulty of addressing the wide variety of issues that may arise.
Trusts
The discussion then moved on to cryptoassets as intermediated assets, whether a Scottish trust can arise in that context and the advantages and disadvantages of this. If cryptoassets are recognised as property, it is possible for them to be held on trust. In fact, trusts are likely to feature prominently in cryptoasset arrangements, especially where digital wallets, exchanges and other crypto platforms are involved. Assets held in trust are ringfenced from the claims of creditors of the trustee and their insolvency estate and so this has wide-ranging property and practical consequences, including a benefit to investors where intermediaries are holding the assets on their behalf. It may, however, be difficult to determine whether there is a trust arrangement, not least because of opaque terms and conditions of different platforms, and what rights and obligations are applicable. Furthermore, the existence and extent of constructive trusts in Scots law are contested matters but could arise where an agent breaches a duty in relation to their principal’s asset(s).
Family Law and Succession
The participants noted that in family law (in the event of divorce, dissolution or separation) and also in the law of succession, a whole variety of digital assets have to be dealt with and significant difficulties in accessing and obtaining control of them can arise for various reasons (e.g. the owner is not able to do what is required (because they have died) or they are unwilling to do so and may be obstructive (e.g. in an acrimonious divorce). In addition, some circumstances are more likely to require the transfer of such assets, while in others the division of assets may be more appropriate (especially divorces and dissolutions). Where children are involved, there can be further complications, including in terms of how cryptoassets are managed on their behalf.
Although a number of remedies are available in divorce, including transfer of property orders and incidental and ancillary orders, as well as interdicts to stop parties transacting with cryptoassets, there are particular challenges where a spouse is acting improperly and covertly and especially if assets are held in another jurisdiction. Valuation seems to be another issue for cryptoassets due to their volatility. As well as clarity regarding the property status and categorisation of cryptoassets, the enforcement mechanisms for the recovery of such assets could be improved, including the ability to obtain relevant information.
Obligations
At the workshop, the participants next considered various ways in which obligations issues can emerge in connection with cryptoassets, with respect to contract, delict (tort) and unjustified enrichment. Contractual issues can arise between the issuer of an asset and the acquirer or between a transferor and transferee, and also between wallet providers and their customers. In each of these relationships, the relevant express terms of the arrangements are of course of great significance, but there may also be implied terms, as well as issues arising from where the assets are located. Furthermore, there may be contractual protections for consumers, whether under the Consumer Rights Act 2015 or other consumer legislation (in terms of the quality of the assets, unfair terms or pre-contract information), or regulatory requirements involving the Financial Conduct Authority.
The participants considered that the law of delict is an adaptable area of law and should be able to accommodate cryptoassets. Where there is fraud and the wrongdoer is identifiable, the legal position should be fairly straightforward, but factual and evidential issues may cause some problems. In other circumstances, delictual claims would ordinarily arise from pure economic loss and it is well-known that recovery is difficult in such circumstances. There are issues of assumption of responsibility, reliance, proximity, reasonable foreseeability and disclaimers to be considered and overcome. In addition, there is a possibility that developers may owe fiduciary duties to the owners of cryptoassets. The quantification of any loss relating to cryptoassets presents problems, including when the valuation of loss is determined.
Similar issues regarding valuation can arise for unjustified enrichment actions. However, beyond that, such claims are likely to be more straightforward, as they will merely involve the application of the normal tests for that category of obligation.
Security Rights and Debt Enforcement
The property categorisation of cryptoassets is important for determining which security rights are available. If cryptoassets are incorporeal moveables, then possessory pledge cannot be used (except to the extent that there is a “cold wallet” hardware device), and cryptoassets are not a type of incorporeal property to which the statutory pledge will apply, once introduced. Given their expansive scope, extending to all property, floating charges can cover cryptoassets but only certain corporate entities such as companies can create them and the creditor’s control is limited. By contrast, if cryptoassets are transferred (assigned) to a creditor for security purposes, the creditor would have control over the assets. Trusts and other forms of functional security, including forms bespoke to cryptoassets, may also be used to protect the creditor’s interests.
The situation is generally more difficult for diligences (debt enforcement mechanisms) than for voluntary security, due to the absence of cooperation by the debtor. Arrestment is likely to be inapplicable unless cryptoassets are held for the debtor by another party (e.g. on trust). Attachment is a diligence for corporeal moveables only, and so cannot be used (except perhaps to obtain a private key on a hardware device, which will involve additional challenges, especially if located in a dwellinghouse). As the residual diligence in Scots law, the outmoded and unsuitable adjudication for debt might have to be relied upon in some circumstances.
During the workshop, various reforms that would assist with accommodating cryptoassets within the law of security and debt enforcement were proposed, including the confirmation of their property status and categorisation, clarity regarding the rules for transfer and good faith acquisition, the desirability of replacing adjudication for debt with a new residual attachment (or equivalent) and greater powers to compel debtors to provide information about cryptoassets and transfer assets without having to rely on insolvency procedures.
Commercial Practice and Tokenisation Projects
The participants then focused on cryptoassets in Scottish commercial practice. The importance of commercial objectives including certainty, predictability and flexibility for innovation were emphasised. It was noted that while there may be a temptation to legislate quickly and at length, a gradualist approach might be more suitable. In the context of commercial practice, there is often a push towards a high level of alignment with English law; however, there are risks in doing this in terms of fitting the rules within the wider system of Scots law. Nevertheless, the participants considered that paying regard to developments in English law is important and functionally equivalent solutions can often be produced.
One important area of commercial practice relating to digital assets is tokenisation, also known as digitalisation, which involves the creation of digital versions of traditional assets in different forms. The workshop featured discussion of tokenisation projects (including in relation to debt instruments and shares) from the perspective of Scots law, in contrast to how such projects proceed under English law. While there are points of uncertainty as to how to successfully complete such projects under the existing law (and considerable difficulties where tokenisation relates to assets that require registration, such as in the Land Register of Scotland), it seems that commercially suitable solutions (including the use of express trusts) are often available.
Further Details
The workshop produced valuable insights regarding the ways in which the law does, and can, accommodate cryptoassets and how it could be improved. To read the report of this workshop (and the first workshop), learn more about the project, and register for news and updates, please visit the project’s webpage.
The project’s workshop series will continue in September at the University of Aberdeen with the third and final workshop, on intra-UK and international dimensions of digital assets in relation to Scotland.
(We are grateful for the support of the RSE in funding this project and for the contributions of the participants at the project workshop event on 29 May 2024. We also would like to thank the Law Society of Scotland for providing their facilities for that event).
