Publication
01 Mar 2024 ·
United Kingdom
Trends in legislation and regulation
4 min read
We may have reached a tipping point at which it’s generally agreed that international coordination and standards are desirable for the regulation of digital assets.
At a global level, regulation has so far developed with relatively little consensus or consistency. But a number of international bodies are now striving to encourage common principles, and there is a growing international appetite for a consistent technology-agnostic approach underpinned by the principle of “same risk, same activity, same regulatory outcome” (in the words of the US Financial Stability Oversight Council's Report on Digital Asset Financial Stability Risks and Regulation).
For example, the G20 leaders’ meeting in New Delhi endorsed the Financial Stability Board’s high-level recommendations for the regulation, supervision and oversight of digital assets and global stablecoin arrangements. It asked the FSB and standard setting bodies to promote the effective and timely implementation of these recommendations in a consistent manner globally to avoid regulatory arbitrage.
Legislative standards
Other bodies are looking to encourage common international standards through legislation. Unidroit, the international institute for the unification of private law, recently adopted draft Principles on Digital Assets and Private Law. It hopes these will enable jurisdictions to take a common approach to legal issues arising from the transfer and use of digital assets.
Unidroit characterises its approach as embodying “best practices and already-forming international standards” and as “functional and neutral, seeking to accommodate diverse types of assets and emerging technologies, along with various legal cultures.”
Common law: the UK example
However, while it’s now widely accepted that the law needs to evolve to meet the challenges posed by digital assets, this does not mean that all jurisdictions will embark on major legislative programmes. In the UK, for instance, the Law Commission’s report of digital assets is generally in favour of the development of common law rather than extensive legislation, arguing that in general it is “sufficiently flexible, and already able, to accommodate digital assets”.
According to the Law Commission: “the courts have developed complex and nuanced principles that can help resolve disputes in a multitude of different situations involving different types of physical thing. We think the courts are well-placed to do so again in relation to digital objects.” The commission’s report makes two specific recommendations for statutory law reform, as well as suggesting the creation of an expert advisory panel.
"The law needs to evolve to meet the challenges posed by digital assets."
Kushal Gandhi
Partner
Kushal Gandhi, Partner
Essentially, English law recognises two types of property.
- Choses in possession – something tangible that you can physically possess.
- Choses in action – something intangible over which you can enforce a right.
Digital assets do not fit neatly into either of these categories. The courts have treated assets such as cryptocurrencies as choses in possession. But the Law Commission has now recommended the creation of “a third category of things to which personal property rights can relate”, to encompass digital assets.
If the government acts on the Law Commission’s recommendation, it will bring additional certainty to the treatment of digital assets. However, there will still be issues to resolve – not least because, in the commissioners’ view, “it is not necessary or appropriate to define in statute the hard boundaries of this third category of things.”
The Law Commission recommends the setting-up of a multi-disciplinary project to formulate and put in place a bespoke statutory legal framework to facilitate the entering into, operation and enforcement of certain collateral arrangements involving digital assets.
The Law Commission believes that common law development is better than statutory law reform at keeping up with rapidly changing technology and the evolution of the associated products and services. But as its report says: “it is an enormous task for the judiciary to remain alive to such technological development.” It thus recommends the creation of a panel of industry-specific technical experts, legal practitioners, academics and judges to provide non-binding guidance on the complex and evolving factual and legal issues.
The robustness of the common law system will also ensure that, even if the government does not adopt the report’s recommendations, the English courts remain an attractive venue for parties to disputes with digital elements. While we might miss the chance to create a genuinely bespoke legal environment for digital assets, the existing system will continue to work.
The robustness of the common law system will also ensure that, even if the government does not adopt the report’s recommendations, the English courts remain an attractive venue for parties to disputes with digital elements. While we might miss the chance to create a genuinely bespoke legal environment for digital assets, the existing system will continue to work.
Looking ahead
The trend towards common international standards will ultimately – while creating additional issues around compliance – introduce greater certainty and encourage a broader ecosystem with a much larger base of investors. Inevitably, it will also reduce the potential for regulatory arbitrage, which has enabled some businesses involved with digital assets to operate in jurisdictions where light-touch regulation (or sometimes the absence of regulation) has often favoured a high-risk, high reward model.
But it will be a long time before all the gaps in the regulation of digital assets are closed and all inconsistencies are ironed out. Even if an initiative like the FSB framework is implemented globally, it will not cover all categories of risk relating to digital assets. (The FSB is mainly concerned with on addressing risks to financial stability that may arise from certain activities and, in particular, from stablecoins.)
Furthermore, innovations will continue to drive the development of digital assets, presenting legislators and regulators with a steady supply of novel products and risks. Ensuring that they have the necessary skills, information and understanding to deal with these will be just as much of a concern as ensuring a consistent international position.
