The hard problem of digital assets: why new UK legislation changes little and leaves the Courts to decide by analogy only

Lord Justice Fry declared in 1885 that “all personal things are either in possession or in action. The law knows no tertium quid between the two.”[1]  That proved to be a terrific red herring.

Fry should have gone on to say “… subject to certain exceptions”, because the existence of other things outside of those two categories has been confirmed by the Courts time and again as well as being created by statute.

Categorisation of property rights falls to be considered in the context of tokens and the blockchains from which they arise, and in the context of other forms of digital assets.  The term “digital asset” is conventionally understood to refer to intangible, electronic assets but as such is left undefined and perhaps leaves more questions begged in what follows than it helps answer.

The Property (Digital Assets etc) Bill

On 11 September 2024, the Property (Digital Assets etc) Bill (the “Bill”) was presented before the House of Lords.  There is just one sentence of substance:

“A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—

(a) a thing in possession, nor

 (b) a thing in action.”

Note the double negative.  Whilst the Bill does not say that tertium quids exist, it legislates to prevent their non-existence.  And it says nothing as to how one might identify property falling into such further categories.

That task is left to the Courts, and to Parliament if it wishes to introduce targeted statute.

Persons and property

Legislators differentiate between persons and property.  Large parts of the statute book concern the way in which property can be used by one person to the exclusion of others.

Persons have minds and are actors in the world.  The law does not usually have difficulties identifying which things in the world are persons, although philosophers have been engaged in centuries of academic debate about the nature of personal identity.

Property

There is no universal definition for “property”.  You will though find definitions of the term in various statutes, but they don’t all say the same thing and they aren’t designed for universal application save to the extent that they are expressed in non-exclusive terms for the purposes of whatever statute they are contained in.  If interpreted on an inclusive only basis, those definitions are usually circular; they say that property is made up of certain kinds of property.  The prudent legislator may leave room for an “…and other things” or words to that effect.

The lack of universal definition is no accident.  Think of the broadest definition possible, perhaps, “save where statute provides otherwise, property is a person’s interest in a thing that the law will enforce or defend.”  That falls down immediately because one can think of exceptions.  For instance, a person has an interest in their own personal data under the Data Protection Act 2018 and yet that is not thought to be a proprietary interest.

We say no more on any definition of property in what follows, save for to note that it remains elusive, and any hunting expedition launched to locate it will quickly find itself lost in a forest of metaphysics.

Real property and personal property

In England and Wales, property is categorised as either real property (interests in land) or personal property (interests in things other than land).  We say no more about real property in what follows.

Personal property

Personal property divides into Fry’s two categories:

• Things in possession that can be physically possessed (gold, a ten pound note, whisky, ducks, clouds, a forest, a hydrogen atom, and so on).
• Things in action, which are not things in possession but which can be claimed or enforced through legal action or proceedings (the right to sue for breach of contract, the right to enforce a debt, the right to assert one’s moral right to be identified as an author, and so on).

But that categorisation cannot be exhaustive.

One might draw a Venn diagram at this point, but there is little by way of consensus on how to do so.  And this is not surprising in the absence of philosophical agreement as to what one is describing.

Tangibles and intangibles

A thing in possession can be pointed at in the real world somewhere.  Those things are tangible.  They have a physical presence, although even then the analysis is not simple: the property in question is not thought to be the thing itself but rather those rights (or perhaps that bundle of rights and obligations) arising from a person’s possession and/or control of that thing.  We say no more on that in what follows save for to say that, if that analysis is correct, thinking of things in possession as being independent things existing in the world separated from persons is perhaps misleading.

And there are a great many intangible things in the world.

The experience of what it is like for you to smell a rose is thought by many philosophers to be a thing called qualia and the subjective quality of an experience.  Not the smell of the rose itself (which can reduce to a chemical formula).  Not you.  But your experience of smelling the rose.  If you deny the later, then you are left with the philosophical zombies posited by David Chalmers, persons who are indistinguishable from humans in every way except that they are not conscious.

The law does not concern itself with what has been called the hard problem of consciousness[2], the how and the why of a person’s subjective experiences.

But are property rights like qualia?  Not the thing in the real world.  Not you.  But a relationship between the two.[3]  That is, perhaps, an interesting analogy.

Certainly, the law can point to things that do not exist as tangible objects and it cares not as to the metaphysics so long as the law can be enforced.

For instance, moral rights can exist as a relationship between two persons, separate from either of them and ceasing to exist if either is not there.  The Courts generally don’t enforce mere moral rights, but legislators can turn moral rights into legal rights.  The right to be attributed as the author of one’s own work is a moral right that has been codified in the Copyright, Designs and Patents Act 1988.

By means of statute or judgment of the Courts, an intangible thing can be held to be personal property.  Often that thing will be a thing in action, but not always and categorising some intangibles is challenging.  It is worth noting the words of Morrit LJ in Re Celtic Extraction Ltd[4]: the “word “property” “is not a term of art but takes its meaning from its context”.

A thing in action

The concept of a thing in action is a necessary condition for the functioning of a modern society.  Without it, we would have no shares in companies, a much less sophisticated framework of intellectual property rights, problems enforcing debts, and some serious conceptual problems for equity and trust lawyers, amongst other concerns.

A debt is an obligation to pay owing from one person to another that the law will enforce.  That is a thing in action.

A right conferred by a share in a company is a thing in action – you can’t see it, or go pick it up, or physically hand it to someone, or set fire to it, and so on, but the law says that it exists and if the law one day says that it does not, then there is nothing of it which can be said to exist anymore.[5]

The same is true of the copyright in the code that runs the operating system on the device that you are presumably using to read this Insight piece.[6]  Some person wrote that code, and the law says that she has a proprietary right in the form of copyright.[7]  If the law one day says that she does not have that right, then there is nothing of it which can be said to exist anymore.

Jurisdictional boundaries for things in action

A moral right could be turned into law outside of the UK by a legislator or a Court in another jurisdiction.  That would not be a thing in action in the UK as conventionally defined.  And yet a person in the UK could agree to buy, sell or waive that right even if the UK says that the right does not exist.

Jessel MR said the following in an 1882 judgment:[8]

“If a man died possessing nothing but French or Italian bonds no one would say that he had died without any property. Such bonds are not [things] in action in the ordinary sense, and that cannot be the definition of property. The mere fact that you cannot sue for the thing does not make it not ‘property.’ I am not going to attempt to define ‘property,’ that would be too dangerous. But there can be no doubt that these foreign bonds, both in common language and in the language of lawyers, are ‘property.’”

The Court of Appeal considered an analogous set of circumstances in 2001’s Dairywise Farm case[9] in relation to milk quotas that had been granted in certain jurisdictions outside of the UK.  The Court found the milk quotas to be personal property rights.  The case has been much-quoted in subsequent judgments concerning property rights attaching to digital assets.

The conclusion must be intangible property rights created in other jurisdictions can be property rights when held by persons in the UK.  But what category of personal property do they fall into?

Yet more red herrings?

Each must be looked on its merits, the meaning taken from its context.  Those which are rights enforceable by law and no more are not things in action if that must be defined as rights enforceable in the UK only.  But that jurisdictional boundary seems arbitrary.  Perhaps it is unhelpful to think of excluding otherwise obvious things in action just because a different set of laws apply.  Perhaps those are further red herrings.

Those not falling into that category are probably something else.   Lord Justice Fry might ask, but what else can there by?  Perhaps, instead of new categories, there is just a holding state where a thing can be held in limbo prior to its being categorised by the Courts and then the judgment of the Courts moves that thing into being either a thing in possession or a thing in action (adapted to allow for overseas things in action).

Fry might approve.  But the analysis falls down because one quickly finds other cases and statutes where property rights are established and which are not so neatly categorised.  There are things that evade the binary categorisation still.

Intangible property rights that may not be things in action

In 2019 in the Gwinnutt case[10], the Court of Appeal found that although barristers could not sue for their fees (which were considered honoraria[11] and not enforceable debts), those fees were still property for the purposes of the Insolvency Act 1986 since the wide definition of the term property in that act was held to allow for the inclusion of honoraria.  But that doesn’t categorise as a thing in action since by definition honoraria itself is not a right that can be enforced by legal action.  A counter argument would be that honoraria divides into two: the relation between the barrister and the solicitor, which was then not legally binding and which is not property; and the inclusion of that honoraria in the estate of the bankrupt barrister for the purposes of the Insolvency Act 1986 which could then be a thing in action.  But the position is not clear.

Similarly, forms of intangible property rights that are or may not be things in action have been created by statute.  For instance, the Copyright and Rights in Databases Regulations 1997 and the protections it confers on investments made in assembling databases.  The rights it confers are not thought to be things in action although database rights are thought to be intangible property nonetheless.

What about goodwill?  That’s even harder to categorise.  It’s not created by statute or regulation, although you can sue to protect it.  It exists perhaps as the aggregated positive intentions of potential buyers of a businesses’ goods and/or services.  On an M&A deal that is an asset sale, goodwill will be given its own value as part of the pricing of the business to be acquired.  It can’t be a thing in action as its existence does not does require any statute or involvement of the Courts.  It might seem unquestionably to be a form of intangible property, but its continuing existence presumably remains linked to the real world things that form the business it arises from.

Are digital assets a bit like that?

Digital assets

In a number of recent judgments, the Courts have found certain kinds of digital assets to be personal property in order to resolve disputes in favour of one group of persons over another.  These have included:

• bitcoin;[12]
• non-fungible tokens (“NFTs”);[13]
• Tether or USDT;[14] and
• various other cryptocurrencies.[15]

Those judgments are in many ways a victory for common sense.  Of course USDT is personal property of some kind: people are buying and selling it, investing in it, and so on.  But what kind?  The judgments don’t much say; and they don’t need to per se since once you conclude that Fry was wrong, the world of the amorphous tertium quid opens up.

We return to the question: are digital assets analogous to the forms of intangible property identified above?  We argue not.  Goodwill, trade secrets, honoraria, and so on are not found in the absence of persons.  Not so for digital assets.

Mere information is not property

Just because something is digital or electronic, it isn’t necessarily personal property.  Put another way, some data is not personal property.

This is a complex area of the law and jurisprudence, but the key academic point is that raw data on its own lacks exclusivity and therefore a distinct existence.  Consider a random series of numbers:

• they don’t exist in the real world and can’t be a thing in possession; and
• they weren’t created by law and aren’t a thing in action.

Are they always some other form of property?[16]  No: a person can’t gain control of them and/or exclude the ability of others to use them because they can be repeated into infinity and cannot be stapled to a specific point in space or time.[17]

What if those numbers are recorded onto a hard drive somewhere?  You can’t open up the hardware to find them.  The data exists in a long series of ones and zeroes in the form of bits.  In some way the numbers in question emerge from that when experienced by a person viewing a screen, and it is that emergent form with which the law is concerned.

But if those numbers are endlessly repeatable by anyone with a computer then the law is not much concerned with identifying property rights since there is no exclusivity and little for persons to fight over (absent conditions of confidentiality or trade secrets and patentable inventions and so on).  That leads to what has been called the ‘double spend’ problem where the value in a thing in digital form will trend to zero if that thing can be endlessly replicated.

By contrast, tokens emerging from a blockchain have scarcity by definition because that is a feature of the blockchain’s protocol that limits the supply of tokens.  Here then perhaps a practical task of categorisation.  Find the conditions for scarcity in a digital asset and the Courts can find the conditions for property rights.

You might ask, however, what is the property being pointed at?  Is it the arrangement of the bits within the nodes and associated software from which arise the rights conferred by the token?[18]  If that is the case, then digital assets are starting to sound very much like things in possession.

In the absence of persons, tokens can be moving around a system controlled by bots.  And that is happening today.  Again, that seems to be indicative of a thing in possession.

We say no more on that here, because the Law Commission took a different route.[19]

The Law Commission

In 2020, the Ministry of Justice asked the Law Commission to review the law on digital assets and consider whether they are sufficiently recognised in UK legislation and, if not, how the law could be reformed so that they are.  In particular, the Law Commission was tasked with determining whether digital assets could be characterised as personal property.  The Law Commission published its call for evidence in 2021.[20]

In 2023, the Law Commission published its 283-page report on Digital Assets.[21]  It confirmed that digital assets do not qualify as things in possession as they are not tangible objects and “the legal concept of possession is nonetheless bound up with tangibility”.  And digital assets are different from things in action as they “continue to exist even if the law were to fail to recognise them”.

The Commission concluded that, although digital assets cannot be classified as a thing in action or a thing in possession, they could still qualify as a form of personal property and therefore as tertium quids.

Categorising digital assets

The challenge then for Courts and legislators is to establish rules around how to identify those digital assets to which property rights should attach.  The 2023 report proposes the following indicia to identify whether a thing is a digital asset:

• the asset is composed of data represented in an electronic medium;
• the asset has a distinct existence, meaning that it exists independently of persons and the legal system; and
• the asset is “rivalrous”, meaning that only one person should be able to control the asset at any given time. This must extend beyond mere factual control (being the individual simply holding the asset in their possession) and must encompass legal control (the individual must have acknowledged ownership rights to own, manage, and exclude others from using the asset).

By following these indicia, it is presumed that assets such as cryptocurrencies, NFTs, digital carbon credits and more can be considered digital assets and would be recognised as such by the Courts.

Is that good enough?

The advantage of this approach is flexibility.  The UK must be careful about writing a rule book that quickly goes out of date, or nobody wants to follow or which they can’t for practical reasons abide by.

Instead, the law can adapt in line with market practice by reference to those cases which are brought before the Courts for judgment and by way of specific statutes introduced by Parliament from time to time.

The principal concerns with this approach are that:

• proceeding by way of analogy with existing legal concepts works well as a means of legislating for incremental changes to technology and market practice; but crypto-enthusiasts will say that mainstream adoption of blockchain technology is an epoch-defining change to the means of production and needs overarching sets of rules to create the framework within which it can flourish[22] – for example, the difference between a UK plc going through the process of be listed on the London Stock Exchange is so fundamentally different to a decentralised autonomous organisation raising funds through an initial token offering that there is no way that the Companies Act 2006 and the Listing Rules etc which apply to the former can be adapted for the later;
• founders of UK crypto ventures are not going to be trawling through case law to find the answers, they will go overseas, or cancel their projects, or just take a flyer and find themselves in hot water perhaps;
• actors in Web3 may wait to commit to projects until certain issues have been through the Courts (and are going to other jurisdictions where they can find certainty); and
• certain issues may never go through the Courts at all and exist in a grey area better dealt with by specific regulation.[23]

It remains to be seen whether the UK’s current approach will prevail.  Meanwhile, the world of Web3 continues to evolve at pace and much of that evolution is taking place overseas in jurisdictions that are introducing bespoke legislation for crypto projects.

This piece was written by Henry Humphreys and Alina Merchant-Mohamed, with input from Robert Humphreys and others.  Please reach out to a member of the HLaw team if you would like to discuss any legal or regulatory queries relating crypto and digital assets generally.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law

[1] Colonial Bank v Whinney (1885) 30 Ch D 261.

[2] The phrase “the Hard Problem of Consciousness” was coined by philosopher David Chalmers in a 1994 talk at The Science of Consciousness conference in Tucson, Arizona12. He introduced this term to distinguish between the “easy” problems of explaining cognitive functions and the “hard” problem of explaining subjective experience.

[3] Smells can be protected by a trade mark in some circumstances in the UK. Isn’t that the same thing?  Probably not; the trade mark gives a monopoly over a particular mark to the exclusion of all others.

[4] Re Celtic Extraction Ltd [2001] Ch 475, at 486.

[5] Bearer shares – where title to the shares sits with the holder of the share certificate – are different, but are not considered further here.

[6] The device itself is obviously a thing in possession.  The operating system – the set of written instructions stored on your device’s flash memory and loaded into its RAM – is also a thing in possession to the extent that it is made up of silicon on the chips in your device.  The raw data that makes up those written instructions is typically not subject to neat property classifications, about which we say more below.

[7] Or, if it was written in the course of her employment, then her employer owns the copyright.

[8] Ex parte Huggins, In re Huggins (1882) 21 Ch D 85.

[9] Swift & Anor v Dairywise Farms Ltd & Ors [2001] EWCA Civ 145.

[10] Gwinnutt v George [2019] EWCA Civ 656.

[11] I.e. an ex gratia payment made without the giver recognising themself as having any liability or legal obligation.

[12] In AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm), in relation to a fraudulent payment of Bitcoin, Mr. Justice Bryan asserted that while “cryptocurrencies do not sit neatly within either category [of personal property, it is] … fallacious [not to recognise] … forms of property other than choses in possession and choses in action”.  He followed the criteria set out in National Provincial Bank v Ainsworth [1965] UKHL 1 and concluded that because cryptoassets are “definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability”, Bitcoin should be considered “a form of property”.  Similarly, in Tulip Trading Limited (A Seychelles Company) v Bitcoin Association For BSV & Ors [2023] EWCA Civ 83, the court likened Bitcoin to a physical coin and concluded that because it “also has properties which exist outside the minds of individuals”, it should be considered a form of property.  See also the Mt Gox case: mtgox_judgment_final.pdf.

 [13] In Osbourne v Persons Unknown Category A & Ors [2023] EWHC 39 (KB), Mr. Justice Lavender followed AA v Persons Unknown to assert that “there is at least a realistically arguable case that NFTs are to be treated as property as a matter of English law”.

 [14] In Boonyaem v Pesons Unknown Category A & Ors [2023] EWHC 3180 (Comm), Deputy Judge Salter suggested that Tether should be considered a tertium quid as “it would be a reproach to the common law were it not to demonstrate sufficient resource and flexibility to afford a remedy to persons in the position of the claimant.”

[15] In D’Aloia v Persons Unknown Category A & Ors [2024] EWHC 2342 (Ch), Judge Richard Farnhill relied on the “strong line of authority in this jurisdiction” to support the conclusion that cryptocurrencies “attract property rights under English law.”

[16] Can they be intangible property?  Well, yes – Channel enjoys a monopoly acquired through trade marks over the use of the number 5 on perfume bottles.

[17] The law is not concerned with whether mere numbers are a thing, although philosophers and mathematicians debate the point.

[18] There are analogies again with that hard problem of consciousness.  Is consciousness a physical state?  Is it a mental state?  Is it both?

[19] Possibly, the intractable point for the Law Commission was that blockchains are by definition spread across ledgers maintained by many nodes/computers, and perhaps tens of thousands of them spread all over the world.  Pointing at where a token actually is – in the same way as one points to the location of a single computer or any other physical object – is then challenging, particularly in the context of dispute resolution and questions of jurisdiction and governing law.

[20] Call for evidence, Law Commission, April 2021.

[21] Digital assets: Final report, Law Com No 412, ordered by the House of Commons to be printed on 27 June 2023.

[22] Contrast that with MiCA in the EU.

[23] In their Digital assets: Final report, Law Com No 412, ordered by the House of Commons to be printed on 27 June 2023, the Law Commission admitted that “there are existing problems with the law of England and Wales that cannot be solved or improved by further common law development” nor the proposed Bill. For example, they recognise that crypto-token collateral arrangements and the tokenisation of securities are not, and cannot be, adequately regulated by the courts. As such, they recommend that the Government establish a “multi-disciplinary project” to develop a “bespoke statutory legal framework that better and more clearly facilitates the entering into, operation and enforcement of (certain) crypto-token and (certain) cryptoasset collateral arrangements”.