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… that is perhaps a fittingly outlandish thought … the English court becoming a substantial (passive) trader and holder of (some) digital currencies over the coming years.

A world on-chain: can our legal infrastructure cope?

Opinion
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A world on-chain: can our legal infrastructure cope?

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Dan Wyatt (and Harvey Briggs) consider if we’re ready for blockchain

For an industry inherently cautious of change, the legal profession has made huge strides in keeping pace with the rapid technological advancement of recent years. The covid-19 pandemic caused the profession to adopt, almost overnight, new ways of operating, underpinned by the use of technology. Technology became essential to its very existence.

But what about the impact of innovations in fintech, including the ever-increasing use of digital asset and blockchain technologies? These are stress-testing the current legal framework in ways unseen since the arrival of the internet. As the Master of the Rolls, Sir Geoffrey Vos said in February 2022:

"The blockchain is now at a stage in its development equivalent to where the internet was in or around 1995. The internet was unstoppable in 1995 and blockchain technology is unstoppable now. It will become ubiquitous in all major industrial and financial sectors, simply because it allows for the immutable recording of data, thereby reducing friction in commercial and consumer transactions and obliterating the scope for dispute as to what has occurred."

Similar to how the legal infrastructure dealt with the practical challenges of covid-19 (working from home, electronic signings and so on), the English court has already shown itself to be adept at managing change brought about by this 'new world'. Its willingness to apply existing legal principles to novel scenarios has promoted this jurisdiction as a forum in which complex, cutting-edge technology-related legal issues may be considered, developed, and determined. In the context of smart contracts, this view was corroborated by the Law Commission's report which concluded that "the current legal framework is clearly able to facilitate and support the use of smart legal contracts" through incremental development of the common law rather than statutory law reform. The flexibility of the English common law was highlighted as a particular strength of this jurisdiction, providing "an ideal platform for business and innovation".

Beyond the realm of smart contracts, one example of such flexibility was the recognition of bitcoin as legal property in English common law. Arguably, when looked at against the general direction of travel, the conclusion drawn in the UK Jurisdiction Taskforce's "Legal Statement on the status of Cryptoassets and Smart Contracts" and subsequent decision in AA v Persons Unknown & Ors, Re Bitcoin[2019] EWHC 3556 (Comm) that cryptoassets are to be regarded as property in English law might seem unsurprising. However, when analysed in detail in the context of the traditional dichotomy that exists under English common law – namely that there are two distinct types of legal property – choses in action and choses in possession, the conclusion is less straightforward. Nonetheless, the English court pragmatically found that the common law is not constrained from considering intangible assets, such as cryptoassets, as property in law.

There have been further examples since AA v Persons Unknown of the English court taking a pragmatic, flexible and forward-looking approach to issues relating to digital assets. There are also examples of gaps being identified and judicial committees being established to seek to plug them: recently a sub-committee of the Civil Procedural Rules Committee, set up by Sir Geoffrey Vos and the Deputy Head of Civil Justice, Sir Colin Birss, was established to look at amending or expanding gateways for service of proceedings out of the jurisdiction, so often a key issue in disputes regarding digital assets. Additionally, in April 2021 the UK Jurisdiction Taskforce published Digital Dispute Resolution Rules, to be incorporated into blockchain digital relationships and smart contracts, providing that disputes may be determined by a tribunal on written submissions without a hearing in appropriate cases.

But there of course remains work to be done. A recent example arises from Tulip Trading Limited v Bitcoin Association for BSV and others [2022] EWHC 141 (Ch), where the court held that bitcoin is not an appropriate means for providing security for costs. That may be right at present, but change is afoot. With progression towards Central Bank Digital Currencies (CBDCs) and stablecoins, as well as the Government's recently announced plans to make the UK a "global cryptoasset technology hub" (which will see stablecoins recognised as a valid form of payment), this surely will need to be revisited. Ultimately, if digital currencies really do become as prominent as some expect, the court will have to adjust to that, at least to the extent of regulated cryptocurrencies such as stablecoins becoming a permissible form of security in appropriate cases. That would have a practical knock-on effect: the Court Funds Office would ideally also need to become able to hold digital currencies in the way that it currently holds cash.

And that is perhaps a fittingly outlandish thought to conclude with: the English court becoming a substantial (passive) trader and holder of (some) digital currencies over the coming years. A notion that would have been 'laughed out of court' a few years ago. The 'new world' really is here. Can the UK's legal infrastructure cope? Absolutely.

 

Dan Wyatt is committee member of the London Solicitors Litigation Association (LSLA) and partner at RPC. He is assisted in this article by Harvey Briggs, trainee solicitor at RPC and LSLA member.