The UK Law Commission released its final report on digital assets on June 28, commissioned by the government in March 2020 and followed by an extensive consultation with industry, legal firms, and others.
The report concluded that the flexibility of common law is well placed to be able to provide legal certainty to digital assets and that the law must continue to develop as the sector continues to evolve.
The commission only made four recommendations where immediate action needs to be considered, which were:
- Creating a third “type” of personal property
- Forming a panel of experts to provide assistance to the courts
- Amending the Financial Collateral Arrangements (No. 2) Regulations 2003 (FCAR) legislation
- Setting up a project to formulate a bespoke legal framework for certain cryptoassets and collateral arrangements
Personal Property Rights
So, what type of property are cryptoassets? The courts to date have been able to confirm that they’re a form of property but haven’t been able to determine what type. For example, in the case of AA v Persons Unknown it was considered that there are no legal rights attached to cryptoassets, but that they were some form of property.
Broadly, there are two categories of personal property rights recognized in English law: a “chose in action,” and a “chose in possession.” The fact that cryptoassets don’t fit into either category was one of the key issues raised in 2019 by the UK Jurisdictional Taskforce and was a key point that the commission wanted to be addressed.
The word “chose” is a common law concept—it has arisen from case law, not statute—that refers to rights in property. It derives from the French word for “thing.” There are either things in action, for example rights, and things in possession, for example physical possessions.
The report considered English common law to be sufficiently flexible to accommodate cryptoassets, but this residual legal uncertainty remained. Due to their vital nature for modern social, economic and legal systems, the commission considered digital assets should be recognized and protected in law. Further, any new definition should be sufficiently broad to cover all types of digital assets, including cryptoassets (tokens, currencies, non-fungible tokens).
A thing will fall within this new category if it:
- Is composed of data represented in an electronic medium. This includes being in the form of computer code, electronic, digital or analogue signals
- Exists both independently of persons and independently of the legal system, and
- Is rivalrous—its use or consumption by one person, or a specific group of persons, prejudices its use or consumption by one or more other persons.
Does This Matter for Tax?
The answer is—partly. The UK tax authority, HM Revenue & Customs, considers cryptoassets to be an asset, but remains silent on whether they’re property, since they’re neither a thing of action nor possession. Does this mean that until this is clarified cryptoassets couldn’t be taxed? The short answer is no.
While commentators often say that HMRC considers cryptoassets to be property, the reality for tax purposes is that this isn’t the whole story. The definition of an asset in legislation is broad, with Section 21 of the Taxation of Chargeable Gains Act 1992 stating that “all forms of property shall be assets for the purposes of this act, whether situated in the United Kingdom or not.”
The provision includes examples of what is an asset, but it isn’t definitive. What type of property is a consideration, but for tax, the key test is if something is capable of being converted into money or money’s worth.
The report’s second recommendation is the creation of a panel of experts to provide non-binding guidance to this developing sector. The commission believes that having a panel of experts from an array of disciplines will help the courts stay up to date with developments and facilitate a clear, logical, and consistent application of legal rules and reasoning over time.
The recent report from the All Party Parliamentary Group for Crypto and Digital Assets suggested the creation of a “Crypto Tsar’’ as an ideal interface between the technical experts and the government.
The third and fourth recommendations recognize that there are issues where cryptoassets are used as collateral. These arise particularly with FCAR and partly relate to its scope, as most digital objects wouldn’t come within the boundary of the regulations. These aspects can’t be resolved through common law, so the report recommends the government establish a project to find resolutions.
The collateralization aspect of the report is relevant to tax for two reasons. First, HMRC recently closed a consultation on possible legislation for the lending of cryptoassets and while not dependent on FCAR, this project could take regulations in a different direction to any potential tax legislation.
Second, the tokenization of securities increasingly is being considered within the crypto sector, for example, where company shares could be represented as a cryptoasset. To achieve this, laws governing the tokenization of equity and other registered corporate securities by UK companies would need to be reviewed.
There is no immediate impact on taxation following the report—however, there is much to consider. The enactment of a third form of personal property will be helpful to the courts but it isn’t determinative for taxation.
One of the key outcomes from such reports is that they continue to recognize cryptoassets in the law. This is a positive for the development of the UK’s crypto sector, as no other jurisdiction has had such a thorough review of its legislation.
Agreeing that cryptoassets are property also diminishes the argument that crypto is a Ponzi scheme, with the growing legal basis to demonstrate that there are legal rights attached to them.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Dion Seymour is crypto & digital assets technical director with Andersen LLP. He has extensive experience in all aspects of taxation of cryptoassets.
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