Refreshing legal clarity on cryptocurrencies and smart contracts

A UK Government-backed task force has reviewed the status of cryptocurrencies and smart contracts under the existing law. In a new Legal Statement, they offer some welcome clarity to these evolving technologies.

Chair of the UK Jurisdiction Taskforce, the Rt Hon Sir Geoffrey Vos, contrasts his newly issued Legal Statement on Cryptoassets and Smart Contracts to the approach taken elsewhere:

“Other jurisdictions have addressed the problem differently. In many cases, they have started from the standpoint of regulation and remedies and worked backwards.”

The Legal Statement looks at some of the core issues that come up in relation to these technologies, and applies existing principles to them.

Cryptoassets are, in principle, to be treated as property

Being confident that cryptoassets are in fact property makes a big difference to how they can be used and managed. This will have important consequences in relation to areas like inheritance and bankruptcy/insolvency.

The Legal Statement discusses what kind of property cryptoassets are. They are clearly not physical, like a sports car or gold bars. They are (probably) not “things in action”, like a debt or a contractual right, but another kind of property like carbon emission allowances, patents or milk quotas.

Because cryptoassets are virtual, there are limits to what you can do with them. Granting security rights will be constrained by the features of the cryptoasset, but is not impossible.

In contrast, private keys are not to be treated as property. 

Smart contracts are capable of having contractual force

Whether smart contracts are in fact legally binding contracts will depend on whether they fulfil the traditional legal requirements - an agreement, intention to create legal relations and consideration. This will depend on the parties' words and conduct. But, in principle, a smart contract can be identified, interpreted and enforced using well-established principles.

Contractual obligations defined by the computer code itself, or implemented through code, are both capable of being recognised under English law. The same goes for bilateral smart contracts and those structured around Decentralised Autonomous Organisations.

What if the law requires writing and a signature?

Some contracts have additional formal requirements to be valid. These tend to be set out in statute and may involve the need for the contract to be in writing and be signed by one or all of the parties. The Legal Statement takes a similarly flexible approach to that described in the recent Law Commissions report on electronic signatures.

  • A requirement for a signature is highly likely to be fulfilled by use of a private key intended to authenticate.
  • A requirement for writing can be met by the use of source code, and, to the extent it is in readable format, object code. Note that it is probably not met by a contract represented only in object code on a running system.

The Legal Statement does not address a range of other potentially relevant areas, like financial regulation, consumer protection, tax, data protection and IP.

What's next?

Next steps will involve the Law Commission assessing whether any legislation is needed. Meanwhile, users of smart contracts and cryptocurrencies can work on the basis that they will operate, at least under English law, in line with the Legal Statement. A court that has to resolve a dispute in this area will not be obliged to follow the conclusions reached, but we can expect that it would. Just one example - a claim for a Bitcoin freezing order over the summer was successful, following similar reasoning.

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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