The UK Jurisdiction Taskforce (one of the six taskforces of the LawTech Delivery Panel) has recently published a legal statement on the status of smart contracts and cryptoassets under English and Welsh law. This is a landmark statement as it is the first time that cryptoassets have been recognised as assets, and smart contracts have been recognised as enforceable under English and Welsh law.
Magic Circle law firm Linklaters played a pivotal role in the project by leading the drafting of the consultation paper published in May 2019 and running a public event in June 2019 in order to give market participants an opportunity to provide their input on perceived issues surrounding the innovative technology.
What is a cryptoasset?
The legal statement did not go as far as to define the term “cryptoasset” as the Panel recognised that there is a wide variety of payment systems in use. Instead, it sought to describe in broad terms, the features of cryptoassets that make them different to traditional assets. The novel features of cryptoassets are summarised as follows:
What did the statement say about cryptoassets?
The statement confirmed that crypto-currencies are capable of being owned, which means that we are likely to start seeing private law applied to transactions involving cryptoassets.
Linklaters confirms that it is not the distributed ledger itself that is ‘owned’. Instead, ownership arises from a combination of elements involved, such as the ledger, the data and the public or private keys, which results in the person having the exclusive ability to update or spend the transaction data (i.e a bitcoin for example).
So, this means that, in the Panel’s view, the owner of a cryptoasset is typically the person who has acquired control of a private key by some lawful means.
What is a smart contract?
Again, reluctant to define a smart contract, the Panel suggests that the characteristic feature of a smart contract is automaticity. A smart contract is a contract that is performed automatically and without the need for human interference. This requires the terms of the contract to be recorded in computer code.
What did the statement say about smart contracts?
Sir Geoffrey Vos, Chancellor of the High Court, confirmed his belief that cryptoassets and smart contracts undoubtedly represent the future.
California made smart contracts legally binding in 2018, so England and Wales are slightly behind Silicon Valley, but have now taken steps to enhance market confidence and ensure they are primed to become a leader in technology law.
In English law, a contract is formed when two or more parties have reached an agreement, intend to create a legal relationship by doing so, and have each given something of benefit. A smart contract is recognised as being equally capable of satisfying those requirements, despite being written in code. The contractual obligations may be defined in computer code, or the computer code may implement an agreement whose meaning is found elsewhere. Either way, the publication confirms that a smart contract can be identified, interpreted and enforced using ordinary and well-established legal principles.
It is yet to be seen how the courts will apply the principles of contract law to smart contracts when issues of uncertainty or contention arise. We predict that this will be a really interesting area of law to follow over the next few years.
Many commentators believe that the legal uncertainty surrounding cryptoassets and smart contracts have been the most significant barriers to their mainstream adoption. It will be exciting to see whether the report will increase market confidence, legal certainty, and thus innovation in these areas.
There are still discussions to be had over the regulation of cryptocurrency and how the insurance market will treat such assets.
The full publication is available to download here.