20/10/2024
The UK’s Digital Ownership Plan
This week’s key terms/concepts:
• Digital Assets: Any thing that is stored in digital or electronic form, including cryptocurrency, tokens and coins.
• Blockchain: A digitally distributed, decentralised public ledger that exists across a network, primarily used in maintaining secure transactions with cryptocurrencies.
• Asset-based Valuation: A form of valuation in business/finance that focuses on the value of a company’s assets, or the fair market value (the price an asset would sell for on an open market) of its total assets after deducting liabilities (financial obligations).
The UK are beginning their course in enacting significant digital assets legislation, which could have a substantial effect on the crypto-token sector and blockchain transactions. The Property (Digital Assets etc) Bill had its first reading last month by Lord Ponsonby of Shulbrede, following a 2023 report from the Law Commission which suggested that the rights given to personal property should be extended to digital assets such as crypto-tokens and non-fungible tokens (NFTs).
What does the bill entail, and why is this significant?
As digital assets are not a ‘thing in action’ nor a ‘thing in possession’, which is what currently determines personal property in the UK, the Bill is proposing the existence of a third category wherein a thing is not prevented from being the object of personal property rights merely because it is neither of these original categories. This will explicitly include digital assets such as tokens and coins, as well as additional unnamed personal property that has been decided will be best determined in the common law rather than in legislation.
If this Bill is to pass, it may have a knock-on effect of making the UK the most prominent destination for crypto in Europe, as digital assets legislation remains a relatively new premise. Japan amended its Payment Services Act last year in a similar manner of constituting digital assets as property, as well as general regulation and proposals globally, but the UK has an opportunity to lead the way and exert a hold on global blockchain deals.
How could this impact law firms?
The enactment of this Bill would lead to digital assets legally constituting personal property, indicating that it holds the same legal rights and protections as other property, such as money or physical possessions. This could lead to an array of circumstances where digital assets may be utilised in transactions, such as using digital assets for loan collateral, seizure of digital assets, or a company issuing digital tokens as equity.
Firms such as Latham & Watkins and Hogan Lovells who have remarkable digital assets and blockchain teams would be at the forefront of new transactions and litigation that the Bill may spark, and this could promote multi-team transactions with the crossover into legal property. These teams might work with their respective M&A teams if digital assets are included in the asset-based valuation of a company and are contributing to the balance sheet and purchase price negotiations. Another instance is working alongside a Bankruptcy/Insolvency practice group, where digital assets would have to be declared as assets for sale and could be liquidated.
The Bill is still in its early stages, and there is a possibility for it to be amended or not enacted, however if it does come to fruition, it could have a vast impact on the UK and global blockchain deals. The second reading committee sitting is set to be heard on the 6th of November, where the legislative process for the Bill will continue.
Lex Weekly 