There is no single agreed definition of a cryptoasset and the market is constantly evolving so that new variations regularly emerge. However, broadly speaking, cryptoassets can be defined as digital assets that utilise cryptography (the science of protecting information through secure technology). Cryptocurrencies, which are a type of cryptoasset, are digital currencies used as a medium of exchange. Bitcoin, Ethereum and Litecoin, the top competitors currently dominating today’s markets, are all examples of cryptocurrencies.
Similar to GBP, USD, EUR and so on, cryptocurrencies represent value. Crucially, however, cryptocurrencies only operate in a digital space. They are intangible which means they lack physical substance and cannot be held in one’s hand (that is, other than the novelty coins pictured above).
There are unique benefits to owning cryptocurrencies. They provide an efficient and secure means of transferring money over the internet and offer an alternative to government-issued fiat money. It can, however, be difficulty to determine who owns cryptoassets and how their ownership is transferred.
As a result, certainty over the legal status of cryptoassets under English law has been lacking in the courts. Historically, cryptoassets have fallen outside the definition of legal property. Instead, they were treated as mere data or information. This was largely due to their five distinctive features, namely their:
- Cryptographic authentication (a complex digital verification process);
- Use of a distributed transaction ledger (a digital ledger containing the history of transactions);
- Decentralisation (responsibility and control dispersed away from a central authority); and
- Dealings governed by consensus (a nonpartisan means of establishing agreement).
However, the UK Jurisdiction Taskforce has now determined in their Legal Statement on the Status of Cryptoassets and Smart Contracts that these features no longer disqualify cryptoassets from being classed as legal property. The courts have confirmed this in the case of Robertson v Persons Unknown. This decision followed the comments of Simon Thorley IJ from a case in the Singapore International Commercial Court, B2C2 Ltd v Quoine Pte Ltd. For the first time, Bitcoin was deemed capable of forming the subject of a trust and could therefore be treated as legal property.
This now means that cryptoasset trusts no longer face issues in establishing certainty of subject matter (a key component necessary for a trust to be valid under English law). Furthermore, remedies in property disputes such as asset preservation orders (APOs) are now available to cryptoasset owners should their property be lost, stolen or fraudulently taken.
APOs can be invaluable as they put in place injunctions to prevent fraudsters from dissipating assets. In the context of inheritance and trust law, this will afford protection to cryptoasset trusts by aiding the recovery of assets fraudulently transferred out of the trust fund by a third party or a trustee in breach.
It is crucial that both cryptoasset owners and their lawyers stay informed of the latest advancements in the crypto world. Given the seismic shift in the global economy caused by the cryptoasset phenomenon, the court’s decision to classify cryptoassets as legal property is likely to have far-reaching implications in both domestic and international financial markets.
If you are affected by the issues in this article, please do not hesitate to contact any member of our Wealth Management and Taxation Team for further advice.