New legal framework for cryptoassets is a significant milestone that offers a promising avenue for clarity and fairness in divorce and dissolution proceedings.
The recent introduction of the Property (Digital Assets Etc.) Bill to parliament marks a significant shift in how digital assets, including cryptocurrencies and NFT's, are recognised under English and Welsh law.
This draft legislation aims to create a clear legal framework for digital holdings addressing a longstanding ambiguity in property law.
A new category of legal ‘thing’
One of the most notable features of the Bill is the establishment of a new category of legal ‘thing’. This will allow digital assets — ranging from cryptocurrencies to digital art and carbon credits — to be classified as personal property under the law. Previously, digital belongings were not definitively included within the existing property law frameworks, leaving owners in a precarious legal position when their assets were interfered with.
Recommendations from the Law Commission
The Bill follows the 2023 report by the Law Commission which advocated for this change. The report highlighted the need for a distinct classification of digital assets, proposing the introduction of a new category of ‘thing’ alongside the existing categories of ‘things in possession’ and ‘things in action’. The draft Bill refers to:
“A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—
(a) a thing in possession, nor
(b) a thing in action.”
This classification aims to enhance the legal status of digital assets, ensuring that they are afforded the same protections as traditional forms of property.
Implications for cryptoassets
Clear ownership rights
With the introduction of this new legal framework, owners of cryptoassets will benefit from clearer ownership rights. This is particularly crucial in situations involving disputes over ownership or interference with digital holdings. The Bill ensures that the rights of digital asset owners are explicitly recognised, reducing the risk of legal ambiguities.
Enhanced security
By defining digital assets as personal property, the Bill also enhances the security of these holdings. Owners can now rely on established legal principles to protect their assets from theft, fraud, or unauthorised access, which has been a significant concern in the digital realm.
Facilitating transactions
The Bill aims to facilitate smoother transactions involving digital assets. By clearly defining the legal status of cryptocurrencies it allows for more straightforward transfer and exchange processes, potentially fostering greater market confidence and investment in digital assets.
Impact on divorce or dissolution proceedings
The recognition of digital assets under the new Bill has significant implications for parties going through a divorce or civil partnership dissolution.
Equitable distribution of assets
With digital assets classified as personal property, courts will be better equipped to include cryptocurrencies and other digital assets in the overall financial settlement. This clarity ensures that both parties can identify and value these assets fairly, leading to more equitable outcomes.
Duty of disclosure
The Bill reinforces the duty of disclosure in financial remedy proceedings. Parties will be required to disclose all digital assets, including crypto holdings, during the divorce process. This transparency is crucial, as it reduces the risk of one party hiding assets, a concern that has been prevalent in cases involving cryptocurrencies.
Valuation challenges
Whilst the Bill enhances the legal status of digital assets, the inherent volatility of cryptocurrencies and NFTs can pose challenges during the valuation exercise. Courts will need to consider the fluctuating nature of these assets when determining their worth, which may affect the overall settlement.
Protection against misappropriation
The legal recognition of digital assets provides additional protection for parties in divorce cases. If one spouse attempts to misappropriate or conceal cryptoassets, the other party can seek legal recourse more effectively, leveraging the rights established by the Bill.
Broader scope of digital assets
The Bill does not limit itself to cryptocurrencies alone. It encompasses a variety of digital holdings, including:
- non-fungible tokens (NFTs): these unique digital tokens representing ownership of a specific item or piece of content (like digital art) will now have legal recognition, allowing creators and collectors to protect their rights
- carbon credits: as climate action becomes increasingly urgent, the recognition of carbon credits as personal property is significant. This could encourage more businesses and individuals to engage in carbon trading, knowing their assets are legally protected.
Conclusion
The introduction of the Bill represents a pivotal moment for the legal recognition of cryptoassets and other digital holdings in England and Wales. By creating a new category of legal ‘thing’, the legislation seeks to clarify ownership rights, enhance security, and facilitate transactions involving digital assets.
For parties going through a divorce or civil partnership dissolution, this framework provides essential clarity and protection regarding digital assets, ensuring that they are included in financial settlements and appropriately valued.
This proactive approach, following the Law Commission’s recommendations, is set to foster a more robust legal environment that reflects the evolving landscape of digital property, providing much-needed clarity and protection for owners of digital assets during one of life’s most challenging transitions.
