Digital assets in Scots private law: consultation

Section 2: Recommendations for Legislative Reform

Primary Legislation

The Scottish Government considers that primary legislation would be the most effective and appropriate means to accommodate digital assets in Scots private law. The Scottish Government is not currently aware of any litigation in Scottish courts that has considered the status of digital assets, meaning that Scots law cannot rely on a body of case law to provide the legal answers needed about digital assets. Scotland is a relatively small jurisdiction, and it is not expected that this situation will change in the near future.

By comparison, litigation in England and Wales in recent years has generated a substantial body of case law confirming that digital assets can be a kind of property and that defines some of their legal characteristics. Judgments delivered by those courts are not binding in Scotland because of the separate and distinct legal systems in our different jurisdictions; however, even with these developments in case law, legal practitioners and the judiciary in England and Wales welcomed the possibility of English and Welsh legislation to confirm and support the emerging views in case law. The Law Commission of England and Wales produced a draft Bill (The Property (Digital Assets Etc.) Bill)^[5] which was introduced by the UK Government into the House of Lords on 11 September 2024.

Legislation is a more efficient means to facilitate greater legal certainty and, in turn, assist businesses than the organic development of case law over time. A legislative underpinning of digital assets as property in Scots law can be achieved by the Scottish Government introducing a Bill into the Scottish Parliament.

Scope of Possible Primary Legislation

We propose that any future primary legislation could be developed with a narrow scope of application, with the intention that a Bill could define digital assets as property and set out provisions to establish how transfers of ownership would operate within Scots property law. A Bill could also contain provisions to clarify that the general principles of Scots private law continue to apply to digital assets, so far as those principles are consistent with the characteristics of digital assets, such as the ability of digital assets to be held on trust.

The Property (Digital Assets Etc.) Bill contains a clause confirming that it extends to England and Wales only; that legislation will therefore not alter Scots private law. Matters of Scots private law are not reserved to the UK Parliament, and they are therefore within the legislative competence of the Scottish Parliament. Alignment with developments in England and Wales, where both appropriate, accounting for the difference between the relevant areas of Scots law and English and Welsh law, and desirable, will aid cross-border consistency and guard against disruption in trade and financial services provision.

The focus of the possible future reforms being consulted on here is on the need to recognise and clarify the status of digital assets as property within Scots property law. Nevertheless, this recognition will bring consequential clarification in other areas of Scots private law where these assets are of relevance, such as contract law and succession, for example. So, although the scope of the legislation may be narrow, and any future Bill would not make provision in relation to reserved matters (such as the currency, financial services, financial markets and most matters relating to insolvency) the benefits of clarification will be widespread.

Statutory Definition of Digital Assets as Property

The ERG proposed that a definition should not be too prescriptive and that it be technologically neutral. The Scottish Government is inclined to accept this proposal, as it is anticipated that this would mean that any future Bill would not be quickly superseded by advances in technology. With a key driver for possible future legislation being that existing legal classifications of property do not clearly or easily accommodate developments in digital technology, we are keen to mitigate the potential for a statutory definition to become redundant quickly due to further developments in the fast-paced worlds of both financial practice and technological innovation. Likewise, a more prescriptive legislative definition could act as an unintended barrier that impedes innovation and technological advances.

This approach would also align with that adopted in cross-jurisdictional statements of relevant private law principles, notably by The International Institute for the Unification of Private Law (UNIDROIT) in its Instrument “The UNIDROIT Principles on Digital Assets and Private Law”^[6]. It will be a benefit for Scots law to be accessible to businesses operating internationally, and for there to be consistency with other legal and regulatory regimes, where possible and appropriate.

The technical analysis undertaken by the ERG identified that, despite their incorporeal character, digital assets share many features of corporeal moveable property in the way they are held and transferred. In other words, digital assets can behave more like coins and banknotes than debts and other incorporeal moveable rights, such as the right to draw money from a bank. The ERG recognised digital assets as being incorporeal but also that there are analytical differences between them and other more familiar kinds of incorporeal property. Property law would need to allow for these differences.

Based on this analysis, the ERG concluded digital assets should be defined with reference to two limiting characteristics:

i) Be capable of existing independently.

Independent existence means that a digital asset can be created as a virtual entity that exists independently of the law and of any person who may have rights in relation to it. The ability of digital assets to have an independent existence is one of the main ways that they are analogous to the kinds of corporeal things that are already legally recognised as property.

ii) Be rivalrous.

Rivalrous in character means that the use or consumption of a digital asset by one person will prejudice the use or consumption of that same asset by another person. Again, rivalrousness is a characteristic of corporeal things that are recognised as property. This criterion also distinguishes a digital asset, which is constituted by data, from what is referred to as ‘ordinary data.’ Digital assets, such as cryptocurrencies or non-fungible tokens, are secured and verified through blockchain and similar technologies. The use of these assets by one individual stops simultaneous use by another, similar to the exclusivity found in traditional forms of property. In contrast, ordinary data, such as photos and documents, can be easily duplicated and shared without affecting the original version. A photo or document can be replicated multiple times, and its use by one person does not prevent others from using it.

Under this proposal, unless a digital asset met these two limiting characteristics, it would not be an object of property in Scots private law.

Applying these characteristics to a commonly understood digital asset, like a cryptocurrency, it is possible to define Bitcoin as property. A Bitcoin is capable of independent existence, since it is created as a unique data set that once created does not require a person or a legal right to continue to exist, fulfilling the first criterion. The cryptographic protections of a Bitcoin prevent it from being copied to make valid ledger transactions, meaning the holder can only spend it once. It is for that reason rivalrous.

Taking this view, many things that are commonly described as “digital assets” (such as information stored on social media platforms and email accounts) would not meet the requirement of independent existence necessary for them to be treated as objects of property. These assets usually depend on the digital provider’s continuous service and exist within contractual arrangements, such as licence agreements. Email messages or social media postings can usually be duplicated and used by other people without excluding others so they would not be considered rivalrous. They could be copied without diminishing the use made of them by the person who holds the account with the service provider. User stories annexed to this consultation give further examples of how the possible reforms being consulted on could apply in real life situations.

We welcome also views on a suitable legal term to use to define digital assets that are recognised to be property. In other words, is it necessary to make a distinction and refer to such property as a “digital object” (or another term) given the common usage of the descriptive term “digital asset”? A contrary view could be that developments across the United Kingdom (and internationally) make use of the term digital assets and retaining this as a legal term could assist Scottish legislation to work in alignment with the legal rules and practice in England and Wales as is deemed appropriate.

Recognition of Digital Assets as Property in Scots law

The ERG recommended that there be a provision in legislation which states that digital assets (as defined above) are moveable things that are capable of being owned. The purpose of such a provision would be to put beyond legal dispute that such digital assets are recognised as property in in Scots law.

Rules on the Transfer of Ownership of Digital Assets

Having identified the kinds of digital asset to be recognised as property, the Scottish Government would then want to consider other provisions that could be included in the possible future primary legislation to support the ownership of this property. The analysis undertaken by the ERG identified the ability to control a digital asset as a starting point to identifying ownership. The ERG’s analysis of the existing understanding from legal practice led them to conclude that while digital assets are incorporeal in nature, there were strong analogies with corporeal moveable assets in the way they are transferred. Putting in place statutory provisions would enable legislation to bridge fundamental gaps around acquiring and transferring ownership that would otherwise be left to case law to develop.

The ERG proposed that any future primary legislation could establish two rules governing the ownership of digital assets.

Rule One

Ownership of a digital asset may be voluntarily transferred when the owner transfers control over it to another person, with the intention of making that other person its owner.

This rule would confirm that, when accompanied by the required intention, the transfer of control over a digital asset would result in the change of ownership of it. This would be consistent with the approach taken by UNIDROIT. As rule one would also require that the current owner intend to make the other person the owner when transferring control, this would preclude an ownership transfer in a situation where an owner transfers control of digital assets to an agent to hold and administer digital assets on their behalf for an indeterminate period, as the necessary intention to transfer ownership would be absent. It would also mean a person whose digital assets was stolen would remain the owner of it.

The rule also clarifies that assignation is not a suitable method to transfer ownership of digital assets. Assignation is a means to transfer a right or claim from one person to another, most commonly the right to payment of a debt. In other words, if a person has a right to be paid for services, they can assign that right to payment to another person. Whereas generally assignation is possible for things that are incorporeal moveable rights, because they consist in legally-constituted networks of rights (e.g., debts owed to a person), this would not be the case for digital assets as they do not consist in legally-constituted rights.

Rule Two

A person who acquires control of a digital asset and does so in good faith and for onerous consideration acquires ownership of it, notwithstanding that the transferor from whom it was acquired was not the owner.

Rule two would extend protections to a good faith acquirer who purchases a digital asset in exchange for value. This will help provide markets and transactions with greater certainty.

Preservation of General Principles

Finally, the ERG has recommended that any future primary legislation could include a set of provisions to state that general principles of Scots private law continue to apply to digital assets that are property, so far as those principles are consistent with their characteristics. This would clarify, for example, that digital assets which qualify as property could be sold and purchased through legal contracts and those contracts would be governed by the general principles of Scots contract law unless disapplied to the extent permitted by law. In addition, the ERG has recommended that a provision could be included in any future primary legislation to clarify that digital assets can be held on trust, to remove any doubt as to whether digital assets can facilitate custody arrangements and structures involving trusts.