UK Crypto Litigation: What’s the Latest?
UK Crypto Litigation: Then and Now
The UK Law Commission (LC) has been very busy in the crypto, as well as the wider digital assets space, for over four years (which is like dog years in such a nascent and rapidly evolving industry).
With all of the above case law and published opinion, the LC is now reviewing the existing body of work and looking to assess the current landscape. Crypto has been defined as property, however existing property laws quite explicitly apply to tangible, physical property. Thus the LC is currently undergoing a review and analysis of the existing laws and legal framework to determine its adequacy, identify any potential gaps and then recommend how best to address these, providing both business and legal certainty to those operating in and around the UK.
Professor Sarah Green is leading this effort and the consultation is open until 4 November 2022. Those across the industry are encouraged to participate.
Is new or additive legislation needed for crypto?
A tremendous amount of case law currently exists around property and physical goods. The rub is how to treat intangible (non-physical) property, i.e. crypto/digital assets?
Putting a wrapper around existing laws is a potential minefield and has the prospect to expand/increase exponentially, however creating something bespoke for crypto/digital assets would undoubtedly take longer and as previously noted, ideally the UK would provide legal and thus business certainty quickly.
Where are English courts re: crypto legislation? Business friendly or room to improve?
English courts have largely been on the cutting edge of this since 2019. Sir Geoffrey Vos is a massive advocate and thought leader in the space currently and has been for many years. He emphasises, amongst other things, education and training for judges on the basics of blockchain and cryptocurrencies. While most initial court cases around cryptocurrency involved theft and recovery of stolen assets, although those still exist (unfortunately), more complex topics are now before the courts, such as whether blockchain developers have a duty to their product users. The consequences of such rulings could be far reaching and highly significant. The general thought around all of this is that the existing framework of English courts is an adequate starting point, but gaps exist and initiatives such as the LC’s current consultation will help fill those gaps.
Airdrops! How can they be used in legal proceedings?
Airdrops are a great example of the global legal community embracing technology and have been used twice this year already to serve defendants with proceedings. The New York Supreme Court was the first ever to allow the use of an NFT airdrop, containing a link to legal papers, to be served on persons unknown via a wallet address. Because the airdrop was successful, the court considered notice to be served, which is mandatory for any court proceedings to move forward.
Following quickly on its heels, the UK court in July allowed the same. Previous attempts to use technology to achieve this had been met with much less success, as email addresses could bounce notices back, etc. However, courts are now satisfied that a successful airdrop, easily demonstrated on the blockchain, constitutes valid notice. This once again underscores the importance and need for education in and around this space.
DAOS — Legal implications, Regulatory approach & pitfalls
Decentralised Autonomous Organisations (DAOs) are another aspect of this landscape being investigated by the UK LC. The initiative has just recently started and is anticipated to last approximately 15 months. The decentralised nature of a DAO, by design, immediately eliminates things like a traditional corporate structure and the accompanying procedural requirements we are accustomed to seeing with LLPs, LLC, etc. This very different model then leads those in the legal profession and elsewhere to have very basic questions such as:
● Can a DAO enter into a legal agreement?
● How and where would any DAO profits be taxed?
● Who is liable if something goes wrong?
Those are just the tip of the iceberg around legal questions currently being contemplated by those in this space. It is very difficult at this stage to predict how UK legislators and regulators will approach DAOs, but possibly another type of entity will be created to better reflect such a structure? Again, it is a highly evolving and emerging space and thus very much still to be determined.
Across the pond, Wyoming was the first (July 2021) of now several US states to allow DAOs to incorporate as an LLC, extending all the state’s current legal protections of LLCs to algorithmic and member-managed DAOs. Incorporation addresses traditional legal issues such as recovery and victim compensation whilst hopefully retaining the ethos of a bottom up, distributed governance model, so foundational to DAOs. It is possible some DAO members might argue incorporation of a DAO undermines its very raison d’être, so hopefully a solution will evolve to reconcile these two seemingly very opposite ideologies.
Blue sky thinking — As Web 3 and digital assets progress, what are the upcoming hurdles?
Whilst obviously the list could be quite long, some key highlights are as follows:
Property status of digital assets: Whilst this is still in flight, ideally this will be fully established soon and fall away as an issue
Stablecoins: Regulation is coming, be it in the currently drafted bill or amended, and will very likely have disputes arising from it
CBDCs: An area to watch, Greengage discussed in more detail in a recent podcast
DAOs: as discussed earlier
Web 3: in general, and especially the metaverse
Regarding the metaverse, key legal discussions that are currently topical include:
● Do traditional laws around marriage and divorce apply in the metaverse?
● What, if any, sort of discrimination/equality laws apply if one feels their metaverse avatar experiences race, gender or any type of discrimination, especially if the avatar is different from the underlying race, gender, etc of the person?
● Around brands and IP, how does copyright law apply, or not, in the metaverse?
● If laws are indeed broken/rights violated in the metaverse, which jurisdiction applies?
The entire crypto/digital assets industry is a fast-moving and evolving space, especially around crypto litigation, with some very interesting and potentially incredibly impactful legal consultation and guidance both ongoing and forthcoming.
Recently Greengage’s CEO interviewed Charlotte Hill of Pennington Manches Cooper on our podcast The Gage for Episode 9. This article is a summary of that discussion. The full podcast can be found here.
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Links/supporting info:
UK Joint Task Force (UKJTF) on Crypto Assets, October 2018:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf
UKJT Paper, Smart Contracts, Nov 2019:
https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf
AA v Persons Unknown Court Decision (crypto as property), Dec 2019:
http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Comm/2019/3556.html
Useful Summary of 2019 Case:
https://eldwicklaw.com/crypto-assets-as-property/
DAOs: Project status with the LC:
https://www.lawcom.gov.uk/project/decentralised-autonomous-organisations-daos/
DAOs in the US:
https://thedefiant.io/starting-a-dao-in-the-usa-steer-clear-of-dao-legislation
