Over the past few years there has been exponential growth in global interest in digital assets. The rise in the price of Bitcoin and Ether over the past 24 months is only the most public and visible expression of what is a rapid and fast moving area of the digital economy. According to Reuters, Bitcoin's market cap surpassed $1 trillion in February 2021, with the total value of all cryptocurrency coming in at $1.7 trillion.
Bitcoin and Ether (which is built on the Ethereum block-chain) are now being held and used on a transactional basis by some of the world's top fund managers, investment banks and global high-net worth Individuals. With increasing adoption across commercial and financial systems around the globe including, for example, the innovative security token like bond-issues that Societe Generale placed in 2019, digital assets have now moved far beyond the 'early adopter' stage and are rapidly becoming a key component of the global economy, which the Covid-19 pandemic only appears to have accelerated.
As a result, all of the world's major economic centres are looking into how to regulate digital asset classes and the first and most obvious question which the law needs to grapple with is "what are digital assets and to what extent do they or can they fit in within existing legal and regulatory regimes?"
In the context of the BVI, the jurisdiction prides itself on combining the flexibility of an offshore centre with light touch regulation and minimal taxation and the commercial certainty that comes from a mature common law legal and regulatory framework. According to a research paper published by KALO Advisors the BVI is currently ranked third for Initial Coin Offerings (tokens issued by companies seeking to build companies with block-chain applications) and 8th of the Crypto Hedge Fund market (behind Cayman at 42%).
So what is the problem?
At present, the legal definition of the various different classes of digital asset remains undetermined by the highest courts in the US or UK and have little or no statutory basis or definition. The first state in the world to recognise digital assets as a form of 'intangible personal property' has been Wyoming. Beyond that, various countries' public authorities have sought to make pronouncements on what various digital assets are and are not. Some, like HMRC, do not consider Bitcoin to be money, whereas Wyoming has enacted a statute that states it is. HMRC has tried to define the physical location of a cryptocurrency by reference to the tax residence of the individual who owns or controls the tokens or coins.
The problem is that at present there is no uniform approach and there is unlikely to be one in the near future.
The current state of the common law
Without a statutory instrument putting digital assets on a firm 'proprietary' footing their status is, at present, uncertain and subject to incremental and piece-meal definition across the common law world. If some or all of what is now collectively known as digital assets do not constitute 'property' then many of the existing statutes and laws in force will not (or more accurately 'arguably not') extend to them.
If some of the extremely valuable digital assets now contained in individual portfolios, diversified funds and crypto-exchanges are not considered 'property' then as a matter of common law there are wide implications for everything from family trust planning and the inheritability of digital assets, through to the powers of liquidators and receivers in company insolvency or personal bankruptcy, and even queries over the availability of various common law remedies to aid in fraud and asset tracing claims over such assets.
It is also abundantly clear that digital assets do not fit neatly within the existing common law definitions of 'property' which are widely considered (on the personal property side) to be limited to either a "chose in possession" or a "chose in action".
The problem highlighted
Recently, the English High Court grappled in a very limited way with this conundrum in the case of AA v Persons Unknown  EWHC 3556 (Comm). The case concerned the extortion of a Canadian insurance company by hackers. The hackers infected and encrypted the target company's computer systems and demanded USD$950,000 in ransom to provide software to unlock (unencrypt) their systems. The ransom money was to be sent as Bitcoin.
The insurance company paid the ransom and then, using a third party company, sought to trace the Bitcoin payment back to the hackers. As part of the proceedings to trace the payment the Applicants sought to obtain Norwich Pharmacal relief alongside a proprietary injunction.
Mr. Justice Bryan, for reasons not relevant to this discussion, focused on the availability of a proprietary injunction and, in doing so, set out the crux of the current 'definitional' problem related to cryptocurrencies. At paragraph 55 of the judgment:
"[Bitcoin] are not choses in possession because they are virtual, they are not tangible, they cannot be possessed [because they exist on a decentralised ledger that nobody individual controls]. They are not choses in action because they do not embody any right capable of being enforced by action."
Mr. Justice Bryan then identified Colonial Bank v Whinney (1885) 30 Ch. D. 261 as being the leading authority for the proposition that as per Fry LJ: "all personal things are either in possession or in action. The law knows no tertium quid between the two."
On such an analysis, cryptocurrency such as Bitcoin or Ethereum would not, according to the current state of the law, be classified as a form of property, in which case cryptocurrencies could not be the subject of a proprietary or freezing injunction (amongst many other things). In considering the availability of such relief, Mr. Justice Bryan surveyed the current state of the common law by reference to a legal statement issued by the UK Judicial Task Force ("UKJT") in November 2019. This statement, though it contains no judicial force, was drafted by Laurence Akka QC, David Quest QC, Matthew Lavy and Sam Goodman and Mr. Justice Bryan found it persuasive.
The statement began by analysing the 'factual soup' surrounding the Colonial Bank case. The drafters of the legal statement, having reviewed the facts, concluded that Colonial Bank was not about the scope or definition of property generally but rather the more limited point of whether shares were things in action within the meaning of the Bankruptcy Act 1883 and therefore the court's proper enquiry had been one of statutory interpretation.
The drafters of the legal statement opined that, in making the statement that all personal things are either in possession or action, Fry LJ in fact attributed a very broad meaning to 'things in action' to the effect that, "they are, in fact, personal property of an incorporeal nature".
The analysis in the legal statement considered that the appeal to the House of Lords had also been concerned not with the nature of property itself but of statutory interpretation and in the House of Lords Lord Blackburn stated: "In modern times lawyers have accurately or inaccurately used the phrase 'things in action' as including all personal chattels that are not in possession". On this expansive definition 'things in action' could cover all things that were not in possession, the legal statement of the UKJT concluded that:
"Our view is that Colonial Bank is not therefore to be treated as limiting the scope of what kind of things can be property in law. If anything, it shows the ability of the common law to stretch traditional definitions and concepts to adapt to new business practices (in that case the development of shares in companies)."
Isn't the problem solved?
It might be thought that the common law would therefore seamlessly develop in this direction and that the question of whether digital assets should fall within the existing division of chose in possession or chose in action (or some as yet undetermined third category) could be left to legal academics, an army of litigators and future judicial consideration.
The reason why all this matters though is of course that Bitcoin and Ethereum are just one type of an ever increasing broader digital asset class and the court's treatment of each of the assets has yet to be tested and determined (despite their ballooning economic value and increasing adoption).
The problem of leaving it to the courts was also highlighted in the case of Your Response Ltd v Datateam Business Media Ltd  EWCA Civ 281,  Q.B. 41 where the Court of Appeal, in different factual circumstances, concluded the following in relation to the Colonial Bank authority:
"[It is] very difficult to accept that the common law recognises the existence of intangible property other than choses in action (apart from patents which are subject to statutory classification)".
Moore-Bick LJ went on to say that there was a "powerful case for reconsidering the dichotomy between choses in possession and choses in action and recognising a third category of intangible property, which may also be susceptible of possession and therefore amenable to the tort of conversion".
The UKJT considered that despite the Court of Appeal's view in Your Response in yet other cases such as Swift v Dairywise Farms Ltd  1 WLR 1177, the court had held that a milk quota could be the subject matter of a trust and that in Armstrong v Winnington  EWHC 10 (Ch) an EU carbon emissions allowance could be the subject of a tracing claim as a form of "other intangible property", even though neither is a chose in possession nor a chose in action.
Also weighing in against Your Response are the cases of Elena Vorotyntseva v Money-4 Limited t/a Nebeus.Com, Sergey Romanovskiy, Konstantin Zaripov  EWHC 2596 (Ch), where Birs J granted a worldwide freezing order in respect of a substantial quantity of Bitcoin and Ethereum, and Liam David Robertson v Persons Unknown, CL-2019-000444 (unreported), 15 July 2019 where Moulder J granted an asset preservation order over Bitcoin held in a Coinbase wallet.
In the AA v Persons Unknown case, Mr. Justice Bryan reached what may be considered to have been a sensible and pragmatic conclusion based largely on the analysis provided in the legal statement of the UKJT in concluding that "…crypto asset[s] such as Bitcoin are property". This has not of course been tested at a higher level and, as the above clearly shows, the nature and definition of any particular type of digital asset remains at present uncertain and distinctly arguable one way or the other.
In Mr. Justice Bryan's opinion and in the opinion of the UKJT Bitcoin, for example, meets the four criteria set out in Lord Wilberforce's classic definition of property in National Provincial Bank v Ainsworth  1 AC 1175 as being (i) definable, (ii) identifiable by third parties, (iii) capable in their nature of assumption by third parties, and (iv) having some degree of permanence.
The common law world is moving incrementally towards recognising digital assets as property
In Singapore, the Singapore International Commercial Court concluded a similar thing to Mr. Justice Bryan in AA v Persons Unknown in the case of B2C2 Limited v Quoine Pte Limited  SGHC (I) 03.
In New Zealand, the New Zealand High Court in Ruscoe v Cryptopia Ltd (in Liquidation)  NZHC 728 has also held that cryptocurrencies were property for the purposes of that country's corporation law legislation, and that they were therefore capable of being held on trust by a company for its accountholders and thus out of reach of the company's creditors.
It was noted, however, in an extensive paper produced by Cambridge University entitled Legal and Regulatory Considerations for Digital Assets, that in the Mt Gox's Bankruptcy (under the Japanese Civil Code) the question arose whether Bitcoins were indeed "things" capable of ownership under Japanese law.
Article 85 of the Japanese Civil Code defined "things" as tangible and restricted the right of ownership to "things". The court recognised that exceptions existed to allow property rights to be held in other rights but that in the circumstances Bitcoin did not qualify as "things" under Article 85 of the Civil Code because it clearly was not (i) tangible; and (ii) subject to exclusive control.
The Wyoming statute
Wyoming is currently the only state in the world to have put the issue of defining digital assets on a statutory footing by reference to the easily understood common law concept of 'intangible personal property'.
In the Wyoming statute the state clearly defined Digital Consumer Assets, Digital Securities and Virtual Currency as forms of intangible personal property which accords with the views of both the UKJT and Mr. Justice Bryan in AA v Persons Unknown.
As the case of AA v Persons Unknown shows, however, whilst the common law courts are proving once again to be flexible and working their way gradually towards proprietary recognition, there is a lack of certainty over the status of the various classes of digital assets, which is commercially undesirable and arguably unnecessary.
The step of putting an asset on a proprietary footing is also not unknown in the BVI. Section 33 of the BCA does this by stating simply that "a share in a company is personal property". It lays down a marker and a default position but that of course does not mean there will not be disputes in the future which go beyond whether a particular digital asset is a form of intangible personal property.
Bringing digital assets into the mainstream of English commercial law by giving them proprietary status would however mean that they would fall within the BVI's existing legislative and regulatory orbit.
The regime in respect of digital assets would, therefore be no more onerous than what exists in relation to BVI company, trust and insolvency law at present, which cover other forms of real and personal property.
The BVI would, therefore, arguably gain a significant 'second mover advantage' in clarifying the treatment of digital assets under its existing law in relation to:
- the powers a liquidator has over digital assets in liquidation, e.g. do existing preference and transactions at an undervalue provisions cover assets if they are not a form of property?;
- whether digital assets can properly form the basis of a trust if they are not some form of recognisable property;
- what happens to such assets as part of the estate in terms of both inheritance and how are they treated for tax purposes (tax authorities will continue to operate within jurisdictional limitations according to the Revenue Rule)?; and
- in fraud cases, does injunctive relief apply to all or only some digital asset classes for the purposes of asset-tracing and recovery?
Putting in place a short statutory instrument in the BVI to make it clear that such assets are within the ambit of existing English property law, as a recognisable form of 'intangible personal property', means that the definition of 'property' and 'assets' currently contained in the Business Companies Act 2004 (as amended) and the Insolvency Act 2003 (as amended) would naturally extend to cover those asset classes without the need to establish a separate legislative and regulatory framework for 'digital assets'.
Taking such a step would, therefore, arguably not increase regulation in the jurisdiction but quite the opposite as it would bring 'digital assets' within the protection of existing statutes and common law concepts without the need for substantial additional legislation.
Such a step is not, however, a panacea to what is an incredibly complex and fast-moving area of the digital economy. Difficult questions remain as to how security interests involving digital assets can properly be structured without 'control', 'possession' or 'access to' the private key associated with a particular block or hash. The Wyoming statute uses the word 'control' but leaves this hanging as to what it can or does mean in respect of a digital asset.
It also does not substantially assist with regulating how custodian relationships over digital assets can and should exist in the future as again 'control' of the asset will be crucial to any such relationships. Each of these areas will be subject to extensive judicial consideration across the common law world in the future.
By defining digital assets as a form of property the BVI would, however, demonstrate once again the flexibility to adapt quickly to the needs of the commercial world and to offer those looking to incorporate funds or conduct transactions involving digital assets a degree of certainty that no other jurisdiction (Wyoming excepted) can currently offer.
If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.
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