Digital Assets in Scots Private Law: Expert Reference Group minutes: March 2022

Attendees and apologies

• Rt Hon Lord Patrick Hodge, Supreme Court of the UK                                

• Professor David Fox, University of Edinburgh  
• Ivan McKee, Minister for Business, Trade, Tourism & Enterprise  
• Dorothy Bain, QC, Lord Advocate 
• Professor Sarah Green, Law Commission of England and Wales  
• Stephen Ingledew, FinTech Scotland 
• Maggie Craig, Financial Conduct Authority 
• David Bartos, Scottish Law Commission  
• John McKinlay, DLA Piper  
• Professor Daniel Broby, University of Ulster  
• Antony McFadyen, Law Society of Scotland  
• Callum Sinclair, Burness Paull  
• Martin Sloan, Brodies LLP

In attendance

• [redacted – s.38 – personal information], Scottish Government, Directorate for Justice 
• [redacted – s.38 – personal information], Scottish Government, Investment Finance 
• [redacted – s.38 – personal information], Scottish Government, Investment Finance 
• [redacted – s.38 – personal information], Scottish Government, Investment Finance 
• [redacted – s.38 – personal information], Scottish Government, Investment Finance 

Apologies

• [redacted – s.38 – personal information], Scottish Government, Solicitors Local Government and Economy
• [redacted – s.38 – personal information], Scottish Government, Technology, Innovation & Entrepreneurship

Items and actions

Welcome and Introductions

Lord Hodge welcomed members to the third meeting of the group. An overview of the group’s purpose was provided with a recap of the last meeting in December 2019, highlighting that the main action point from the groups second meeting was Professor Fox’s paper. Lord Hodge also noted the expansion of the groups remit to consider digital assets more broadly, rather than a narrow focus on crypto-assets, due to recent technological developments in the field.

Introductory speech, Ivan McKee - Minister for Business, Trade, Tourism and Enterprise

Ivan McKee’s speech highlighted the pace at which digital assets have evolved since their inception and the origination of Bitcoin in 2008. He also emphasised the pressing need for legal clarification on the status of digital assets, with a focus on developing appropriate reforms which consider both business and consumer interests at pace. Whilst Mr McKee acknowledged not for this group, consideration of the broader economic, social and environmental issues surrounding digital assets need to be considered and work will be taken forward on this by officials.

Areas of legal uncertainty in Scots private law: Professor David Fox

Professor Fox introduced his paper, ‘Digital assets in Scots Private Law 2021’ with the overall theme of highlighting the areas of legal uncertainty in accommodating digital assets in Scots private law. He mentioned the importance of developing system neutral principles capable of working across the different jurisdictions. Professor Fox advised all fundamental areas of concern were on page 16 of his paper and would be discussed later.

Professor Fox made the recommendation of treating digital assets as corporeal things but being intangible by nature. He mentioned it is not legally perfect and would require alterations from the existing definitions on corporeality which have been developed for tangible moveables. He also mentioned through this suggestion that digital assets would be capable of possession but best to not treat as capable of possession for doctrinal reasons. Professor Fox noted we need have some clear definitional criteria for control of the digital asset.

Professor Fox acknowledged the work of the Law Commission of England and Wales (LCEW), on smart contracts, electronic trade documents (ETDs) and digital assets. LCEW are working more broadly on digital assets and the status of digital assets in property law. The fundamental issue for Scotland (and this is not even a particularly Scottish problem) is digital assets are not goods, and that ownership and control can be separated.

Professor Fox noted in England and Wales, the consideration has been to leave this to general case law. Additionally, Professor Fox mentioned the pace at which Scotland moves, highlighting that with a smaller jurisdiction and lower volume of case law, we cannot wait for a definitive judicial determination to secure a position in the market and to show Scotland is up with the curve.

Project overviews: Law Commission of England and Wales

Electronic Trade Documents

Professor Sarah Green provided a brief introduction on the LCEW and the ETD project in relation to international trade, explaining that the LCEW have a dedicated team, with specialist support and an advisory panel of experts for each project. They are funded by the government but act independently. Additionally, LCEW have been working closely with Professor Fox.

Professor Green described what ETDs are and why reform is needed. It was noted that within the recommended reforms, these would aim to be technology-neutral, and to take the least interventionist approach to remove any legal blockages.

Professor Green advised international trade is worth approx. £1.27trn to the UK and the LCEW recommends:

• ETDs are exclusive and not transferable.
• Professor Green estimates the final report on ETDs will be published by the LCEW in April 2022.

Digital Assets

Professor Green suggested there are similarities between digital assets and ETDs. She outlined the scope of the digital assets project following the review of English and Welsh law relating to digital assets and ensuring they can accommodate digital assets which include cryptocurrencies. Principles from property have been extracted and applied to digital assets. Some of the key issues mentioned include acquisition, disposition, derivative transfer of title and competing claims in relation to digital assets. Professor Green asked the question: How do we define and articulate the “thing”?

Professor Green expressed the clear view that this is an area of law that needs legislation. A consultation paper for digital assets is expected to be published in Q2 2022.

Lord Hodge stated the best way forward may now be for Scotland to link more formally into the work of LCEW.

Payments and transactions overview: FinTech Scotland

Stephen Ingledew introduced FinTech Scotland’s new ‘Fintech Research and Innovation Roadmap.’ He discussed the key themes of the roadmap (Open Finance, Climate Finance, Payment & Transactions and Financial regulation) and highlighted that FinTech Scotland is a community of approximately 200+ FinTechs with participation from regulators, academia, government, and the City of London.

Stephen highlighted the linkage between cluster excellence and alignment with the government’s recently published ‘National Strategy for Economic Transformation.’ Stephen advised there is a growing appetite from firms and larger financial services institutions to develop digital currency and use digital in different ways.

Lord Hodge applauded this work, and it was good to know we have practitioners in this field to experiment and work within those frameworks.

In discussion, Maggie Craig commented that the more legal clarity the FCA has, the easier it will be to regulate the digital asset space. Maggie raised the question If they do not have the power to regulate the whole perimeter of digital assets, what does this mean for regulation.

Professor Daniel Broby advised the fast-growing areas of DeFi (Decentralised finance) and NFT's (Non-Fungible Tokens) be separately defined and addressed as distinct from crypto currency. Both DeFi and NFT's make use of smart contracts that facilitate non-custodial settlement. This distinction is important for the growth of the financial sector, as it facilitates new and innovative services and products. 

Questions for consideration: Professor David Fox

To initiate the open discussion, Professor Fox asked the following questions:

• Do we think we have the legislation required?
• Should Scotland participate in the LCEW’s reforms?
• If Scotland does not participate in those reforms, then how might Scotland go about coordinating their efforts?

Professor Fox commented on developments in decentralised finance and automated settlement of transactoins, stating we need to have an eye on future developments.  Although developments in the field are moving fast, it would be best deal with them in stages rather than try to take on everything at once. Other work should be needed for accommodate them, it would be best not to delay progress on our work on digital assets.

Open forum

Consultation questions

In discussion, the members made several points in relation to the questions posed by Professor Fox and the treatment of digital assets in Scots law more broadly.

Martin Sloan raised security concerns around crypto assets requiring urgent attention. He also stated about making changes on security over intellectual property but a possible missed opportunity to utilise this through the Moveable Transactions Bill in the Scottish Parliament.

Callum Sinclair commented the direction of today’s conversation was in favour of leveraging on the good work of the LCEW and we should keep things as straightforward and joined up as possible across legal jurisdictions within the UK. He spoke about identifying the major hurdles between Scots and English law, and that from a business perspective it would be preferable for something that works well and works for everyone.  

John McKinley raised the point regarding property rights of digital assets and asked how do you put a boundary around digital assets to establish what is captured under this umbrella term. The issue of defining what is covered under the term digital assets was raised on several occasions throughout the meeting.

Professor Green reinforced clarifying the boundary is important. She explained we need to distinguish something that is not tangible but can be possessed. Professor Green said an example of this would be a debt as it has an existence but has no data and independent of a person.

Professor Fox stated there is scope for misunderstanding and it is important to have a definition of digital assets and manifestations of data versus other types of manifestations of data. He added that once you make it property you give someone control, therefore there is a need of definitional control over data.

David Bartos asked if the group could have some more time to comment further on Professor Fox’s paper. It was agreed that all comments are welcome.

Lord Hodge reiterated there was a reasonable consensus that legislation is necessary from the discussion today, and for an executive recommendation to the ministers to be made a later stage.

Lord Hodge advised on the process for taking things forward, that this group or a sub-group can provide input to the ETD work.

In relation to the ETD project, Professor Green provided timescales and informed the group that this is nearly completed and envisaged this would be finished by end of March 2022. The LCEW Digital Assets project will be concluding the final report at the end of 2022, with any proposed Bill projected to be 2-3 months after this (dependent on findings).

Revision of consultees

Lord Hodge outlined that the action for members to nominate individuals with appropriate expertise will remain as a continuous action. As work progresses further expertise may be required. It was proposed there would be further stakeholder input on Professor Fox’s paper from all sectors.

Next steps for Scotland

Professor Green highlighted the huge amount of common ground based on property law, and that we are incredibly substantively close between Scotland, and England and Wales. Lord Hodge commented further that he would be reluctant to set up projects attempting to duplicate existing work and reinvent the wheel on this matter. In conclusion. There was a strong view to work collaboratively alongside the LCEW. 

The Lord Advocate expressed her support for the project and suggested that a formal exchange of letters between her office (via SG (Scottish Government) legal) and the SLC, to formalise their support for the ERG work on digital assets.

​Actions

• [redacted – s.38 – personal information] to circulate FinTech Scotland’s Research and Innovation roadmap with the ERG membership
• all members to submit any further comments on Professor Fox’s paper to [redacted – s.38 – personal information] by 23 March
• David Bartos to send Scottish Law Commission comments to the secretariat regarding ETDs
• Law Society of Scotland and FinTech Scotland to reach out to their respective stakeholders for comments on Professor Fox’s paper. A proposed deadline of 5th April has been suggested to allow time for comments. Professor Fox also to reach out in the academic community for further comments.
• Lord Advocate to send ministerial exchange of letters with the Scottish Law Commission, with the invitation to the Scottish Law Commission to play a consultative role to support the work of the ERG more formally.
• there was no other business raised and Lord Hodge thanked members for their contributions.