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

Attendees and apologies

• Lord Patrick Hodge, Supreme Court of the UK                              
• Professor David Fox, University of Edinburgh  
• Professor Sarah Green, Law Commission of England and Wales
• Maggie Craig, Financial Conduct Authority  
• David Bartos, Scottish Law Commission  
• Professor Daniel Broby, University of Ulster  
• Antony McFadyen, Law Society of Scotland  
• Callum Sinclair, Burness Paull  
• Martin Sloan, Brodies LLP
• Professor Andrew Steven, University of Edinburgh 

In attendance

• [redacted, s.38 – personal information], Scottish Government, Directorate for Justice 
• [redacted, s.38 – personal information], Scottish Government, Legal Secretariat to The Lord Advocate
• [redacted, s.38 – personal information], Scottish Government, Legal Secretariat to The Lord Advocate
• [redacted, s.38 – personal information], Scottish Government, Investment Finance 
• [redacted, s.38 – personal information], Scottish Government, Investment Finance 

Apologies

• Dorothy Bain, QC, Lord Advocate

Items and actions

Welcome and Introductions

Lord Hodge welcomed everyone and introduced Professor Andrew Steven who has joined the group.

Lord Hodge asked if anyone had any amendments to previous minutes, no amendments required.

Lord Hodge advised no outstanding actions from the last meeting and gave an overview of the meeting’s agenda.

Electronic Trade Documents (ETD) Response: Professor David Fox

Professor Fox highlighted changes in his paper compared to March’s version which has been superseded by subsequent events. Professor Fox’s updated paper is now ready to be sent out for consultation and will be discussed later in the meeting.

Professor Fox noted updates on what had changed and what changes were on the way from the last meeting:

• Law Commission of England and Wales consultations paper on digital assets expected to be published in July 2022.
• Content the consultation paper will be relevant to any possible law reform in Scotland this group may be in favour of.
• Now have final report and changes to bill in relation to Electronic Trade Documents and previous paper written last year is now superseded by Law Commission of England and Wales’ ETD.
• The proposal is to take paper transactions and make them digital and as per the bill, will be an electronic proxy.
• Definition in the bill of what is an ETD will be tested and based on the exclusive control of the ETD and what is new now, is possession.

Professor Fox highlighted the delivery of possession is the critical idea for transferring a paper documented title and have this notion of statutory fiat, a notion of possession of the ETD which is transferred but deliberately left open so that the practice or courts can work out for themselves what that notion means in practice.

Digital Assets Property Status: Professor David Fox

Professor Fox turned the member’s attention to end of his paper (Summary and Conclusion on page 16). He explained that Digital Assets is not a perfect fit:  one could treat digital assets as property already within Scots property law and enough with an analogy of existing categories of thing to say they are already property.

Professor Fox noted if digital assets are not classed as property now, we would be condemning a lot of existing transactions going to nullity status and markets/practitioners would not be satisfied with this outcome.

Professor Fox highlighted however these things are characterised there would be significant benefit in legislating to confirm or declare that view of being treated as property. The reasons are particularly important to Scotland due to the relative dearth of litigation in Scotland, we would be waiting possibly a long time for courts to confirm that status.

Professor Fox noted the view of “possession” in his paper, is not to think of a digital asset as a possession and more in terms of control and transfer of control; transferring that control as being what brings the change of ownership in that digital asset. This view is similar to UNIDROIT’s approach to digital assets currently.

Professor Fox turned member’s attention to the 5 questions in section 10 (page 18 of his paper). He notes they are ordered in time urgency reference and there has already been a lot of Scottish responses to the Law Commission of England and Wales (LCEW) on trade documents, with some of these considered. He noted if we follow the LCEW’s reform, we need to find the best of way of participating in it and do we have the Westminster bill extend to Scotland.

 Professor Fox stressed that on the digital assets' questions (4 and 5) the group and any consultees need to solve the key question:

• Is legislation the most effective way to resolve the uncertainty of digital assets in Scots law.
• Following from this, what is the scope of that legislation, how we might define them, how they might fit within current schemes of property and how they may be dealt with?

Update from the Law Commission of England and Wales: Professor Sarah Green

Professor Green shared and discussed the proposed ETD bill:

Item 1: Definitions and changes to original version

• 1. (i)(b) discussed why this was important as could create uncertainty in documents in secondary money markets.

Item 2: Control v Possession

• 2.2 (a) and (b) legal rights and explaining in factual terms (a) + (b) – important for purposes to divide the two

Item 3: Possession

• This has been updated a few times and with this and Digital assets, a more principle-based approach has been taken. Keen to use principles approach rather than a checklist approach which will help the law be able to accommodate future “things”
• Clause 3: feedback said it needed to be more explicit for ETDs, with ETDs being a digital analogue of something we have now. This is all about treating ETDs the same as paper.

Item 4: Bearer bonds

• should bearer bonds stay in? This is still under discussion; included in Queens speech and currently in hands of DCMS

Professor Green discussed ETDs v digital assets and English and Welsh courts have felt they should be treated differently to paper; it is what happens on transferring of a digital asset that matters and how do we make it real (like transfer of a token on block chain against that of a diamond.)

Consultation is out until July 2022 and feedback is invited with final report to Parliament early next year, with short draft bill by mid 2023.

LCEW are not aiming to take “possession” approach for digital assets and think control is a better fit and more authentic.

Financial Conduct Authority’s (FCA) Regulatory Overview: Maggie Craig

Maggie highlighted research the FCA published last year highlighted that 78% of adults had said they heard of cryptocurrency.

Maggie specified the FCA’s regulatory perimeter which signals the boundary of what is included/excluded within their scope of financial regulation. It was also mentioned that UK parliament set the limit of the FCA’s perimeter through legislation but is not divined by a single piece of legislation due to the sophistication of financial services. Any changes to the perimeter also require changes in legislation or amendments to existing legislation.

The FCA are only regulated in the UK for money laundering purposes and Maggie explained the FCA does not have conduct or consumer protection powers over the industry. UK crypto asset businesses however must comply with money laundering regulations and must register with the FCA. Maggie noted although businesses are registered solely for anti-money laundering purposes, this does not mean these businesses are in the FCA’s full regulatory perimeter.

Maggie noted FCA have banned the sale of crypto derivatives to retail customers as deemed not suited for ordinary retail customers due to the harm they might pose. This was implemented last year with an estimated saving £53 million to customers from these products.

Maggie also highlighted the FCA’s work in March 2022 linked the work around sanctions to cryptocurrency considering the current events in Ukraine. The FCA reminded all UK financial service firms (including the crypto asset sector) they are responsible for ensuring sanctions are complied with.

The FCA published a consultation paper in Jan 2022 around strengthening the financial promotion rules for high-risk investments, including crypto assets. The consultation closed in March and findings will be published in the summer of 2022.

Maggie highlighted HM Treasury’s UK regulatory approach to crypto assets which confirmed the necessary legislative steps to bring stable coins into the UK regulatory perimeter, primarily by extending the existing electronic money and payments legislation. The rationale is that some stable coins have the potential utility of widespread means of payment and therefore must be brought in to protect consumers.

The FCA brought together in early May crypto participants from around the world via their Crypto Sprint and will share findings. Maggie suggested to share the information covered today in a short paper which would be circulated with members of the group. Lord Hodge welcomed this proposal.

Group Discussion

Lord Hodge asked for thoughts/comments in response to:

• ETDs
• Consider way ahead for reforms of digital assets, using the questions poised in Professor Fox’s paper

David Bartos and Professor Steven shared similar concerns around the relation Electronic Trade Bills and its associated documents. David refers to warehouse receipts/mate’s receipts and raised concerns with the drafting of the bill around custom as was not sure what effect this would have with a warehouse receipt which could be used customarily in Scotland but have a different legal interpretation in England. Professor Steven agreed to the more general view that it is not clear which are trade documents as Scotland does not have the case law that England has. Professor Steven does refer to the presented bill and that a specific clause deals with this issue as it allows the interpretation to be Scots law, rather than English law - the bills drafting allows for manoeuvrability.

David Bartos also commented on understanding Professor Stevens view on the interaction of the proposed ETD bill against the Moveable Transactions bill into the Scottish Parliament as raised the point if items such as warehouse receipts were covered in the Moveable Transactions bill, it may not be necessary for them to be covered in the ETD bill. Lord Hodge added that the Moveable Transactions bill does not cover electronic documents which was confirmed with Professor Steven and he further commented that both the ETD bill as well as the Moveable transactions bill are required.

Professor Broby raised the question for ETDs, of there being exclusive reference to smart contracts as there could be ambiguity around if it is a legal contract or a piece of code. Professor Broby also mentioned in reference to digital assets, the need to futureproof what is being legislated to allow for the possibility that legal tender could be in the form of a central bank digital currency (CBDC). In response Lord Hodge asked what Professor Broby had in mind regarding this point and Professor Broby explained about the manner in way electronic trades can be executed (by programming) and the dispute may be about the code used in addition to the legal contractual obligations – he then suggested an additional clause to highlight how these instruments might be traded digitally. Lord Hodge stated this matter would not be included in the ETD bill but did agree that there may be an analogy due to smart contracts being self-implementing. Professor Fox commented that by moving to legislate on digital assets will not close off in any way, the possible use central bank digital currencies.

Martin Sloan noted insight from a commercial perspective, Scotland should be involved in the bill. On digital assets Martin agreed with the approach of control rather than possession which Professor Green outlined earlier on in her presentation and added it would be wrong to attempt to shoehorn digital assets into things that have been historically dealt with.

Lord Hodge indicated from discussions had in these sessions, that Scotland should participate in the ETD reform the one of the ways in which this could be achieved is to provide a recommendation to the Scottish Government.

List of Consultees

Lord Hodge referred to the wider uncertainty on digital assets and opened floor to members to see there were any objections of consulting on the basis that legislation is necessary.

Professor Broby asked if there were upcoming cases that could answer the questions around court involvement and if there is anything in the pipeline. Lord Hodge was not aware of anything either on this matter and David Bartos agreed, but added he is aware of cryptocurrencies have come up in succession law context with reference to administering executries, so they have been recognised as property. He further added he supports the idea of legislation. Lord Hodge also added when reaching out to consultees that the groups view is that legislation is necessary.

Callum Sinclair also added from the private perspective, certainty is what they need and is in favour of supporting legislation. Martin Sloan supported these comments and added about experiences regarding electronic signing and the caution around ‘doing things different’ especially when there are security risks imposed. Advisors will want certainty in the methods they are using to, or this will inhibit transactions.

Lord Hodge summarised that based on Professor Fox’s paper, we wish to participate in the bill before parliament and that the group is in alignment regarding legislation is the most effective of way resolving. Lord Hodge added that within Professor Fox’s paper, the questions addressed to the group can be amended to questions for the consultees.

Future Role of Scottish Law Commission

Lord Hodge outlined the role of Commissioner David Bartos within the Expert Reference Group. Mr Bartos is to continue attending meetings of the ERG, but (at present) designated as currently serving as a commissioner on, but not speaking on behalf of, the Scottish Law Commission. Any of Mr Bartos’ contributions/comments would be made purely as an individual.

David added this decision is related to the available resourcing taking into consideration those resources focused on the completion of the Scottish Law Commissions’ 10th programme. He added the Scottish Law Commission very much want to participate in Digital Assets.

David noted new programmes will start in Jan 2023

Actions

• Maggie Craig to send the secretariat a short paper summarising the FCA’s regulatory position which will be shared with all members
• all members to send any proposed consultee recommendations to the secretariat by 20th May 2022
• Professor Fox to amend questions in his paper in preparation for consultation
• there was no other business raised and Lord Hodge thanked members for their contribution
• the next meeting of the group will be scheduled by Scottish Government after considering the responses and respond to LCEW’s soon to be published consultation paper on digital assets