Digital Assets in Scots Private Law: Expert Reference Group minutes: October 2023

Attendees and apologies

• Lord Patrick Hodge, Supreme Court of the UK (Chair)
• Professor David Fox, University of Edinburgh
• Ruth Charteris, Solicitor General for Scotland
• Professor Andrew Steven, University of Edinburgh
• Martin Sloan, Brodies LLP
• Callum Sinclair, Burness Paull LLP
• Professor Daniel Broby, University of Ulster
• Gavin Davies, Law Society of Scotland

In attendance

• [redacted, s.38 – personal information], Scottish Government, Investment Finance
• [redacted, s.38 – personal information], Scottish Government, Investment Finance
• [redacted, s.38 – personal information], Scottish Governments Legal Services
• [redacted, s.38 – personal information], Legal Secretariat to The Lord Advocate
• [redacted, s.38 – personal information], Law Officers' Private Office

Apologies

• Dorothy Bain, KC, Lord Advocate
• Stephen Ingledew, FinTech Scotland
• Nicola Anderson, FinTech Scotland
• Mickael Paris, FinTech Scotland
• Antony McFadyen, Law Society of Scotland
• Michael Thom, Burness Paull LLP
• Professor Sarah Green, Law Commission of England and Wales

Items and actions

Welcome and Introductions

Lord Hodge welcomed everyone and outlined the main purpose of today’s meeting is to discuss the draft recommendations for consideration by Scottish Government ministers.

Lord Hodge thanked those who had provided responses in advance, noting the support of the draft recommendations and the emphasis for its outcomes to align with English law. Professor Sarah Green had responded suggesting the need to make clear that digital assets have an existence independent of persons and the legal system. She referred the decision of the High Court of Singapore which did not recognise the significance of independence and concluded that crypto assets are things in action.

Overview of Draft Recommendations - Professor David Fox

Professor Fox provided an overview of the ERG draft recommendations, focusing on the below:

Page One: Basic recommendation for the Scottish Parliament to enact primary legislation to enable the status of digital assets in Scots private law. We would be seeking to build on the work by the Law Commission of England and Wales (LCEW), using that as the basis for somewhat different legislative provisions.

Point two: similar recommendation to UK Government – for legislation which clarifies the status of digital assets as property in law.

First point of divergence from Law Commission of England and Wales (LCEW) as Scotland needs its own legislation from the Scottish Parliament to solve the digital assets problem. As a result, we would propose the drafting of a bill for the Scottish Parliament. Legislative Consent Motion (LCM) would not be required or appropriate in this case (as with the Electronic Trade Documents bill).

Point 3 – 4 referred to the technical reasoning, as well as commercial and economic opportunities.

Point five – Outlined the recommendation to the Scottish Parliament.

Point six summarises the context and points of legislation to clarify the status of digital assets.

Annex 1 outlines the suggested provisions of the Bill which the ERG recommended.  The clauses could be brief:

• We describe main characteristics of why digital objects are defined as property, keeping the wording brief and referring only to main legally relevant characterisations.
• Keeping the description brief and technically neutral will ensure that the definition is less likely to become redundant as technology develops.
• We would go somewhat further than the LCEW by adding some more provisions: E.g., specifying that digital objects are transferred through the transfer of control – not leaving this to case law development.
• There is an emerging practice on how ownership can be acquired through good faith acquisition. Might be useful to legislate on that point considering the lack of case law in Scotland.
• Other clarifications of how digital objects would operate in Scots law: (i) specifying that they can be held in trust in order to facilitate custody arrangements; and (ii) specifying that the general principles of private law would apply to digital objects.  There was no need to be more prescriptive.
• The Scottish Law Commission might want to express a view on the drafting of these clauses and their wider impact. There could be some implications for the law of diligence.

Professor Fox noted that none of the recommendations in Annex 2 requires legislation at this stage. For the most part, these are recommendations on how work can be done in future. They don’t require action from the Scottish Parliament at present.

Group Discussion – ERG Draft Recommendations

Callum Sinclair asked if this is this a bill relating to property matters and not a bill straying into reserved matters? Lord Hodge responded by stating this is very much within Scots private law and within the competence of the Scottish Parliament. When digital assets are more widely used there will be a UK dimension and it wouldn’t be smart to duplicate efforts within the UK.

The Solicitor General referred to other areas (Section A3 – Financial Services) that came to light during the enactment of the Moveable Transactions Bill, and it would be sensible to caveat that a full [Scottish Government] consideration would be required to ensure that any proposal is within legislative competence. Professor Steven agreed on this point and stated he was the Law Commissioner for the Moveable Transactions Bill. He also notes issues relating to Section 104 of the Scotland Act.

Professor Steven raised the point of Intellectual property – we were not altering the law of intellectual property. He did raise corporate insolvency as an area that might sit with Westminster. He is very supportive of what is being proposed and referred to the need for an impact assessment in relation to for example, the economic justification of why these changes are required.

Professor Steven asked regarding trusts – if it’s clear digital assets are property, it can be held in trusts. Why are they keen to have a specific provision on that? Lord Hodge thanked Professor Steven for his work on the Moveable Transactions Bill. He answered that, while the general law might have that effect, it was important to make clear that custodianship can be through the mechanism of trust, given the importance of intermediation in the holding of financial assets.

Martin Sloan emphasised the importance of harmonisation of the law relating to digital assets in the UK. There is a greater need for legislation for Scots law due to the lack of case law in the courts. He also outlined the importance of there being Scottish representation on the multi-disciplinary panel described in Annex 2 so that it doesn’t say something unsuitable for Scots law that could have been avoided if Scottish interest were included from the outset.

Martin asked how the concept of control and custody arrangements would work. Lord Hodge answered that that would be addressed in practice down the line. In London, Sir Geoffrey Vos was very involved in statements of guidance for English law in digital assets. First, we would seek ministerial support for statutory underpinning of the basics. Lord Hodge agrees entirely having Scottish legal advisors in the multi-disciplinary panel to advise on technical aspects of control over digital assets would be beneficial.

Lord Hodge referred to Professor Steven’s suggestion that there should be an impact assessment.  Lord Hodge said that section (4) of the letter refers to the commercial rationale for this bill. Lord Hodge asked if Martin was content with this wording. Martin suggested that the text should express the point that businesses might establish themselves in England if there were not a facilitative legal regime in Scotland. Lord Hodge is happy to add in this additional wording to reflect Martin’s comments.

Professor Steven asked if it were possible to get some monetary statistics to emphasise the value of digital assets reforms: E.g., it is estimated that digital assets are worth X amount in the UK. It was agreed to ask FinTech Scotland for reliable figures.  

Professor Broby referred to Para 6 (Annex 1) should be redrafted to reflect the below point ensuring no ambiguity. Professor Broby stated maybe the letter should specify the technology neutral term ‘digital objects’ used to describe ‘digital assets’ to help reflect this point.  It was agreed that the terminology in the letter should be neutral.

Callum Sinclair commented that under point three, there was a risk is that digital assets fall outside legal property. The implications of that such as the loss or theft of digital assets should be made clear. Callum added that this is covered in the annexes but might be usefully brought forward into the letter by adding a sentence.

There was overall agreement from the group on the recommendation proposals.

Actions

• Professor Fox and Lord Hodge to incorporate comments from today’s meeting into the draft recommendations and send to the Minister for Small Business, Innovation, Tourism and Trade minister on behalf of the ERG.
• [redacted, s.38 – personal information]to liaise with FinTech Scotland for figures around digital assets.
• There was no other business raised and Lord Hodge thanked members for their contribution