Law Commission to review treatment of smart contracts & digital assets

The Law Commission has started two new projects to modernise English Law to accommodate smart contracts and digital assets. The idea behind the reviews is that both technologies could revolutionise the way we do business and that English law needs to evolve accordingly to encourage greater use of the technologies.

Smart contracts

The Law Commission considers smart contracts to be contracts that are performed automatically by computer code without human input. According to the Law Commission, smart contracts may be entirely made up of computer code, a combination of an ordinary contract and computer code, or an ordinary contract that is performed by computer code. Most smart contracts tend to be formulated as a trigger and consequence - for example, if Party 1 does [A], the consequence is [B].

Currently, many transactions (for example, asset transfers) require the involvement of multiple parties, which can make deals costly and time consuming, particularly when parties are unfamiliar with each other, raising issues of trust and confidence between them. As smart contracts are built on blockchain technology, they are considered to be efficient and cost effective (as the distributed ledger technology largely removes the need for intermediary parties). As such, smart contracts can make the process of entering into certain transactions more efficient.

However, contracts which are heavily code dependent can raise issues from a legal perspective. For example:

• In what circumstances will a contract written in code be legally binding?

• How are smart contracts to be interpreted by a court?

• What are the legal consequences of the code not performing as intended?

The Law Commission's view is that these questions need to be answered so that English law maintains its reputation for sophistication, coherence, and efficacy, and so that businesses can be confident in their use of smart contracts.

Digital Assets

Digital (ie intangible) assets like cryptocurrency are becoming increasingly common. However, according to the Law Commission, the law is not keeping up to date. The example provided by the Law Commission to demonstrate this is the exclusion of digital assets from certain legal protections because of their 'digital' status. Under English law, there is a requirement for a document of title to be in a person's possession. However, the Law Commission flags that digital assets are inherently intangible and cannot be "possessed" under English law, meaning it is not possible to have digital documents of title.

In order for English law to facilitate the continued trend to digital assets and paperless processes, the Law Commission has been asked by the UK Government to make recommendations for reform to ensure that the law is capable of accommodating both cryptoassets and other digital assets in a way which allows the possibilities of these new technologies to flourish.

UK Jurisdiction Taskforce's Legal Statement

The Law Commission also intends to build on the work of the UK Jurisdiction Taskforce (the "Taskforce"). The Taskforce published a Legal Statement on cryptoassets and smart contracts in November 2019, which was one of the first authoritative statements of its kind globally. Our summary of the Legal Statement can be found here, but broadly speaking, the Taskforce concluded that cryptoassets should, in principle, be capable of being treated as property under English law, and smart contracts are capable of satisfying the requirements of an English law contract. However, whether they do in any particular case will depend on the specific circumstances.

The Law Commission began work on the smart contract review in August 2020 and will publish a call for evidence in due course. The Law Commission also intends to publish a consultation paper in the first half of 2021 on its digital assets review.

If you would like to contact the Law Commission or be added to their stakeholder lists, you can contact them at the respective project's email addresses:

• contracts@lawcommission.gov.uk

• digitalassets@lawcommission.gov.uk

Please get in contact with Simmons & Simmons if you have any questions.