1. The Act

Section 1 of the Act declares that:

A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—

1. (a) a thing in possession, nor

2. (b) a thing in action.Footnote ⁶

The Act is negatively framed: a thing is not prevented from being property, even if it cannot fit within the traditional bipartite categorisation. The Act does not just apply to digital assets,Footnote ⁷ although these were front and centre in the Law Commission report which was the driving force behind the Act.Footnote ⁸

The Act follows not just a Law Commission consultation and report, but also several years of mostly interim decisions relating to whether digital assets were property.Footnote ⁹ These cases usually considered the applicability of interim proprietary remedies in response to misappropriation of these assets.Footnote ¹⁰ The issue of categorisation arose in the context of the property question. If personal property had to be either and only a thing in action or a thing in possession, then digital assets – intangible and not consisting of a right enforceable by action – posed a problem. If outside both categories of personal property, then their position within the personal property law framework was uncertain. Any concerns that uncertainty of classification would lead to the conclusion that these assets could not be property at all did not materialise.Footnote ¹¹ Judges treated the assets in question as property for the purpose of the interim remedy, without always mentioning the issue of categorisation.Footnote ¹² Cases that did turn their attention to categorisation usually suggested that a third category might (at least informally) already exist and that digital assets fell within it.Footnote ¹³ The Law Commission acknowledged that its recommendations for statutory reform were a ‘confirmation and restatement of the existing common law position’.Footnote ¹⁴

Against this backdrop, the Act does not add much, giving permission for the common law to develop exactly as it was already doing. The Law Commission intended for the Act to be minimalistic,Footnote ¹⁵ deliberately leaving almost everything up to the common law to determine.Footnote ¹⁶ The problem is that the Act is overly minimalistic in its effect. It does less than the existing common law was already doing, as it does not even confirm the existence of a third category. The remainder of this commentary engages with two issues with which the common law will likely have to grapple: the scope of the third category; and the content of the property right of a thing within the third category.

2. The scope of the third category

The first issue is the contents of a third category. The Act is negatively framed, so the scope of any third category is dependent on the breadth the other two categories, particularly things in action, the other category encompassing intangible assets. The distinction between a thing in action or a third category thing is important, as the appropriate legal response to misappropriation will likely bifurcate on this basis.Footnote ¹⁷

The Act does not create (or even mention) a third category of personal property, but it reminds the common law that one can be recognised and developed. Even though the Act does not go as far as creating a third category, future cases will probably continue to acknowledge one. Obiter comments in Howells v Newport City Council, made when the Act was still a Bill, accepted a third category as uncontroversial in light of earlier cases and the Law Commission Report.Footnote ¹⁸

Digital assets were intended to fall within a third category,Footnote ¹⁹ but given the wording of the Act and the history of the thing in action category, they do not have to. This is because the meaning of a thing in action has not been fixed and the category has operated as a residual category for all intangible property. On paper, a thing in action is straightforwardly, ‘all personal rights of property which can only be claimed or enforced by action, and not by taking physical possession’.Footnote ²⁰ In practice, adherence to this definition has been less than strict and the category has expanded over time. What was once a category of ‘right[s] of action and nothing more’,Footnote ²¹ soon became one populated with ‘a very large number of things of very different kinds’.Footnote ²² Not all of these assets were rights of action, such as sharesFootnote ²³ or intellectual property.Footnote ²⁴ The category was so broad that even by the turn of the twentieth century, some were contemplating whether ‘personal property of an incorporeal nature’,Footnote ²⁵ would be a more appropriate collective term for assets deemed to be things in action. This breadth was perhaps to situate all intangible personal property, no matter how analytically troublesome, into a category of personal property.

The Act intentionally leaves it to the common law to sort intangible property into things in action and third category things.Footnote ²⁶ But this overly minimalistic approach has its problems. Without directly creating a third category, or limiting the thing in action category, the Act is open to being made redundant if the appellate courts categorise digital assets as things in action. Although this is unlikely given the trajectory of recently decided cases,Footnote ²⁷ the history of the category as malleable and expansive would make it capable of subsuming digital assets within its scope. In this regard, the Act is a missed opportunity to clarify the ambit of things in action. This is turn would indicate what characteristics an asset should have for it to fall within the third category.

3. The object of property rights

Secondly and more fundamentally, assuming a third category takes root, the Act tells us little about the object of property rights in third category things. It also does not tell us what rights an owner of a third category thing might have in their property. Instead, these issues are left to the common law to disentangle.

The language of the Act, which refers to ‘a thing’ that is ‘the object of personal property rights’,Footnote ²⁸ assumes that there is some type of ‘thing’ to which property rights attach. This aligns with the conceptualisation used recently in this jurisdiction,Footnote ²⁹ and is the approach envisaged by the Law Commission in its Final Report.Footnote ³⁰ It contrasts with other framings of digital assets as property which identify the digital assets as things in action,Footnote ³¹ which has been the approach in other common law jurisdictions.Footnote ³² This means that the property in the third category is framed in terms of things, rather than rights. The uniting feature of third category things is that they are rivalrous and independent of persons and the legal system.Footnote ³³ One task for the common law is to work out what this thing actually is.

The Law Commission framed cryptoassets (or, in their words, crypto-tokens) as ‘a notional quantity unit manifested by the combination of the active operation of software by a network of participants and network-instantiated data’.Footnote ³⁴ In other words, a digital asset, such as a Bitcoin, is created on the Bitcoin blockchain, with creation and transfer of assetsFootnote ³⁵ verified by users on the system and recorded on a distributed ledger. Users are able to ‘make new transactions’ that are ‘recognised as valid by the rules of the system’.Footnote ³⁶

The digital things that might end up in a third category do not function like the tangible things with which they share the characteristics of rivalrousness and independence of others and the legal system. Digital assets are decentralised. Unlike a tangible movable, they do not have the same clear structure and boundaries. If a digital asset can be viewed as a singular thing at all, it is best conceptualised as being ideational,Footnote ³⁷ a concept to condense the underlying technical processes and transactional capabilities into something more conceptually palatable (such as a Bitcoin). If the thing is ideational, then there are presumably rights which attach to this ideational thing. The Act does not say anything about the content of these rights, nor how they are transferred or protected.

Cases that have sought to conceptualise the property aspect of digital assets tend to do so in terms of the technical or functional abilities they enable. For instance, D’Aloia v Persons Unknown described the property aspect of the asset as the ‘specific transactional power over unique data entries on the ledger’.Footnote ³⁸ In other words, what the data enables the user to do is the makes up the property element.Footnote ³⁹ But if this is essentially a power to make transactions, there is nothing to stop it being a thing in action. The technological aspects of the asset have distracted from what is fundamentally a question of identifying rights and the characteristics of property. Starting the analysis with what rights there are in relation to a digital asset,Footnote ⁴⁰ and addressing what makes these assets property, allows the common law to develop in a more technology-neutral wayFootnote ⁴¹ that aligns with existing property principles.