Clarifying the status of digital assets in Scots law: a call for primary legislation

Background

On 27 November 2024, the Scottish Government launched its consultation on “Digital assets in Scots private law”, requesting “views on options for possible legislative changes to Scots private law to clarify the status of digital assets as property”.

The consultation underlines both the need for legal certainty for businesses and the importance of Scotland moving with technological developments “to help support economic growth and to allow Scotland to remain attractive for investment”.  

The consultation was launched following work undertaken by an Expert Reference Group established by the Scottish Government to review the existing legal framework in this area and against the backdrop of the considerable work and reports produced by the English Law Commission on digital assets in English law (culminating in the Property (Digital Assets Etc.) Bill currently making its way through the legislative process in Westminster).

We submitted a response to the thirteen questions comprising the Scottish Government’s consultation, set out in full below.

The consultation closed on 5 February 2025. We look forward to the publication of the full range of responses later this year.

Executive Summary

• we welcome the consultation and generally support the proposals;
• we support primary legislation to resolve the uncertainty in Scots private law, but are generally of the view that Scots private law is sufficiently flexible to accommodate digital assets as property;
• any primary legislation should be initially narrow in scope for expediency, although we recognise and appreciate the other areas of private law identified by academics and fellow practitioners that will need to be addressed if not now, in the future (e.g. debt enforcement and insolvency);
• any primary legislation should be technologically neutral;
• our view is that digital assets are a “particular kind” of incorporeal moveable property;
• we have no objections to the two proposed defining characteristics of (1) independent existence and (2) rivalrousness – they are both criteria identified by the Law Commission of England and Wales in their work on digital assets and our view is that these terms are jurisdictionally neutral;
• the voluntary transfer of the ownership of a digital asset should require the transfer of control and it is likely to be important for market participants that this can occur either off-chain or on-chain;
• we are of the view that the clarification that digital assets may be held on trust is not strictly necessary, but we do not have any objections on the basis it is clarificatory in nature and we recognise the important role of trusts in digital asset transactions (e.g. custody arrangements); and
• from a policy perspective and protecting market participants, we support the proposal that third parties that acquire digital assets in good faith should be protected.

Response to Consultation

1. Is primary legislation the most effective way to resolve uncertainty about the status of digital assets in Scots private law?

Yes.

We copy, for reference, part of the response to the Law Commission of England and Wales’ “digital assets as personal property – short consultation on draft clauses” dated February 2024 (submitted by Fiona Henderson, Charles Kerrigan and Mike Ringer, CMS Cameron McKenna Nabarro Olswang LLP):

“Our view is that it is currently difficult for law firms to give clean legal opinions to market participants (e.g., issuers and financial institutions) in relation to tokenised securities. While there has been some recognition of digital assets as property by the English courts in relation to injunctions, such developments are, by their nature, piecemeal, specific to the circumstances of the particular case, and at risk of being overturned by subsequent judicial decisions. In the absence of a clear and conclusive legal foundation, in our experience, competition from other jurisdictions is strong.

Consequently, English law governed issuances of tokenised securities are currently considered by some market participants to involve a degree of legal uncertainty. In our experience, more issuances are taking place in other jurisdictions where the position of digital assets is perceived as being more certain (with several jurisdictions having passed legislation that caters for or addresses the adoption of blockchain technology and digital assets). In our practice, we have seen this being a cause of frustration for the UK market.

Our view is that the Bill has the potential to provide legal certainty to market participants and their advisers, facilitating the development of digital assets markets in the UK.”.

Generally, our view is that Scots private law is sufficiently flexible to accommodate digital assets as property.

While, on the one hand, recognition may occur organically through the common law, on the other hand, primary legislation provides an opportunity to clearly address and recognise digital assets as property under Scots private law. Our support of the latter aligns with our views of the position under English law too; that the enactment of the Property (Digital Assets etc) Bill under English law codifies the position that is already generally accepted by practitioners and academics but ultimately puts the matter beyond doubt which provides certainty to UK market participants.

However, in contrast with English law (and as noted in the letter of the Expert Reference Group to the Minister for Business published on 18 November 2024), Scotland is, at this stage, unlikely to be able to rely on a significant body of case law being generated through the Scottish courts in order to clarify and shape the law in this area as quickly as commercial demands require. An appropriate case may take years to arrive in the courts or may not arrive at all. Moreover, a case may only cover one discrete issue while leaving large areas unconsidered.

Accordingly, there is a strong case for primary legislation setting out the status of digital assets under Scots law.  

Assuming that the Property (Digital Assets etc) Bill is passed in England; we are also of the view that having a clear legislative footing for digital assets across the UK will facilitate intra-UK digital asset transactions and will be a positive step for marketing the UK as a tech hub (of which Scotland should form an important part).

2. Should any possible future primary legislation have a narrow scope of application by being limited to a statutory definition of digital assets as property, rules governing the transfer of ownership, and provisions confirming that the principles of Scots private law continue to apply to digital assets?

Generally, our view is yes.

However, due to the smaller number of cases likely to arise in Scotland there is a case for the primary legislation proposed in Scotland to be more extensive than the Property (Digital Assets etc) Bill currently progressing through the UK parliament (see our responses below).

Any initial primary legislation should set out the framework to recognise digital assets as property under Scots law and should take a flexible approach that does not constrain technological changes.

3. For the purposes of Scots property law, should digital assets be classified as incorporeal moveable things?

Yes.

In terms of the categories of heritable (immovable) and movable property, digital assets are moveable property (on the basis they are clearly not heritable property). Moveable property comprises two categories: corporeal and incorporeal property. Digital assets are not physical, they are comprised of data existing on a blockchain. Digital assets are therefore not corporeal property.

Our view, aligned with other practitioners and academics, is that digital assets are a “particular kind” of incorporeal moveable property. This places them in the same category as personal rights (such as those under a contract), company shares and intellectual property rights, although with specific defining characteristics. We refer to a “particular kind” of incorporeal moveable property on the basis that they are a distinct subset. For example, digital assets are not contractual rights as they are created by software (not by contract), and digital assets are not intellectual property rights, which are (generally) created by statute.

As identified by the Expert Reference Group, digital assets can exist independently unlike other assets which currently fall within the category of incorporeal moveables. Accordingly, careful legal consideration is required to determine how they fit into the wider body of Scots law.

4. Should any future statutory definition of the category of digital assets considered an object of property be technologically neutral and avoid being too prescriptive?

Yes. Technology will continue to evolve and Scots law should follow the position taken in other jurisdictions that have already passed legislation in relation to digital assets and blockchain. That is, it should be technology neutral.

5. The Expert Reference Group proposed that digital assets be defined with reference to two limiting characteristics. The first characteristic would be that the digital asset is capable of independent existence. Should this be a defining criterion?

Independent existence means that a digital asset can be created as a virtual entity that exists independently of the law and of any person who may have rights in relation to it.

Yes.

As set out above in our answer to question 3 above, we are of the view that digital assets can be accommodated within Scots private law and would fall within the category of incorporeal moveable property. However, as stated above, they would, by necessity, form a distinct subset of that class.

Primary legislation which recognises digital assets under Scots law should therefore clearly set out their defining characteristics. We agree with the Expert Reference Group’s conclusion that one such characteristic should be that the digital asset is capable of independent existence.

While we note this would go beyond the approach taken in England and Wales (via the Property (Digital Assets etc) Bill), where, on the recommendation of the Law Commission of England and Wales, a prescriptive approach was eventually eschewed, but there are good justifications for doing so. Primarily, a conscious decision was made to let the English common law shape the law around digital assets. The reasons why Scots law cannot follow or should not rely upon the same approach are outlined above (see response to question 1).

We note too that the requirement for a digital asset to be capable of independent existence accords with the Law Commission of England and Wales’ analysis of the indicia of their proposed third class of personal property.

6. The second characteristic would be that the digital asset is of rivalrous nature, in that the use or consumption of the digital asset by one person will prejudice the use or consumption of that same asset by another person. Should this be a defining criterion?

Rivalrous nature means that the use or consumption of a digital asset by one person will prejudice the use or consumption of that same asset by another person.

Yes. We agree with the Expert Reference Group’s conclusion that a defining characteristic of digital assets should be that they are of rivalrous nature. We note that this accords with the Law Commission of England and Wales’ analysis of the indicia of their proposed third class of personal property and, in our view, there is no reason that this characteristic would not have the same application under Scots law.

We refer to our reasoning in question 5 above as to why a prescriptive approach is appropriate.

7. Should any possible future primary legislation refer to the category of digital assets which are to be classed as objects of property for the purposes of Scots property law as “digital assets”, without creating any other defined term to describe this category, such as “digital objects”?

Yes. Our view is that the legislative approach can be distinguished from the approach in England on the basis that there is a general view that digital assets can be accommodated in an existing category of property under Scots law (see our response to question 3 above).

8. Should control over a digital asset generally be the basis for establishing ownership of that asset?

Yes.

9. Should the voluntary transfer of the ownership of a digital asset require the transfer of control over that asset from the current owner to another person, coupled with the current owner intending to transfer ownership to that other person?

Yes.

The requirement for actual transfer accords with the publicity principle under Scots law which requires an external act for the transfer of real rights (though in reality what amounts to a “public” act may not, in fact, be public (in the sense that the external act in question may only be known to the parties to a transaction). For instance, under the common law, transfer of ownership of corporeal moveables is achieved through intention to transfer coupled with delivery (though this has been amended for contracts of sale of goods, where intention alone is sufficient to transfer title through operation of statute – see s.17 of the Sale of Goods Act 1979). Likewise, assignation of (currently recognised assets falling within the category of) incorporeal moveables is effected only through intimation to the underlying debtor or, once the Moveable Transactions (Scotland) Act 2023 comes fully into force, registration. In a similar manner, transfer of control of a digital asset (e.g., by recording the transfer on a blockchain) should be a requirement to transfer ownership.

While this departs from the accepted method of transferring incorporeal moveables, requiring assignation for each transfer of a digital asset would not reflect the unique characteristics of this novel class of assets (in addition to being commercially unworkable in practice).

Pairing the requirement of an actual transfer of control (occurring on-chain) with an intention on the part of the transferor to transfer ownership provides the necessary animus and accords with the spirit of existing principles of Scots private law and would be consistent with commercial reality and market participants’ expectations of on-chain transactions.

Consideration should additionally be given to the occurrence of off-chain transfers.

10. Should a person who acquires control of a digital asset in good faith and for onerous consideration be recognised in Scots property law as acquiring the ownership of that digital asset, even where the transferor from whom they acquired the digital asset was not the owner?

Yes.

11. Should any possible future primary legislation make provision confirming that the principles of Scots private law continue to apply to digital assets, so far as those principles are consistent with the characteristics of those assets?

In our view, this is not strictly necessary if primary legislation recognises that digital assets are property objects under Scots private law. That being said, we do not have any objections to this clarification.

12. Should any possible future primary legislation make provision to clarify that digital assets which qualify as property may be held on trust?

In our view, this is not necessary if primary legislation recognises that digital assets are property objects under Scots private law. That is, if digital assets are property objects, then digital assets can, subject to the existing law in relation to trusts, be the subject of a trust.

That being said, we do not have any objections to this clarification. If primary legislation makes express mention of trusts, it should do so on the basis it is clarificatory in nature and not to the exclusion of other principles of Scots private law.

Additionally, we note that constructive trusts have been an important consideration in English law in the context of loss due to fraudulent transfers (e.g., Fabrizio D'Aloia v Persons Unknown Category A, Binance Holdings Limited, Polo Digital Assets Inc, Gate Technology Corp, Aux Cayes Fintech Co Ltd, Bitkub Online Co Ltd, Persons Unknown Category B (EWHC 2342 (Ch), 12 Sep 2024)). Consideration of which Scots law remedies are appropriate to address similar fact patterns would be beneficial for market certainty.

13. Should any possible future primary legislation contain any other substantive provisions within devolved competence which are not set out in this consultation?

No. In our view, the needs which future primary legislation on digital assets will address will be best identified once legal practitioners, the judiciary, academics, industry and consumers have had the opportunity to interact with and apply the initial Scottish digital assets legislation.