La propriété, c'est le vol!*
Proudhon got it all wrong. Property is not theft – it is fraud.**
Introduction
On 28 July 2022, the Law Commission of England and Wales (LCEW) released a ground-breaking, 549-page consultation paper1 on the topic of digital assets such as cryptocurrencies and non-fungible tokens.2 The LCEW's remit was simple enough: set out the current law applicable to these emerging technologies and make recommendations to ensure that the law is capable of accommodating digital assets, including whether they should be capable of "possession".
In the course of its paper, the LCEW presents the history and underlying assumptions of personal property law, reaching several important conclusions and recommendations for further consultation. Primary among these was a recommendation to recognise a new form of personal property it calls data objects.3
While the consultation paper only represents one method of dealing with property rights for digital assets, it has considerable significance to Australian practitioners. The Australian federal government is actively monitoring overseas developments in this sector – several of our common law neighbours have already adopted recommendations from an earlier Legal Statement on digital assets and smart contracts published by the UK Jurisdiction Taskforce in November 2019, including Singapore and New Zealand.4
As with many other countries, the law in Australia has not kept up with the explosive adoption rate of digital assets5 or the novel use-cases these technologies offer. This article will look at the case for law reform, recent developments in Australia and the framework proposed by the LCEW.
Why do we need a new form of property right?
The law "knows no tertium quid" is the commonly cited dictum of Fry LJ in Colonial Bank v Whinney6 forming the basis of a "bifurcated" choice between two forms of personal property recognised at law:7
- things in possession, eg, real estate, chattels and physical cash
- things in action, eg, debt obligations, money held on account at a bank and rights to recover damages.
The underlying nature of digital assets challenges these categories. They are not capable of "possession" in the usual sense of the word and their use, ownership and transfer is determined exclusively by the rules established on the cryptographically secured network on which these things exist. The legal system has no practical ability to adjust these network rules or enforce orders contrary to those rules without the consensus of the network participants.
There has also been a tendency in the law to reject the idea that information and data have a proprietary nature, exemplified by the case of Your Response Ltd v Datateam Business Media Ltd where the English Court of Appeal held that a database of customers was not property.8
How has Australia responded to this issue?
Australia has seen a slow, piecemeal response to the regulatory and legal issues provoked by digital assets. This is not unusual, as regulators and lawmakers at all levels of national and international bodies have struggled to keep pace with the technological developments and the retail market.
The Australian Tax Office (ATO) came out of the blocks very early, stating in 2014 that Bitcoin is property. However, the ATO has not offered an official determination on the thousands of other digital assets, instead adopting the generic term "crypto assets" which the ATO defines as a "digital representation of value that you can transfer, store, or trade electronically".9
In October 2021, a Senate Select Committee published its report into the regulation of digital assets, presenting 12 high level recommendations for further investigation10 including the tax treatment of digital assets. While this report was welcomed by the industry, the recommendations left many questions unanswered. In any event, the Albanese government has dispensed with all but one of the recommendations and commenced its own fact-finding mission with a public consultation paper on "token mapping" having been released for comment. As if to emphasise the unique problem posed by digital assets, the Treasury's Consultation Paper presents the conundrum as follows:
"A crypto token itself is just data. It is unlike 'tangible' property – because it is not a 'thing' (it exists as information on many independent but identical databases). It is unlike 'intangible' property – because its inherent characteristics are not created or controllable by law." 11
The Australian Law Reform Commission has also recently entered the fold, using its current review of the Corporations Act 2001 (Cth) to publish a Background Paper on the regulation of digital assets. It notes at the outset that there is presently no legislative definition of "crypto asset" or "digital asset" in Australia and more pointedly that:
"Even the rationale for the use of the term 'asset', as in 'crypto asset', is equivocal to the extent that the proprietary nature of a crypto asset is subject to ongoing analysis and debate".12
At this juncture, the law must either wait for the courts to adapt property law to accommodate the challenges posed by these technologies or establish sound foundations through legislative reform.
The unique problem for common law jurisdictions relying on the incremental, piecemeal nature of legal reform through the courts was identified by the LCEW as one of the key reasons why it encouraged legislative reform.13 The LCEW noted that recent case law:
". . . suggests that the law is moving towards the recognition of a third category of personal property, distinct from both things in possession and things in action, although the position remains uncertain".14
And further, that legislative recognition of a third category of property:
". . . will help the common law to develop in a logical and consistent manner, without binding it to references to existing technology or technical implementations".15
How might the Australian position develop in the absence of legislative reform?
To determine the extent to which the courts in Australia might recognise a new category of property, one should start with the test set out in National Provincial Bank Ltd v Ainsworth.16 In that case, Lord Wilberforce said:17
"Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence or stability".
The High Court of Australia has, in different contexts, relied on the Ainsworth formulation18 and would be expected to do so in the case of digital assets.
Further insight on how this might apply to digital assets was offered in the recent judgment of the New Zealand High Court in Ruscoe v Cryptopia Ltd (in Liquidation).19 In this case, the question was whether the definition of "property" as defined by s2 of the Companies Act 1993 (NZ) applied to cryptocurrencies and, if so, whether such cryptocurrencies formed the subject matter of a trust under which Cryptopia held the cryptocurrencies for the benefit of Cryptopia's account holders.
Gendall J applied the Ainsworth test and concluded that, for the purposes of s2, the cryptocurrencies could attract property rights, treating them as a "species of intangible personal property and clearly an identifiable thing of value".20 Gendall J also determined that the various cryptocurrencies were, at equity, held on separate express trusts for the accountholders.21
What is a 'data object'?
Having considered the Australian approach to date, it is worthwhile considering how the LCEW approached matters as its paper focused specifically on the proprietary nature (or otherwise) of digital assets. Taking inspiration from the Ainsworth formulation, the authors of the Consultation Paper propose a three-part test to determine whether a thing should be classified as a data object. To satisfy the test, the thing in question must:
- be composed of data represented in an electronic medium
- exist independently of persons and the law
- be rivalrous.
The first leg of the test is a question of fact and is broad enough to encompass emerging technologies. This should not pose significant difficulties for the courts.
The second leg of the test is intended to exclude things in action such as contractual rights, existing forms of intangible property and statutory rights, even where those things are represented in digital form or by data.22 The intent of this element was to permit a clear divide between existing forms of property and this new category.23
The final leg of the test – rivalrousness – is by far the most novel and thorny feature of the proposal. The authors describe the test as follows:
"More formally, a resource is rivalrous if use of the resource by one person necessarily prejudices the ability of others to make equivalent use of it at the same time".24
The rivalrousness test effectively dispenses with both the "capable of assumption" and "degree of permanence" legs in Ainsworth as well as the concepts of "excludability"25 and "control"26 that are broadly considered core features of property rights. Importantly, the LCEW recognises that rivalrousness in the digital domain can be fragile and dynamic by design and that this "idiosyncrasy" should not exclude digital things from taking on a proprietary nature, although the LCEW does leave the question open as to the extent to which rivalrousness should exist before property rights arise.27
What types of things are, and are not, data objects?
The consultation paper helpfully analyses several categories of things in the digital realm to determine whether they rise to the category of Data Object. These examples may shed some light on how the concept of Data Object might be interpreted.
Cryptocurrencies such as AVAX, XRP, Bitcoin and Ethereum28 are archetypal data objects as they satisfy the three criteria. Unlike traditional property categories, the LCEW explained that its concept of data object would also extend to digital assets not capable of transfer or assumption by third parties, noting that this type of digital asset is a fertile area of development for tokenised financial products.29
Media files,30 software files31 and digital records32 are unlikely to be considered data objects per se as they consist of information that is not rivalrous. This does not mean that other proprietary rights do not exist as there may be other intellectual property rights associated with such files and records.
Email accounts, in-game items and other electronic things reliant on an End User Licence Agreement (EULA) for their existence are also unlikely to be considered data objects as they are already subject to the law of contract for their use and enforcement. However, this leaves open questions regarding emerging forms of dis-intermediated platforms based on private key encryption and blockchain solutions (such as Alter Network for email and "play and earn" games such as the Axie Infinity and Crabada33).
Similarly, in the case of digital assets linked to other intangible items, the digital asset may itself be a data object while the thing it is linked to is not. Examples include digital assets used to record and register a person's right to real property, company shares or art (as is the case with NFTs). In these cases, separate proprietary rights would need to be considered.
Domain names would be unlikely to satisfy the data object test as they rely on contractual rights from the registry and ICANN. As with the above examples, emerging address protocols such as the Ethereum Name Service (ENS) and Avvy Domains34 have created dis-intermediated solutions where the requisite elements of independence and rivalrousness may arise.
Conclusion
Digital assets and decentralised technologies present jurisprudential frontiers that today remain largely unexplored. This author has often surveyed the landscape opened up by these emerging technologies only to find vast territories where no jurist has yet set foot and where traditional frameworks are found wanting.
In the case of property, the LCEW has presented compelling reasons why reform in this area is warranted. And while Australia's property laws are flexible, they will be tested by emerging technologies in the digital asset space.
The new category of property proposed by the LCEW presents an early foray into this new frontier. It is both conservative in its attempts to bring digital assets into the existing property rights framework, and revolutionary in the manner in which it does so. This approach is to be applauded and is likely to find a receptive audience in Australia. ■
By Paul Imseih.
Paul is the founder and principal of Daimon Legal and a board member of the Dai Foundation, the entity that oversees operations and intellectual property for Maker DAO. He is an internationally recognised legal theorist working at the cutting edge of fintech, emerging technologies and law, supporting international clients in the DeFi, NFT, AI, cryptocurrency and blockchain industries.
Footnotes
* Commonly translated as "Property is theft!" in Proudhon, Pierre-Joseph Qu'est-ce que la propriété? ou Recherche sur le principe du Droit et du Gouvernement (1840) (1st edn). Paris: Brocard, 2.
** Gray K, "Property in Thin Air" [1991] Cambridge Law Journal 252.