A lawyer leading the UK Law Commission’s review of the application of UK laws to digital assets has highlighted the need for more clarity around cryptocurrency lending.
Laura Burgoyne revealed details of the organization’s four major recommendations to the UK government in an interview with Cointelegraph. This follows a lengthy process of reviewing the existing legal frameworks in the country and how they have been applied to the digital assets sector so far.
As Cointelegraph reported on July 3, the Law Commission is calling for the creation of a separate personal property category for cryptocurrencies and digital assets. Additionally, the body recommended the creation of a sector-specific panel and legal framework for crypto-related assets, as well as legal reforms to clarify whether the asset class falls within the scope of the UK’s Financial Collateral Arrangements (FCAR) Regulations.
Burgoyne highlighted the importance of FCAR in allowing traditional financial intermediaries to ensure the security of assets “without a number of restrictions and formalities”, which would traditionally apply.
In the financial context, security interests provide a legal right over an asset that a borrower has provided to a lender in the event that the lender cannot meet its repayment obligations. Burgoyne told Cointelegraph that the purpose of these provisions is to streamline asset security in the event that an investor defaults on their obligations or becomes insolvent.
“They constitute an important instrument in the use and regulation of collateral agreements, and it is necessary for the proper functioning of the crypto market and for market security to know whether FCARs apply in the context of collateral agreements regarding certain digital assets.”
Whether cryptocurrencies, digital assets, and other tokens can be used as collateral under a qualifying financial collateral arrangement depends on whether the assets in question qualify as “cash,” “financial instruments,” or “private debt” under the FCAR.
Burgoyne added that the scope of the “FCAR regime is largely a matter of legal interpretation” and that whether the policy applies to new asset classes, including crypto tokens, central bank digital currencies and stablecoins, requires an assessment of existing law:
“For this reason, we believe it is necessary to review the situation and clarify things. »
Personal property law works, but a new category is needed
The Law Commission’s main recommendation focused on existing personal property laws in the UK and how they have been applied to legal proceedings relating to cryptocurrency and digital assets to date.
As Burgoyne explains, personal property law has traditionally been a matter of common law rather than a matter of statutory law. Common law, which is developed by the judiciary and not Parliament, has been considered sufficiently “flexible” to respond to an “infinite variety” of circumstances and disputes:
“Over the past decade, courts have faced disputes over digital assets and have, for the most part, been successful in finding appropriate common law solutions. »
The need for a third, “separate” category of personal property law relating to digital assets is driven by the fact that digital assets do not fit easily into existing personal property categories.
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Existing types of personal property law in the UK include ‘things in possession’ such as a vehicle or personal computer, and ‘things in action’ such as legal rights or debts owed.
“Digital assets do not fit easily into either category and applying the legal rules of either category to digital assets does not always result in what appears to be an obvious, fair or even achievable result.”
Burgoyne added that the Law Commission’s recommendations were deliberately short and focused. The government intends to establish an expert working group and target statutory reform only where common law cannot resolve disputes, to implement the recommendations within a limited time frame.
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