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Tue, 24 November 2020

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By Lord Garnier
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Adapting English law for the digital revolution

Law Commission

4 min read Partner content

The Law Commission has begun work on two new projects to ensure that English law can accommodate two emerging technologies that could revolutionise commerce: smart contracts and digital assets.

The Law Commission will analyse the law relating to smart contracts, to find any gaps in the law and identify reforms to ensure that the law can meet the growth in the use of this technology.

The work on digital assets will ensure that the law is capable of accommodating electronic documents, cryptoassets and other digital assets in a way which allows the possibilities of technology to flourish.

The project on smart contracts was announced by the Law Commission as part of its 13th Programme of Law Reform in December 2017, but was paused pending the outcome of the government-backed LawTech Delivery Panel’s work in the same area. Following the publication of the Legal Statement on the Status of Cryptoassets and Smart Contracts by the Panel’s UK Jurisdiction Taskforce, the Law Commission is now embarking on two new strands of work which build upon the topics covered by the Legal Statement.

Smart contracts

Contracts are ordinarily written in natural language and performed by legal persons, be they human beings or companies. However, emerging technologies such as distributed ledgers have made it possible for the performance of contracts to be automated. These contracts, known as “smart contracts”, command performance by computational algorithms without the need for human intervention. They have been widely touted as promoting efficiency, trust and certainty in business.

English contract law has developed with natural language contracts in mind. The development of technological capacity to engage in smart contracts gives rise to a range of questions. 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? 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.

The Law Commission will analyse the law relating to smart contracts, highlight any uncertainties or gaps, and identify any reforms to the law that may be required. We are currently seeking initial views from business and from the technology sector, with a view to publishing a call for evidence in late 2020.

Digital assets

The commercial world is moving rapidly towards complete digitisation of trade and transactions, yet legislation implemented more than a century ago is preventing businesses from achieving an optimal electronic environment. For example, the intangibility of a simple digitised document means it cannot, on current understanding, be “possessed” and therefore cannot constitute a document of title under the Bills of Exchange Act 1882. This can cause considerable commercial difficulties, particularly in the context of international trade finance.

Although the Law Commission’s most recent Programme for Law Reform mentioned only smart contracts, the consideration of the digitisation of commerce has given rise to more general questions about the legal status of intangible assets. Some, such as electronic documents and computer software, are not novel in commercial terms; others, such as Bitcoin or distributed ledger entries tied to physical assets, are far less familiar to both users and their professional advisers.

The Law Commission has been asked by 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 this technology to flourish.

In the first instance, we will consider the issue of possession, particularly with regard to documents of title, documentary intangibles and negotiable instruments. Our current intention is to publish a consultation paper in the first half of 2021.

Law Commissioner Sarah Green said:

“Smart contracts, digitised assets and electronic documents promise to revolutionise the way we do business, digitising existing processes and in some cases introducing entirely new concepts. There are, however, lingering uncertainties about whether and how English law can accommodate these.

“We believe there is a compelling case for reviewing the law in these areas to ensure that the jurisdiction of England and Wales remains a competitive choice for those who want to use and to develop emerging technology.”

 Justice Secretary, Robert Buckland QC MP, said:

“Cryptoassets and smart contracts are transforming the way we do business and we want to ensure UK firms are able to fully benefit.

“These reviews will help ensure the UK’s legal sector remains world-leading by offering certainty in these emerging technologies.”

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