Commercial lawyers grappling with digital assets should focus on established property law principles rather than assuming emerging technologies require new legal concepts, CCG Legal Practitioner Director Helen Fielder advises.
The financial services regulation lawyer will present on Bullion, Bitcoin and Carbon Credits: Commercial Drafting for New Forms of Property at the Queensland Law Society Specialist Practice Conference next month.
Ms Fielder said the starting point for any analysis remained on traditional concepts such as identifying the asset, determining who has title or enforceable interests, and considering issues such as possession, control, exclusion transfer and enforceability against third parties.
“Digital assets make some of those concepts more difficult to apply, but I do not think that necessarily means the underlying legal concepts have become obsolete,” she said.
“Bitcoin is a good example. It is important not to confuse the Bitcoin with the private key, wallet, seed phrase or blockchain. Those may provide evidence of, or the means of exercising, control over the asset, but they are not necessarily the asset itself.
“This also raises an interesting distinction between possession and control. Traditional property law developed largely around tangible property capable of possession.
“Modern commercial law already recognises forms of control that do not involve physical possession, particularly under the PPSA and in intermediated securities arrangements.
“The current High Court cases therefore raise a broader question: should a new asset necessarily be forced into the historic categories of a chose in possession or chose in action, or can existing property principles accommodate it by looking at the substantive relationship between a person and the asset?”
She pointed out the High Court decision in Poulton v Conrad and Yeates v The King, which involves Bitcoin and property rights, was an important indicator.
“One particularly interesting aspect of the arguments is the distinction between the asset and the mechanism by which control is exercised. A private key may be information, but that does not necessarily mean the asset controlled through that information is itself merely information.
“Another issue is whether ‘control’ should assume greater significance for digitally native property. That has obvious implications beyond Bitcoin for the PPSA, secured transactions, custody arrangements and insolvency.”
She advised practitioners should also watch developments in tokenisation, digital asset custody and overseas legislation dealing with digital assets and control.
“The direction of travel internationally appears to be towards adapting existing commercial and securities law rather than abandoning it,” she said.
“I would also watch the distinction between blockchain-native assets such as Bitcoin and tokenised real-world assets. They are often discussed together but legally they are quite different. Bitcoin is itself the asset; a token representing gold, shares or another real-world asset is generally part of a legal structure that must be analysed separately.”
Ms Fielder warned that one of the greatest risks for lawyers is relying on technology rather than legal function. To accommodate rapid technological change, lawyers should draft contracts by reference to legal function rather than specific technologies.
“For example, describing an investment as “tokenised gold” does not tell the investor what they actually own.”
A token holder may own specific bullion, hold a beneficial interest under a trust, possess a contractual claim against an issuer, have redemption rights to physical gold or simply have an entitlement to proceeds linked to the asset’s value.
“Those outcomes are very different, particularly upon insolvency,” she said.
“The drafting therefore needs to answer conventional legal questions: What is the asset? Who owns it? Who holds or controls it? What rights can the client enforce? Against whom? Can the asset be redeemed or transferred? What happens if the custodian or issuer fails?
“In that respect, the technology may be new but the drafting questions are not.”
She said provisions should also contemplate technological changes and the replacement of service providers. This is especially important where assets are held through intermediaries.
“Digital assets may involve different technology, but many of the legal questions are familiar,” she said.
“Contracts should therefore be sufficiently technology-neutral to survive changes in the infrastructure through which the asset is held or transferred.”
Ms Fielder said probably the most common issue was assuming the technological description of an asset told its legal character. It does not.
“A ‘token’, for example, may represent ownership, a beneficial interest, a contractual claim or a redemption entitlement. Practitioners need to examine the legal documentation rather than the label,” she said.
“The High Court arguments have reinforced for me that the more useful approach may be to return to first principles: identify the asset, identify the legal relationship, identify who can exclude others and dispose of it, and then determine the consequences for ownership, security, priority and insolvency.
“The technology may change very quickly. Those underlying commercial law questions have changed remarkably little.”
The QLS Specialist Practice Conference runs from 7-9 October. Ms Fielder will present on day two which features Property, Commercial and Commercial Litigation as well as Government Lawyers Conference.
Registrations are now open.
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