Will the Law Commission’s digital assets final report make the UK a DeFi jurisdiction of choice?

Laws and regulations for digital assets tend to arrive either too early or too late. Too early when they include details that turn out to be awkward or irrelevant when technology moves in a different direction. Too late when they wait for certainty and meanwhile leave important areas unregulated and vulnerable to fraud.

The English Law Commission, in its final report on digital assets, proposes to solve this riddle with a new approach that might make the U.K. a jurisdiction of choice for DeFi and other digital asset structures.

As a holder of NFTs or a participant in DeFi, you might think that legal uncertainty does not affect you — cryptoassets exist independently of any legal system and do not need to be controlled by regulations. But a lack of clarity in how they are treated by the courts prevents DeFi and the digital asset economy from developing more widely. Here are a few examples:

• If you hold your cryptoassets via an exchange, you might not actually hold any cryptoassets at all. This is what cryptoasset exchanges themselves have argued in a series of recent English cases. Victims of fraud attempted to freeze cryptoassets held in exchanges or obtain remedies against exchanges through which their cryptoassets had passed. They were largely unsuccessful. In many circumstances, all that an exchange customer will have is a contractual right against the exchange, enforceable by the courts. Legal uncertainty means it might not be clear whether they actually own a cryptoasset.
• If you post cryptocurrency collateral as part of a DeFi transaction and there is some problem with the structure — error or fraud — and some cryptocurrency is lost, perhaps from a different account that is part of the same structure, you might not be able to get your cryptocurrency back. This will depend on whether, in legal terms, you have transferred your cryptocurrency to somebody else or merely shared control over it. Again, legal uncertainty makes it impossible to gauge this risk and thereby inhibits growth in DeFi. And a myriad of custody and private key management possibilities make it hard to come up with clear legal rules that will apply in all situations.