The Treatment of Cryptotokens at English Law: Back to the Future

The UK Jurisdiction Task Force (UKJT) is one of the six taskforces of the LawTech Delivery Panel, formed with the aim of ensuring that English law and the jurisdiction of England and Wales together provide a robust foundation for the development of DLT, smart contracts, and associated technologies. To that end, it is coordinating the preparation of an authoritative legal statement on the status of cryptoassets and smart contracts under English private law. In response to this, Clifford Chance have produced a paper addressing how English law should develop to accommodate cryptotokens.

The starting point is that tokens are electronic tools that can perform a wide variety of different functions—some tokens may be used as payment mechanisms, others as investments, and others still for completely non-financial purposes. Thus, in considering a transaction involving a token, the court must analyse the transaction, not the token. The paper proposes that tokens used to replicate investments or as securities settlement mechanisms should be regarded as cognate with investments and/or securities—however, tokens constructed to be used as payment media should be regarded as such. In this regard, the paper reviews the way in which previous generations of innovative payment instruments were incorporated into common law through the recognition of their practical usage and the common understanding of their functions, and considers how an equivalent process of incorporation might be achieved today.

The primary conclusion is that there is not, and should not be, any such thing as a ‘law of cryptotokens’. A cryptotoken is simply a tool which is used to effect a transaction. The role of the law is to decide:

1. Whether or not to give effect to that transaction; and
2. Whether the transaction has been entered into in accordance with the laws that apply to a transaction of that type.

With regards to the first of these considerations, the law should approach any issue involving tokens by asking three simple questions:

• What was the token designed to do?
• What did the participants in the transaction concerned believe that they were doing?
• Would that assessment have been shared by people generally?

If the answers to all of these questions are clear, then the law should strive to deliver the intended outcome of the transaction.

It should be apparent that this is nothing more than the continuation of the approach employed by the English courts in the 18th and 19th centuries to accommodate new instruments as they developed in the City of London. The paper notes that the English courts have historically been active in recognising and developing new forms of payment mechanisms—indeed Milnes Holden's History of Commercial Instruments in English Law (Athlone Press 1955) is a continuing record of court-driven legal innovation. The development of innovative payment mechanisms and transaction types in English law, whether through the development of promissory notes, of bills of exchange or negotiable securities, all involved the recognition by the courts of instruments which were already in circulation in the markets. There is no reason why the courts of today should be less accepting of market developments than were the courts of previous centuries. In the words of Chief Justice Cockburn, 'Why is the door to be now shut to the admission and adoption of usage in a matter altogether of cognate character, as though the law had been finally stereotyped and settled by some positive and peremptory enactment?' (Goodwin v Robarts (1875) LR 10 Ex 337, 352) 

In practice, cryptotokens are universally spoken of, and dealt with, as transferable property. There is no policy argument for refusing to recognise this treatment as a matter of law. Arguments about the definition of the term 'chose in action' are of only antiquarian interest.

Simon Gleeson is a partner at Clifford Chance.