Control and Relativity of Title of Digital Assets

In an article recently published (‘Digital Assets, Blockchains and Relativity of Title’ [2024] Journal of Business Law 78), I examine the Law Commission’s proposals in their report on Digital Assets for relativity of title. The report, published in July 2023, contains a wealth of discussion about the private law of cryptoassets.  However, I argue that the Commission has badly misanalysed the concepts of “control” and “legal title” to cryptoassets.

The Law Commission argues that cryptoassets such as bitcoin are neither choses in possession nor choses in action. Traditionally, it is said that all property must be one of those two things. The Law Commission, however, argues that there should now be legislation confirming that a third type of property exists. The idea of a third category of property and the question whether bitcoin, ether etc are an example thereof is, however, a red herring. Choses in possession are tangible assets, like chairs or computers. Choses in action are intangible assets like debts or company shares. While bitcoins are unlike chairs in that they are intangible, they are also unlike debts in that they do not, in and of themselves, amount to a right held against another. This, however, does not amount to a need for a third category. The category of “intangible property” is highly heterogenous. Debts are not like company shares, which are not like carbon credits or copyright or bitcoin. Splitting property into tangible and intangible makes for a coherent split and then what matters is a close analysis of the characteristics of the intangible asset with which we are concerned.

On a separate point, the Law Commission correctly argues that cryptoassets should not be possessable. The policy drivers for relativity of possession-based title simply do not apply in the crypto-context. For example, I cannot be physically dispossessed of my bitcoin. I can be physically dispossessed of my private key in the form of a QR code, but that is protected because it is physical, not because of the ability it grants to access my (intangible) coin address. Further bitcoin cannot be “found” in the same way that a ring was found on the floor of an airport lounge in BAB v Parker [1982] QB 1004. There is no need for the “finder” to stand in for the owner until he is located.

Yet having correctly dismissed possession, the Law Commission’s analysis goes badly wrong. There are three reasons for this.

First, they reinvent the wheel with their concept of control.  They define control in the same terms as possession. Control requires an intention to control (just like possession does). If tokens are airdropped into my public address, I may not know they are there or intend to control them, and so according to the Commission I do not own or control them. Factual possession of tangibles is often described in terms of factual ability to control—as in The Tubantia (no 2) [1924] P 78 where the wreck could not be physically held, but the question was whether the claimants had, by sending divers and extracting cargo, taken sufficient factual control to be in possession. The Commission also allows for superior and inferior control-based titles. A sufficiently mistaken transferor will retain superior title to the bitcoin even though the transferee has control (and a lesser title). The transferor presumably has a right to demand conveyance and actual control from the transferee. This is essentially constructive control, just as the bailor at will has constructive possession.

Secondly, this is all completely unnecessary. It is hard to see circumstances where an equitable solution would not work equally well or even better. Of course, a holding intermediary such as Coinbase should be able to sue a hacker, as the Commission insists they should, but they will equally be able to do so as a trustee or as an unencumbered legal owner.

Thirdly, the Commission’s suggestion turns out to be conceptually muddled. Coinbase’s (or another holding intermediary) being in effect bailees with the depositing clients holding legal title as tenants in common, as the Law Commission suggests, creates two conceptual issues. First, the Commission insists that title can only be passed through a change in control and not merely by intention alone. The intermediary must be in control of the bailed pool of assets, but the tenants in common will need—by analogy with the unity of possession—unity of control. At what point, however, does the holding intermediary pass control back to the clients so that they can share legal title to the cryptoassets as tenants in common? It does not, so the tenancy in common cannot come into being. Secondly, what if an intermediary purports to hold some but not all assets on trust and then mixes them all in the same omnibus account? The intermediary must have full legal title of the assets held on trust, but lesser legal title to those held as bailee. However, if it has full legal title to the commingled assets, it must hold both superior and inferior title to the assets purportedly bailed to it. That makes no sense. Its interest in control is the same. The only question is how relatively strong it is. The inferior title is subsumed by the superior. This leaves the putative bailors with nothing and defeats the objective of the exercise as far as they are concerned.

Duncan Sheehan is the Professor of Business Law at the University of Leeds. He can be contacted at D.K.Sheehan@leeds.ac.uk.