Andrew Foyle

The application of 17th century principles to modern blockchain technology has exposed gaps in the way that ownership and possession of non-corporeal assets operate under Scots law.

That is the background to the Digital Assets (Scotland) Bill, the principles of which have just been approved by the Economy and Fair Work Committee of the Scottish Parliament.

What are digital assets? The answer is very wide in scope. They range from cryptocurrencies such as bitcoin through to tokenised securities where the right to payment under a security is represented by a digital token issued on a blockchain.

What these categories have in common is that the “asset” has no physical existence and is usually not located in a single place.  It is (or is represented by) a string of data on a distributed ledger system, possibly across multiple servers. Control over the asset is asserted by way of a digital “key”. Transfer from one person to another, results in a change in the ledger within the blockchain, with the new holder gaining exclusive control over the asset.

On one level, the categorisation of digital assets might seem simple: they are incorporeal moveable property. However, Scotland has traditionally defined incorporeal moveable property as rights and not property per se. Digital assets are not “rights” as we understand them – a cryptocurrency is “owned” by the person with control over the key. There is no counterparty.  By contrast, money in a bank account (which is also incorporeal) consists of a right to payment from the bank corresponding to the bank’s duty to account to their customer. Transfer of ownership of an incorporeal moveable is usually done by way of assignation or contract rather than by physical transfer.

Therefore, digital assets don’t fit neatly into the constructs of the Scottish law of property, and there are doubts whether the current law allows for “ownership” of most digital assets.

The Digital Assets (Scotland) Bill seeks to address that challenge. It does so by setting out that digital assets are incorporeal moveable property and that the law is applied to them on that basis (subject to any enactment). Moreover, it provides that ownership of a digital asset is to be presumed from having control of the asset, unless the contrary can be established.

The most important part of the Act is section 4, which sets out the mechanism by which ownership of a digital asset may be acquired. It states that the asset is to be treated for this purpose as though it were a corporeal moveable asset, with exclusive control of the asset being treated as physical possession of it.

This is a neat solution, for it recognises the unique characteristics of digital assets without rendering them a new category of property, which would take them wholly outside of the existing legal framework.

Of course, the bill is in its early stages and there are a number of issues which may merit further scrutiny. For example, the knock-on effects on diligence and insolvency should be considered. I would suggest now would be a good time to revisit the diligence of Residual Attachment, which is on the statute book, but has never been brought into force.

However, where the law of England & Wales had already started to move forward on this subject, it is vitally important that Scots law does not get left behind. The Digital Assets (Scotland) Bill is a very substantial start.

Andrew Foyle is a solicitor advocate and partner on contentious financial services matters within Shoosmiths’ dispute resolution and litigation team in Scotland