In late June 2023, the Law Commission released their Digital Assets Final Report.
As previously reported, the key takeaway is that the Law Commission stands by the notion of a “third category” of personal property which would cover digital assets, including crypto tokens.
The question for dispute resolution lawyers is what impact does this have, in practice, on the claims and remedies available to victims when crypto tokens have been lost or stolen?
The Law Commission’s report concludes that much of the current law regarding causes of action and remedies in England and Wales is sufficiently flexible so as to be applied to third category things, and in those cases there is no need for law reform. This includes remedies for breach of contract, actions to enforce an obligation to “pay” tokens, and the law on vitiating factors such as mistake, misrepresentation and duress. Where third category things, such as crypto tokens, are held on trust or dealt with by fiduciaries, the Law Commission has concluded that existing principles governing the award of equitable remedies are sufficiently flexible to apply.
However, there are some aspects of the current law where there is room for improvement or development of the common law, two of which are addressed below: (i) the “burning tokens” lacuna; and (ii) the bona fide purchaser for value defence in the context of crypto tokens.
The “burning tokens” lacuna
Burning effectively removes a crypto token from circulation by irreversibly sending it to an inaccessible “burn address” (a public address to which the private key is unknown) such that the crypto token is then outside of anyone’s control. Burning can be done validly within a crypto ecosystem but it can also be done wrongfully without the owner’s consent.
In cases where a claimant’s crypto token is “burned” by a defendant, a claim made in proprietary restitution, unjust enrichment or the tort of conversion may not provide redress for the claimant.
Proprietary restitution
A claim of proprietary restitution can only be made out where the claimant retains the legal title to the object of the personal property rights in question (or its traceable substitute). When a crypto token is burned, depending on the circumstances, this requirement may well not be satisfied.
The Report says it would not be desirable to expand the scope of claims for proprietary restitution to encompass burning, as this would risk developing the doctrine “beyond its conceptual foundation” i.e. it would facilitate a proprietary restitution claim where the defendant no longer holds the object of personal property rights (i.e. the crypto token), or its traceable substitute.
Restitution for unjust enrichment
A claim in unjust enrichment is a claim for “recovery of a benefit unjustly gained [by a defendant] at the expense of the claimant” (Boake Allen Ltd v HMRC [2006] EWCA Civ 25). Where the claimant is successful, the court orders restitution – usually in the form of a monetary award – representing the value of the benefit unjustly gained for the purposes of reversing the defendant’s enrichment.
As the Report notes, determining the nature and value of an enrichment involving a crypto token might be difficult and, particularly in light of the complex way in which crypto tokens can be transferred, challenges may arise when trying to establish that the defendant’s enrichment was at the claimant’s expense. In the context of a wrongful crypto token “burn”, a claim in unjust enrichment may be unavailable because it does not involve an enrichment to the defendant.
The Report does not recommend law reform to change the position, because this would be a significant development in the boundaries of unjust enrichment to fix a relatively discrete issue. In addition, the principles of unjust enrichment do not sit well with a factual scenario involving burning, where the main reason for subjecting the defendant to liability is their wrongful interference with an object of personal property rights, rather than their enrichment.
Tort of conversion
The tort of conversion is not itself available as a remedy in the context of third category things (and therefore crypto tokens), as the tort can only be made out in relation to “things in possession”.
However, the Law Commission concludes that the courts should develop “specific and discrete” principles of tortious liability by analogy with the tort of conversion. This recommendation is preferable to the blanket application of the tort of conversion of crypto tokens, or the extension of the law of proprietary restitution or unjust enrichment, which may have unintended consequences.
The “bona fide purchaser for value” defence
Finally, a note on the “bona fide purchaser for value” defence: what if you pay for and receive a crypto token in good faith, without realising the seller stole it from its true owner?
The Law Commission have concluded that, in the context of crypto tokens, it is appropriate for the courts to “recognise, refine and develop”, by way of incremental development of the common law, a special defence of being a bona fide purchaser for value without notice. This is a development that can be further extended to other “third category” things.
Given the Report’s emphasis on developing the law incrementally via court decisions, any claimant seeking the return of lost or stolen crypto tokens must not only have an eye on the current law, but also on the anticipated developments to that law as set out in the Report.
