Digital assets in Scots private law: consultation

I do think that the legislation should have a fairly narrow scope of application. However in addition to the matters in the question and those in the later questions, it should cover at least the following:

- a definition of digital asset which clarifies what digital "things" (in a lay sense) are or are not "assets" e.g. making it clear that certain things are not a digital assets e.g. items on Facebook, emails etc. This will include the notion of rivalrousness expressed in one way or another (e.g. as part of a "control" definition ?? as in the UNIDROIT principles)

- a recognition that control can make effective a right in security over a digital asset (ie. its pledge) without the need for registration under the Moveable Transactions (S) Act: see UNIDROIT principles, principles 15, 17, and 19 and the commentary on them.

- custody of the digital asset on behalf of the owner and insolvency (both of the custodian or owner). This is important because Scots law (unlike English law) does not automatically create a trust over the asset with the custodian (or sub-custodian) as trustee and the owner as beneficiary and thus exposes the owner to loss of the asset through the custodian's (or sub-custodian's) insolvency. See UNIDROIT principles

- international private law provisions: see my comments responding to question 13 below.

There are at least two separate questions within this question 4 and a preliminary point regarding terminology.

With regard to the terminology, the phrase "object of property" is not one known to Scots law. The word "property" can have two meanings, legally. The first meaning is synonymous with a thing. That is the way in which it is used in question 3. It is the traditional Scots law usage. The second, less common meaning (but often used in English law), is the right of ownership over a thing. Thus English lawyers often refer to the "property in a thing" when in fact they mean, to a Scots lawyer the "ownership of a thing".

I presume that by this unfortunate phrase "object of property" is meant "a thing capable of being owned" as mentioned in question 3. I proceed on that basis to consider the two questions within the question.

The first question is whether this new incorporeal moveable thing should be "technologically neutral". I tend to the view that, yes, it should.

The second question is whether the definition of the new thing that is being recognised should avoid being too prescriptive. I do not really understand what "too prescriptive" means in this context. The two limiting characteristics mentioned in questions 5 and 6 should be present in some form.

There might be some benefit to the layman in a non-exclusive list of things e.g. email that do not meet the definition. It depends on how clearly the rivalrousness criterion can be expressed: Parliamentary Counsel Office would be able to assist. Is the express exclusion of some things being too prescriptive ? In a doubtful case the court might be able to derive some benefit from seeing things that are definitely not digital assets and see if the thing they are considering is analogous in its key characteristics. On the other hand that might detract from consideration of the key independence//rivalrousness criteria. it's a difficult point. Again PCO may provide a guidance.

Once again I take issue with the use of the phrase "objects of property". The better phrase for Scots law is "things capable of being owned".

As I see the shape of the legislation:

1) there will be a provision defining the scope of the expression "digital asset". The description of the scope will allow the inclusion of say crypto assets but exclusion of email, WhatsApp pictures etc. The concept of rivalriousness will appear in this description in some form.

2) here will be a provision stating that a digital asset is an incorporeal moveable thing (or property).

3) here will be a provision stating that a digital asset is capable of being owned.

I do not think that any other provision is necessary. The law is there to regulate the things that are digital assets and not the "things" that are not, such as email. Thus if something does not fall within the "digital asset" description, it will not be covered by the legislation at all.

I can see no benefit for "digital object" as opposed to "digital asset". It might only serve to confuse.

See my comments in answer to question 2. Aside from the provisions mentioned there, the international aspects of digital assets must not be disregarded. There are two basic aspects.

Firstly the basic description/definition of a "digital asset" must contain some connection to Scotland to make it Scottish. This is essential so that users know when the legislation does (or does not) apply, say to a cryptocurrency, which is bought and sold in Scotland using a foreign intermediary/custodian. Scottish investors should know whether say the rules of transfer in the legislation apply to the crypto they hold or whether another jurisdiction's rules apply.

Secondly - and this may be related to the first aspect - the legislation should include a rule or rules of international private law setting out what Scots law sees as the law governing a digital asset and the law of location of the digital asset. This is important both for lifetime transfers and transfers on death.

Scots law lags behind English law in this area, simply because so much of it is common law where there are no Scots cases. A practical example is a share in a foreign company. Does a Scottish executor of the shareholder have a right over the share ? In general the executor has a right of administration only over assets in Scotland (unless the foreign authorities recognise the Scottish executor). However, based on English case law an incorporeal asset is situated in a place where it can effectively be dealt with (Brassard v Smith [1925] AC 371). That need not be the place of incorporation: the share register need not be in that place.

Given that digital assets can be dealt with anywhere, it is important the legislation addresses these matters so that people can be confident when it does or does not apply. Certainty in these matters that a well-balance regime applies in Scotland can encourage investment into Scottish d/assets.