The Law Commission’s recommendations highlight the need to clarify whether cryptocurrency lending falls under existing financial collateral regulations.
A lawyer leading the United Kingdom’s Law Commission’s review of the application of British laws toward digital assets has stressed the need for further clarity around cryptocurrency lending.
Laura Burgoyne unpacked the details of the organization’s four major recommendations to the U.K. government in an interview with Cointelegraph. This comes after a lengthy review process of existing legal frameworks in the country and how they’ve been applied to the digital asset sector to date.
As reported by Cointelegraph on July 3, the Law Commission is calling for the creation of a distinct category of personal property for cryptocurrencies and digital assets. In addition, the body recommended the establishment of an industry-specific panel and a legal framework for crypto-related assets, as well as legal reforms to clarify whether the asset class falls under the scope of the U.K.’s Financial Collateral Arrangements Regulations (FCAR).
Burgoyne highlighted the importance of FCAR in allowing traditional finance intermediaries to take security over assets “free from a number of restrictions and formalities,” which would traditionally apply.
In the context of finance, security interest gives a legal claim over an asset that a borrower has supplied to a lender in the event that the loanee cannot meet their repayment obligations. Burgoyne told Cointelegraph that the purpose of these provisions is to streamline asset security in the event that an investor defaults on their obligations or becomes insolvent.
“They are an important instrument in the use and regulation of collateral arrangements, and it is necessary for [the] smooth operation of the crypto market, and for market certainty, to know whether the FCARs apply in the context of collateral arrangements in respect of certain digital assets.”
Whether cryptocurrencies, digital assets and other tokens can be used as collateral under a qualifying financial collateral arrangement is dependent on whether the assets in question can constitute “cash,” “financial instruments,” or “credit claims” in accordance with FCARs.
Burgoyne added that the scope of the “FCARs regime is largely a question of legal interpretation,” and whether the policy applies to new asset classes, including crypto tokens, central bank digital currencies and stablecoins, requires an evaluation of the existing law:
“For this reason, we think there is a need to review the situation and make the matter clear.”
Personal property law works, but new category needed
The Law Commission’s main recommendation was centered around existing personal property laws in the U.K., and how they’ve been applied to cryptocurrency and digital asset legal proceedings to date.
As Burgoyne explains, personal property law is traditionally a common law matter rather than a statutory law matter. Common law, which is developed by the court system, not parliament, has been considered “flexible” enough to respond to an “infinite variety” of circumstances and disputes:
“In the past decade, the courts have had to grapple with disputes concerning digital assets and, for the most part, have been able to find appropriate solutions coming out of the common law.”
The need for a “distinct” third category of personal property law pertaining to digital assets is driven by the fact that digital assets do not easily fit into the existing personal property categories.
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The existing types of personal property law in the U.K. include “things in possession” like a vehicle or personal computer, and “things in action” such as legal rights or debts owed.
“Digital assets do not fit easily into either category and applying the legal rules of one or other category to digital assets does not always reach what appears to be an obvious, fair, or even workable result.”
Burgoyne added that the Law Commission’s recommendations were kept deliberately short and targeted. Setting up an expert working group and targeting statutory reform only where common law cannot settle disputes is intended by the government to institute the recommendations with limited delay.
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