RLBA response to Law Commission’s consultation on Digital Assets
The Residential Logbook Association (RLBA) has given this response to the Law Commission’s consultation on Digital Assets.
The Law Commission has opened a Consultation on Digital Assets. They state that Digital assets are generally treated as property by market participants. Property and property rights are vital to modern social, economic and legal systems and should be recognised and protected as such. The consultation requests input from individuals and industry bodies on key aspects of law relating to their industry. This document outlines the RLBA response.
Overview:
The RLBA believe that a residential Property Logbook is a clear example of a ‘digital asset’ whose recognition, status and treatment in law have yet to be defined in any meaningful way by the legal industry.
We have responded to the Law Commission’s Consultation making that case for their recognition in laws relating to property, assets and transactions. However, we have framed the call for Property Logbook recognition within a call to consider the wider context for ‘digital assets’.
We make the case that there is an ‘immediate’ problem to be resolved in residential property law around digital assets made up of data, online services, apps and logbooks; and a ‘future’ challenge around blockchain and crypto-based issues for which we can begin to lay out principles. We have urged the Law Commission not to focus on the second of these issues (which are more high profile) before solving the first (which have immediate commercial implications).
This document summarises the RLBA response to both sets of issues raised in our submission and, at the end, we have provided the full text of our submission as entered on the Law Commission website.
The RLBA summary response:
The Residential Logbook Association recognises that the concept of digital assets has implications for a wide range of industries and processes. Our focus is specifically on their recognition and use in connection with residential property and, in particular, transfer of ownership during residential property transactions.
The RLBA believes that recognition of digital assets is a key factor in the wider digitisation of the property industry. This issue is an outcome of the wider digitisation in the way we run our homes and interact with the services providers around us. It is poorly reflected in current property law and the RLBA believe it requires urgent attention within the wider changes occurring within conveyancing.
There is an emphasis in the Law Commission’s overview briefing on blockchain based concepts and technologies (cryptoassets, smart contracts, distributed ledger technology etc). For residential property these are ‘future’ concepts and we comment on their implication for residential property markets in the second part of our submission. However, the term ‘digital assets’ has a wider and more ‘immediate’ implication for residential property and property transactions that we believe need urgent action. We urge the Law Commission to focus on the immediate before addressing future issues.
The RLBA defines the term ‘digital assets’ as referring to a wide range of online accounts, passcodes, and apps that create a fog of connected data around our homes. Ownership of these assets is not well defined and this problem becomes most obvious now when a home gets sold. The RLBA breaks down this mess of digital activity into at least three types of digital ‘asset’ that need to be considered when buying or selling a home:
- Online accounts for services (e.g. utilities) and the data they hold against a specific property
- Online accounts attached to fixed hardware (e.g. central heating apps and CCTV apps) which need to be passed on at sale
- Data and digital documentation held in long-term records (e.g. residential property logbooks) which need to be recognised.
We have made the case that the above systems, accounts and records need to be recognised in law as ‘digital assets’ attached to ‘physical asset’ of a home. They may need to be considered as part of a property’s ‘fixtures and fittings’, with principles and processes established to ensure their transfer to new owners when the ownership of the physical asset is also transferred.
Our submission states:
“The law needs to evolve to both recognise the existence of digital assets and the principle that they can be attached to a property asset”.
We also make the case that any organisation creating data on behalf of a property should not be viewed as the ‘owner’ of that data, but as an agent for the property owner with the data recognised as belonging to the main property asset.
Our submission states:
“Digital assets created by an owner, or by a third party organisation for or about a property and its performance should accrue in law to that property’s asset base and recorded in the property’s asset register (e.g. its Fixtures and Fittings Report).”
With a specific reference to the Law Commissions question on the nature of ‘possession’ around digital assets the RLBA make the case that ‘ownership’ needs to be defined as:
“having a sole right to access, manage and transfer the asset, but this right might be mediated by a third party”
possession needs to be defined as:
“having control of the means to access, manage and transfer the asset.”
We offered the following examples to differentiate between ‘ownership’ and ‘possession’ of a digital asset as it impacts Residential property:
Ownership – The data held by a utility on the energy performance of a home may be described as being ‘owned by the homeowner’ as part of their wider ownership of the property asset. Ownership implies the right to dictate how the data is stored and used (albeit the utility is the data ‘controller’ and ‘processor’ and can be described as being in possession of if). But the data is not ‘possessed’ by the homeowner as they have no direct control over where and how it is stored, and have no rights to move, delete or transfer that data without recourse to the utility (or data controller).
Possession – The data and/or documentation held by a homeowner in Property Logbook may be described as being both ‘owned by the homeowner’ as part of their wider ownership of the property asset, but also ‘possessed by them’ as they have direct control over where and how it is stored, and have rights to move, delete* or transfer that data. (*Note: some data in Property Logbooks is immutable so cannot be deleted).
We need the law to recognise the ownership of a Property Logbook and the concept that it can be ‘possessed’ and linked as an asset to the physical asset of the underlying property.
Very specifically, these concepts impact residential property in two ways. A homeowner selling their property needs to be able to transfer both kinds of data to a new owner on completion.
More importantly:
“the act of transferring control should be an explicit and recognised step in the conveyancing process – as outlined in the Law Society’s Conveyancing Quality Scheme (CQS).”
The RLBA would welcome debate on all the above points of immediate concern and will be participating in any industry wide discussion of the points. We also recognise there is need to debate the implications of future changes, and the use of blockchain based concepts in residential property.
Comment on blockchain-based Digital Assets:
This section offers the RLBA’s comment on various aspects of the potential use of blockchain technology in residential property transactions, with a particular focus on Distributed Ledger, Smart Contract and Tokenisation.
Distributed Ledger
The RLBA recognises that, in societies with very low trust in institutions, and where no Land Registry functions exist, then it is possible to imagine the advent of disintermediated blockchain-based property registers that utilise the ‘Distributed Ledger’ capability to create trust. However the UK is not one of those markets, and we expect any blockchain based property register to be introduced and managed by the Land Registry.
Smart Contracts
While we recognise that ‘Smart Contract’ systems, based on blockchain protocols may play a part in enabling transactions to take place in the future, we recognise there is currently no overarching or dominant protocol that links all blockchain protocols and that a series of incompatible Smart Contract systems is a likely outcome in the short term. We therefore anticipate Smart Contracts for residential property transactions will have to take place either
- in systems where both parties recognise the same protocol and agree use of the system, (e.g. in auction systems, or conveyancer CRMs)…or
- in a standard UK system run by a single trusted agent (most likely the Land Registry).
In the second of these concepts, it is possible to envisage the Land Registry Smart Contracts becoming recognised as ‘digital deeds’. However, in both systems the Smart Contract (or ‘digital deed’) would be ownable but not possessable due to the nature of Smart Contract systems.
The RLBA would encourage development of rules for these systems in which the homeowner can realise the concept of ‘ownership’ through a range of access routes. We anticipate Property Logbooks adding functions by which Smart Contracts can be recorded and accessed. The ‘ownership’ right to a Smart Contract must be realisable through third party systems; be attachable to another digital asset (i.e. Logbook) and transferable on sale of the underlying property.
Tokenisation
However, of greater concern is the potential for tokenisation of residential property ownership, and specifically, how those tokens may be recognised in law and used in digital systems as proof of ownership of a residential property.
The RLBA recognises that blockchain based tokens can be both ‘owned’ and ‘possessed’. If the residential property market were to adopt a tokenised system (where property ownership is enshrined in a form of crypto token supported by smart contracts) then a homeowner would, by definition, be deemed to own the token and which represented ownership of the underlying physical and digital assets. In the UK we would advocate that this be within a system built and managed by the Land Registry.
We also recognise that a homeowner would be able to ‘possess’ the token with the correct property related wallet software. We anticipate Property Logbooks developing a residential token ‘wallet’ (analogous to a bitcoin wallet) but it would need to be interoperable with a token issuing system which is, once again, created and managed by Land Registry.
While possession of a property token may technically mean that confirmation or personal identity would not be required for each transaction, we anticipate that KYC/AML checks would not be superseded, but might be sought once at the point where people sign up to use the blockchain system.
Kindly shared by Residential Logbook Association
Main article photo courtesy of Pixabay
