UK Law Commission Digital Assets Report: Establishing the Third Category

For centuries, English personal property law has recognised two categories of personal property: things in possession and things in action. A chair is a thing in possession — a tangible object that can be physically held, used, and transferred by delivery. A debt is a thing in action — not a physical object but a right to enforce a claim through legal action. This binary classification worked well for the physical and financial world of English commercial law’s formative period. It works considerably less well for digital assets.

The Law Commission’s June 2023 report on digital assets — “Digital Assets: Final Report” — reached a conclusion that had been building in English legal scholarship for years: crypto tokens, NFTs, and other digital assets do not fit comfortably within either existing category, and the uncertainty this creates for property rights is a genuine legal and commercial problem. The recommended solution — recognising a third category of personal property — is simple in statement and profound in implication.

Why Digital Assets Don’t Fit Either Category

Things in possession must be tangible — they must exist in physical space, be capable of being possessed by physical control. A bitcoin token is not tangible. It has no physical instantiation; it exists only as a record on a distributed ledger. This disqualifies it from being a thing in possession under orthodox English property analysis.

Things in action are defined by being enforceable through legal action — they represent a personal right against a specific counterparty who owes an obligation. A debt is a thing in action because the creditor has a claim against a specific debtor. A share is a thing in action because the shareholder has rights against the company as a legal person. But a bitcoin token does not give its holder a claim against any specific person. There is no issuer, no counterparty, no obligor. The holder’s position is defined by the protocol rules, not by a personal right against an identified party. This disqualifies most crypto assets from being things in action.

The consequence of fitting neither category was analytically uncomfortable: some courts and commentators concluded that digital assets were not property at all under English law — a position with serious implications for asset recovery in fraud cases, insolvency proceedings, and the structuring of transactions involving digital assets. English courts had begun to recognise digital assets as property through case law — notably the 2019 judgment in AA v Persons Unknown — but the doctrinal basis was uncertain and the limits of the recognition untested.

The Third Category Recommendation

The Law Commission’s solution was elegant. Rather than forcing digital assets into an ill-fitting existing category or concluding they are not property, the Commission recommended that English law should recognise that some things — of which digital assets are the paradigm case — can be objects of personal property rights without being things in possession or things in action. These objects share certain characteristics: they are distinct from other objects, the rules of the system in which they exist can be identified, and the system reliably produces consistent results. But they are intangible, and they do not involve personal rights against counterparties.

The Commission declined to define the third category exhaustively, preferring to leave its outer limits to be developed through case law as courts encounter novel cases. This common law approach — establishing the principle while leaving doctrinal development to courts — is characteristic of English legal reform and contrasts with the more codified approach of civil law systems.

The third category recommendation has immediate practical implications for digital asset ownership. If a bitcoin or other crypto token is property — of this new third kind — then property law’s full apparatus applies to it: it can be owned, transferred, held on trust, charged as security, and claimed in insolvency proceedings. The legal infrastructure of English commercial law, built around property concepts, becomes available to participants in digital asset markets without requiring bespoke contractual arrangements to achieve the same outcomes.

Implications for Tokenized Assets

For tokenization specifically, the third category recommendation addresses a foundational question: what legal rights does a token confer? If a tokenized bond is represented by a token on a public blockchain, and that token is third-category property, then ownership of the token constitutes a proprietary interest — not merely a contractual claim against the issuer or the platform. This distinction matters enormously in insolvency: contractual claims against an insolvent counterparty rank as unsecured debts and may recover pennies in the pound; proprietary interests allow the holder to assert ownership of specific assets outside the insolvency estate.

The Commission’s report also considered the position of smart contracts. It concluded that smart contracts can, in principle, satisfy English law requirements for contracts — including offer, acceptance, and consideration — and that contractual obligations can be created and performed through code without human intervention at the time of execution. This confirmation is foundational for tokenization platforms whose business models depend on smart-contract-mediated asset transfers and automated compliance functions.

NFTs received specific attention in the report. The Commission confirmed that NFTs can constitute property in English law, and that where an NFT represents rights in underlying digital content — such as artwork or music — the characterisation of both the NFT and the underlying content as property depends on the legal arrangements that the NFT’s terms create. This nuanced analysis is important for platforms tokenizing intellectual property rights.

Government Response and Legislative Status

HM Government’s response to the Law Commission’s report was cautious. The government accepted the analysis and expressed support for the direction of travel but, as of early 2026, has not introduced primary legislation to enact the third category recommendation. The government’s position is that existing case law development — in which English courts have been willing to recognise digital assets as property without explicit statutory authority — provides sufficient immediate legal certainty, and that legislation should follow once the common law has developed further.

This incremental approach has supporters and critics within the legal community. Supporters argue that common law development is more flexible and less likely to produce unintended consequences than statute. Critics argue that commercial certainty requires legislative clarity, and that relying on case-by-case judicial development creates uncertainty that undermines London’s competitiveness as a digital asset hub.

Comparison with Other Common Law Jurisdictions

The Law Commission’s recommendation places England and Wales in dialogue with other common law jurisdictions grappling with the same question. Singapore’s courts have similarly recognised crypto assets as property without requiring legislative change. The Cayman Islands amended its legislation explicitly to recognise virtual assets as property in 2020. Australia’s Law Reform Commission has produced similar analysis, concluding that Australian law can accommodate digital asset property rights under existing frameworks. The emerging consensus among common law jurisdictions — that digital assets are a form of property, even if they require a new doctrinal category — strengthens the case for legislative clarity in England and Wales, where certainty of legal foundation matters enormously to the global financial institutions and law firms that have made London their home.