Stuck in a digital dark age

Stuck in a digital dark age

Technology and Digital Bitesize Update

Lawyers (particularly tax lawyers, including private client practitioners such as me) are used to getting to grips with changes to the law. Normally, such changes are dealt with by someone (often, in larger teams, the knowledge lawyer) sitting down and tackling the legislation, with the help of commentary from learned peers and the occasional seminar or conference where needed.

Once comfortable with the new provisions, the rest of the team can be trained on the developments and how they are likely to affect clients. Then comes the task of educating the clients on why it all matters (and why, perhaps more importantly to them, it is worth incurring fees to deal with it properly).

Although mastering such changes can sometimes be challenging (the memory of trying to make head or tail of the residence nil rate band legislation for the first time back in 2017 still causes a shudder), it is often also very rewarding. Lawyers tend to like learning and then displaying new skills. This is in part why digital assets are so frustrating. There simply is (in many key respects) no legislation to master, leading to countless uncertainties and unsatisfactory moments, not least when a client asks what will happen in a particular scenario and the only honest answer is "I don’t know". Although lawyers in all specialisms are likely to have their own specific issues with the lack of certainty around digital assets, I want to  focus on problems for private clients.

Digital assets are now ubiquitous.  They can have significant value (such as cryptocurrencies and non-fungible tokens) and/or sentimental value (the most common example being digital photos). For many clients considering lifetime estate planning, or seeking professional advice administering the estate of a deceased loved one, the sentimental assets are at least as important as the financial ones and therefore cannot be overlooked.

Given the prevalence and importance of digital assets, it is therefore a source of consternation that there is not even a legal definition of "digital assets". Unfortunately this is just an indication of the state of things to come as you look more closely at this subject. There are any number of issues which could be picked out as particularly unsatisfactory, but concerns around access to these assets impact particularly on private client lawyers.

The question of (legal) access to digital assets could affect almost everyone. In brief, the issue here is that section 1 of the Computer Misuse Act 1990 makes it an offence to access ‘computer material’ (including digital assets) without authorisation. That authorisation in most cases needs to come from the internet service provider (ISP) which makes the relevant online account available. More often than not, these ISPs are based in the US, which has strict privacy rules. As a result, most online accounts include in their terms and conditions a prohibition on assigning the benefit of the contract or sharing passwords.

While some of the bigger providers (such as Apple and Google) have provided some sort of lifetime-planning option to allow named individuals to access an account after the death of the account holder, this is the exception rather than the rule, and in any event is not widely known about or understood. In most cases, there is little people can do during their lifetime to ensure access to their digital assets after death. Those trying to administer the estate of a deceased relative or friend are faced with time-consuming and costly court processes to gain such access, unless they are willing to break the law (which of course no professional adviser could recommend as a valid alternative). This is not a choice that personal representatives should be faced with when simply trying to comply with their legal duties to collect in and administer the assets of the deceased.

Efforts to legislate for digital assets are under way but progressing slowly given the scale of what is needed, and the uncertainty caused while practitioners and their clients wait for this.

A Law Commission report on digital assets and English law was announced in September 2020, with a call for evidence at the end of April 2021. It took until November 2021 for an interim report to be published and it is currently expected that the consultation paper will be published in mid-2022.

The commission noted in its interim report that further work needs to be done to define digital assets (possibly with multiple sub-categories), and that a third category of personal property may be needed to ‘resolve the ambiguity as to the legal categorisation of certain digital assets’. It also notes on its website that while digital assets can be ‘owned’, they cannot be ‘possessed’ and that this ‘has consequences for how digital assets are transferred, secured and protected under the law’. It is therefore clear that there is much work to be done – and quickly.  

In the meantime, other initiatives are being launched, such as Ian Paisley MP’s Digital Devices (Access for Next of Kin) Bill, which received its second reading on 6 May, and various projects to better regulate cryptoassets. However, it seems  that more nuanced questions such as these (and countless other issues outside the scope of this article) cannot be adequately addressed until the basic application of key legal concepts to digital assets has been established.

This article was first published in Law Gazette and can be accessed here.

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