Official Report: Minutes of Evidence

The Chairperson (Mr O'Toole): This will be an interesting evidence session. At the meeting, we have Michael Foster from the civil law reform division, who is a frequent attendee at the Committee, and Fidelma O'Hagan, who is a relatively new member of the same team. Welcome, Fidelma. Thank you very much for coming to give us evidence. The Committee obviously wants to properly understand what is happening with the legislative consent motion (LCM), so we might ask some basic questions. Thank you very much for coming, Michael and Fidelma. We will have a brief opening statement from you, and then we will move on to questions. Members, indicate if you wish to ask a question. Go ahead, Michael or Fidelma.

Mr Michael Foster (Department of Finance): Thanks, Chair. Having made it to your Christmas card list for keeping opening remarks very brief in our previous evidence session —

The Chairperson (Mr O'Toole): Absolutely, yes. It will be a digital Christmas card, given the way things are going.

Mr Foster: — I will try to do the same again.

The main point that I want to convey to the Committee today is that the Bill is not intended in any way to bring about root-and-branch reform of financial services. Digital assets tend to conjure up thoughts of things such as bitcoin, blockchain and other such recent innovations. However, the Bill is not about setting out any new rights or obligations for those who currently own or hold such things or use them as an asset in conjunction with other more traditional holdings. Somebody who has an investment in bitcoin at the moment will not find any change in their legal position on foot of the Bill. The Bill is intended to clarify the law in relation to the classifications of those types of assets, because the Law Commission basically found that clarity would be helpful to business and to those who hold them as personal assets and, perhaps most acutely, most helpful for judges, who may, at some point, need to consider those types of assets, be it in a contractual matter, a financial dispute or a range of other circumstances in which those types of things can be used.

Put briefly, personal property, under the law as it stands, can be classified only in two main ways. One is "things in possession", which is, basically, tangible property, such as cash, cheques or things like that. The other is "things in action", which is intangible property. Those are things such as a debt or a contractual right.

The Chairperson (Mr O'Toole): Am I right in saying that the balance in a bank account is in the first category because it is capable of being held?

Mr Foster: Yes.

The Chairperson (Mr O'Toole): If you have £100 in a bank account, it is not the second category, because you could take it out and have £100 in cash.

Mr Foster: Yes. That is tangible property.

The Chairperson (Mr O'Toole): Intangible property would be when I am owed £100 by whomever it is. Is that right?

Mr Foster: Yes. That is the position.

The problem with digital assets is that they do not fit neatly into either of those two categories. That is not to say that the courts, to date, have not been able to deal with them: they have. However, the difficulty that the Law Commission identified is that there has been a certain inconsistency in approach by the courts and that some clarity on that would be a particularly useful way of dealing with it.

The Bill will not create any additional legal responsibilities or duties on assets holders, nor will it take away any existing rights or privileges. What it is hoped, and certainly what England and Wales have been saying in the evidence given to date at Westminster, is that it will make the jurisdiction of England and Wales and, if agreed, this jurisdiction an attractive one for the transaction of digital assets and the resolution of disputes, because the courts will not have to take that preliminary step of identifying whether something can be classified as personal property, because the Bill will step in to say that there is space for that to happen.

The Chairperson (Mr O'Toole): What happens as it is?

Mr Foster: What happens at the minute is that the courts will look at a particular transaction or dispute and make a determination as to whether a digital asset is capable of attracting personal property rights and for that —.

The Chairperson (Mr O'Toole): Does that normally arise from civil litigation — a divorce, for example — or something in which personal property is legally relevant to the proceedings and it is necessary to establish one party's assets? Is it that kind of thing?

Mr Foster: Yes, exactly that. Some things are relatively straightforward and have been set out, to date, by the courts in a fairly clear way. For example, bitcoin is one of those that is very common. This is such an evolving area. Ten years ago, we might have had just the beginnings of bitcoin, and that has developed into all sorts. Some of the terminology used in the Law Commission document would baffle most people. There is such a wide range of different things that are currently there. Who knows what that will look like in five years' time or 10 years' time.

The Bill is designed to allow the common law to step in and develop those principles, having a statutory buffer there to say that it can be done, whereas, in the absence of the Bill, the courts would be left to themselves, largely, to try to develop the law. That could take some time. We might get to the same place, but it could take much longer, which would leave that element of uncertainty for those who use these types of things on a day-to-day basis.

The Chairperson (Mr O'Toole): Thank you very much for that and for your opening remarks. Am I understanding it correctly in saying that normally what happens in an LCM is that the UK Government draft the law and say, "We would like it to extend to Northern Ireland in an area of devolved competence. Can we have your permission?". Then, they sort of ignore whether we give our permission or not, but they at least ask. However, that is not what happened on this occasion.

Mr Foster: What happened in this case was that officials contacted us a couple of months back and said that the Law Commission had reported on it and that they were going to take forward a quick Law Commission Bill. Just to clarify for members, Law Commission Bills do not go through the same process as normal UK Government Bills.

The Chairperson (Mr O'Toole): Was this legislation initiated by the Law Commission?

Mr Foster: No. The legislation itself will be —.

The Chairperson (Mr O'Toole): Recommended.

Mr Foster: The Law Commission drafted this, but it was taken on by the UK Government.

The Chairperson (Mr O'Toole): Is that the Ministry of Justice?

Mr Foster: Yes. It has taken this forward. However, it goes through a process different from that for normal Bills, so it can be a little bit quicker. For example, it starts its journey in the Lords, as opposed to the Commons, and in a special Committee of the Lords, as opposed to on the Floor of the House. Therefore, the relevant Lords Minister wrote to our Minister shortly after introduction and indicated that the Law Commission had, in its report, basically touched on the fact that Northern Ireland may well benefit from this as well. The Law Commission, as a statutory body, has no jurisdiction for Northern Ireland, so that is why there has been no specific Northern Ireland consultation. It tends to focus its consultation on its own jurisdiction of England and Wales. However, that is how it started. That offer was made to our Minister. We, obviously, assessed it and thought that it is a useful, very modest, law reform piece. It is a one-clause Bill. It is certainly not something that we could justify taking forward on our own. Therefore, if we did not come aboard with an LCM, we would be in a position where we would just have to let the common law develop here, and some of those uncertainties that I mentioned earlier may be in play.

The Chairperson (Mr O'Toole): Thank you. That is really useful. I have one or two final points, and then I will bring in other members. You mentioned that this might make it an attractive jurisdiction. Some people would say that we are an attractive jurisdiction for certain other types of civil litigation and, I think, in my personal view, not in a good way. We have discussed that before, Michael. Is there a risk? You were talking about an attractive jurisdiction for people who want to trade and hold those assets in Northern Ireland, but that is because, if litigation is brought, it is easier or more —. Is there a potential burden on the justice system?

Mr Foster: We do not see it that way. Certainly, in relation to criminal law — fraud, scams and things — the law is already one step ahead in the criminal field. We had the Economic Crime and Corporate Transparency Act last year, which extended to this jurisdiction. That would deal with digital assets in that type of sphere. This will basically allow the courts to develop the common law in the civil side. It is not really about necessarily making this jurisdiction a more attractive place to bring your disputes around it, but it is more for —

The Chairperson (Mr O'Toole): The assets?

Mr Foster: — businesses to operate in a system where they know that a particular digital asset is and can be used as personal property. If there is a problem to do with their civil litigation, it can be dealt with by the courts here in a way that is more certain than might otherwise be the case.

The Chairperson (Mr O'Toole): My final question is this: is there any interaction with EU law, in either a good or bad way, and is there any potential cross-border context that is relevant? I think about the large number of data centres in the Republic and the fact that a large number of digital assets are held in the Republic too. Are there any potential disruptions in that regard? I am not quite sure what they would be at this stage, but I ask the question.

Mr Foster: We do not see so. This Bill, as I indicated earlier in my remarks, does not create any new rights or responsibilities or any duties. What I would say is that we are not aware of any similar legislation in the South that provides for digital assets to be categorised in this way. However, they have the common law very much moving in that direction by implicitly recognising them as such, and you will probably be aware of the markets in crypto-assets (MiCA) regulation, which stems from EU legislation on crypto-assets. That is more of a regulatory issue, and it is not really on all fours with this Bill. Certainly, England and Wales are looking at broader regulatory and licensing issues around digital assets, but that is way out of scope for this particular piece of legislation and would actually be taken forward by a different Department there.

The Chairperson (Mr O'Toole): Presumably that would be UK-wide, because it would be —.

Mr Foster: It would be financial services.

The Chairperson (Mr O'Toole): I open the meeting to colleagues.

Miss Brogan: Thank you, Michael and Fidelma for attending this afternoon. I want to follow up on some of the questions from the Chair.

Michael, you outlined that there is a slightly different kind of process for this legislation going through Westminster: that the Law Commission drafted it, and it is going through the Lords first and then the Commons.

Do you see any challenges in the way in which it is being progressed and with the fact that it is going through Westminster first — I know that it is a LCM — and not being subjected to the same consultation here as legislation going through the Assembly would receive?

Mr Foster: Not for such a small, simple, technical Bill as this. Without creating a hostage to fortune, we do not necessarily see local stakeholders in this jurisdiction having a particularly keen interest in this. It is the bigger financial organisations, some of which are set up in England and Wales but have a presence here, that might have an interest. They will probably have already been well positioned to respond to these types of issues through the work over in England and Wales. Obviously, if we get a contrary view over the next week or 10 days, from stakeholders whom we have contacted, we can certainly take that on board.

Miss Brogan: That was my next question. The Minister has said that, if she receives any significantly different views on this, she would change her approach. Have you received anything like that? Broadly, what has the response been, so far?

Mr Foster: The simple answer, which might not come as a big surprise to the Committee, is that we have not received one substantive response. This is pretty niche stuff, to be honest. Since it does not create any immediate or new rights or obligations for the people who hold digital assets or the big financial institutions that hold such assets, and the existing rights and obligations are not changing, it is not something that, to date, has captured a significant amount of interest. The analysis and research that was undertaken for the work in England and Wales was a lot more involved, and we could not possibly hope to match that with our limited resource. We are taking advantage of the work that they have done and the evidence that they have received, to date, to inform our thinking.

Miss Brogan: That is helpful. Finally, Michael, will you give me an outline on the timeline for the LCM progressing?

Mr Foster: It is slightly unclear at the moment. Obviously, the Executive meet tomorrow. As I understand it, the paper is on the agenda for that meeting. We hope, without prejudging the Executive's view, obviously, that we will be in a position to bring forward the formal LCM material by the end of this month and after the consultation period is ended. I got a sense from colleagues in England and Wales that, ideally, we would have a legislative consent motion through the Assembly by around the end of January. That is a tight time frame, but, for a Bill as short and, hopefully, straightforward as this, we are hopeful that that will be achievable.

Miss Brogan: So, the end of January is your scope. That is helpful, Michael; thank you.

Mr Carroll: I have three quick questions. Michael, I appreciate that this LCM does not impose any new duties on asset owners. Presumably, therefore, there is no mention, talk or conversation about taxation on the assets.

Mr Foster: That is correct; there is not. It is a simple answer.

Mr Carroll: The Chair mentioned not having the breakdown of the number of people involved in bitcoin and cryptocurrency, which was requested at the previous briefing. You also mentioned something, Chair, on which I would like clarity from yourself or Michael, about London having the highest percentage of people using cryptocurrency, and you said something about the North. Do we have the percentages, rather than an actual number, of people who are using cryptocurrency in this region? What is the data on that?

Mr Foster: I will bring in Fidelma on that point. She had a look at some of the research that was carried out.

Ms Fidelma O'Hagan (Department of Finance): It is very difficult to identify how many people are involved in cryptocurrency, by the very nature of how it is dealt with. We found research that was carried out by the Financial Conduct Authority (FCA) in 2023. It stemmed from an online survey from 2021, so it was already considerably out of date by the time that the research concluded. Around 5,500 to 6,000 people responded online. As the Chair said, when looking at the profile of adults who own cryptocurrencies, it said that ownership is highest here and in London, but it did not go on to say why.

The Chairperson (Mr O'Toole): Do we have the joint-highest ownership of cryptocurrency in the UK along with London?

Ms O'Hagan: Yes. That is what the 2023 research from the FCA identified.

Mr Brett: It is all that crypto that you have, Matthew.

The Chairperson (Mr O'Toole): I wish. [Inaudible.]

That was a joke, for anyone who knows.

OK. That is interesting. I had not completely taken that in, even though it is in my note.

Did you want to ask anything else, Gerry?

Mr Carroll: Go ahead, Fidelma.

Ms O'Hagan: That is as much information as we were able to find. The FCA did not break that down. It was simply a bullet point in its relatively brief 2023 report.

Mr Carroll: OK. Thank you. Then there is no average expected income, is there? Whether a percentage or an amount, there is no figure for what the average cryptocurrency holder has? Is that knowledge available?

Ms O'Hagan: Some information is available about holders of cryptocurrency and crypto-assets. The research found that, across the UK at that time, 39% of those holders held a value of under £100 and that 52% held a value of under £250.

The Chairperson (Mr O'Toole): It is probably the same as with bank accounts, where there is a vast tail. Most bank accounts hold a very small amount of money, but a tiny number of people have vast amounts in the bank, so you would kind of expect that average.

Mr Carroll: This is my final question, which may be for Michael. Is clarity being sought about what type of property this is? Do you expect a raft of legal cases? Why is clarity being sought now?

Mr Foster: It is not necessarily that a raft of legal cases is anticipated. It is more to do with the fact that, to date, the case law has developed in a piecemeal manner. It is seen to be that the Bill brings a bit of clarity to that to allow the courts to develop common law with a degree of certainty and understanding of the parameters for its development. That is exactly what the Bill aims to do.

Mr Carroll: OK. Thank you.

Dr Aiken: You might already have mentioned whether the move for classification purposes has any implications for HMRC. Has there been any consultation with HMRC? Is that part and parcel of why we are doing this?

Mr Foster: I am not aware of whether HMRC specifically was included. Fidelma, do you know?

Ms O'Hagan: As far as I am aware, it was a consultee in the consultation.

Mr Foster: It was one of the consultees in the Law Commission consultation that preceded the introduction of the Bill.

On your broader question, I do not think that there is a specific part of the tax system that categorises digital assets in exactly the same way as the Bill does; that may or may not be subject to change. Bear in mind that that is way outside the remit of the Bill and of this Department.

Dr Aiken: Passing the legislative consent memorandum to allow this measure in Northern Ireland would mean that there would be a distinctive class that covers those areas, so it will be much easier for future taxation or whatever routes are ahead, because they are in a distinctive class that can be looked at.

Mr Foster: We have to be careful about saying that it is a distinctive class. It is a distinctive class only insofar as it allows the courts to develop the common law to take digital assets into account now and in the future. Certain things will not fall into that category, but others will, depending on their characteristics and nature. The courts would arrive at that place, in any case, as we go down the line, but this is seen very much as a way to simplify the process and give legal certainty to investors, businesses and the judiciary, when it comes to determining any particular disputes involving digital assets.

Dr Aiken: Should we expect actions coming through that, which will then come before the courts? Is there an expectation of there being a likelihood of that happening?

Mr Foster: No more so than there already is. The courts still deal with those types of issues in the course of litigation. What they will have, if the Bill is passed, is a degree of certainty about the parameters within which they can operate, and they can develop the common law accordingly to take account of the different types of digital assets, both those that are present at the moment and those that may become present as the law develops in the future.

Dr Aiken: OK. Thanks for your evidence.

Mr Frew: You say that nobody responded to the consultation. How many people did you consult, and what sort of people did you consult?

Mr Foster: We have a list, which, I think, was submitted to the Committee. Given the relatively short space of time, we restricted the consultation to a targeted number of groups. For example: credit unions; the Federation of Small Businesses (FSB); a number of banks in this jurisdiction; the Northern Ireland Chamber of Commerce and Industry; the Law Society; the Law Society Financial Advice; the Bar Council; some of the big accountancy firms; some companies such as Citibank, which are renowned for dealing with those types of issues; CME Group; the Fiscal Council; and academics at both universities here.

Mr Frew: It is a pretty common list of those whom you would consult on all legislation. Again, you would expect some of them, at least, to come back with something.

Mr Foster: There are two sides to it. First, some of those may well have been involved directly or indirectly with the Law Commission work, if they have a presence not only here but in England and Wales. Secondly, the issue is quite niche — I may have created that impression — and because the Bill does not create any immediate rights, obligations or duties, those organisations may well be content for it to proceed as it is.

Mr Frew: I am loath to use the word "enable", but the Bill will basically enable the courts to define what property is.

Mr Foster: That is exactly it. At the moment, the courts have a precedent that dates back to 1885, when, clearly, digital assets were not on the radar. They were not even on the radar in 1985. In 1885, the case of Colonial Bank v Whinney set out that, basically, there are two types of personal property. To date, the courts have had to work within that framework. They have been able to be imaginative in how they deal with digital assets, but the Bill says, "Here they are; develop the common law as you see fit with that distinct third category of personal property in mind".

Mr Frew: Digital currency is one thing, but a digital presence through which someone can make money is another. What I mean is that some people make a lot of money through YouTube channels. Is a YouTube channel on which someone has made a lot of money now going to be defined as property?

Mr Foster: That will be for the courts to determine. At this stage, the answer to that is that there is no exhaustive list of what is and is not property. That is deliberate in order to allow the common law that flexibility to operate as it can to determine whether a or b can be determined as property or c should not. The courts will be able to develop common law based on the parameters that are set by the Bill.

Mr Frew: I take it that most people here who have cryptocurrency use it like shares in the FTSE 100 index or whatever. I take it that shares are property.

Mr Foster: Yes.

Mr Frew: It is about aligning those types of thing. OK. I am content.

The Chairperson (Mr O'Toole): It is a fascinating area, because is an interesting subject of the law. I am not sure where we got this information, and I do not know whether it is in absolute or proportionate terms, but we have the highest level of crypto-holdings in the UK. If that is in absolute terms, it is even more interesting. That would be fascinating because we have a small population. Do we know whether it is proportionate? Is it per head?

Mr Foster: I am not sure. Fidelma can correct me if I am wrong, but our assessment is that it is not necessarily the number of holdings. It is the number of people who dabble in cryptocurrencies, bitcoin or whatever.

The Chairperson (Mr O'Toole): OK, it could be the number of people. Even so, regardless of whether the number is absolute or proportionate, it is interesting. I wonder whether an action for us, as part of our brief look at this, might be to ask the FCA to elaborate a bit on that information so that we can get a fuller picture of it and say that we have done our work.

I was going to suggest an action. It is one for the Department to think about and probably not one for our Committee. It is about reaching out and endeavouring to get information to people. If part of the purpose of the UK legislation is to make it a more attractive place to hold or trade digital assets, is there a worth in communicating that to people?

It sounds as though the people who hold such assets are individuals who, for whatever reason, were told by a financial adviser to stick a couple of hundred quid of their savings into crypto rather than an ISA or whatever it is, or they might be people with a VPN in their garage who have thousands of pounds or tens of thousands of pounds of the stuff. One way of communicating the message could be for the Department to tweet or puts on social media, "Give us your views on this". Perhaps not. That is something to leave with the Committee. It sounds like some of the more traditional stakeholders, such as the banks, the Fiscal Council and the universities, are no more likely than you are to be able to reach those people.

In any case, I do not have any more questions. Unless any other members have a question, we will await confirmation that it has been agreed at the Executive tomorrow, and, ideally, we can write to the FCA to see whether it can provide us with a bit more information on why this interesting situation pertains where we have high levels of crypto assets. We will come back to the issue, because we will have to give our view on the LCM to the rest of the Assembly at some point. We will have further discussion on it.

At this stage, thank you, Fidelma and Michael. As always, we really appreciate your time. I note again, because it is interesting, the amount of work that the small but hard-working civil law reform division does in the Department of Finance and the fact that it was your colleagues in the UK Ministry of Justice who sent you the information. I reiterate that anomaly in the breadth of work that you have to cover. That is a tribute to you. In most other jurisdictions, civil law sits in the Justice Department, where staff are properly resourced to do it, but you guys do a great job with minimal resource. Anyway, thank you very much.

Mr Foster: Thank you.