Crypto Collateralising: The Property (Digital Assets etc) Bill and implications of counting digital assets as ‘personal property’ in loan transactions

Introduction:

FCA research published in 2024 has found that 12% of all UK adults now own digital assets (including cryptocurrencies, non-fungible tokens, carbon credits and other tokenised assets traded via blockchain networks). Interestingly, their findings have also recorded that ownership in NI is the highest in the UK, tied with London.

In a move that may appear overdue, the Property (Digital Assets etc) Bill (“Digital Assets Bill”) was introduced into Parliament in 2024 seeking to provide certainty that cryptoassets are to be treated, for all legal intents and purposes, as ‘personal property’. This has now been given the green light by the House of Lords, and had a first reading in the House of Commons on 12 May 2025, so may well be on the cusp of passage. Whilst this update would only apply in England & Wales if enacted, it would be precedent-setting for the proposal of equivalent legislation in NI in line the increasing prevalence of digital asset ownership.

In this article, we explore how digital assets may be incorporated into loan security packages and some of the potential implications to be considered within borrowing transactions.

‘Digital Assets’ as Personal Property?: Current vs Proposed Legal Position

Traditionally, the law has recognised that something can only be classified as ‘personal property’ if it is one of two things:-

1. A “thing in possession” (i.e. tangible belongings with an attributable monetary value); or
2. A “thing in action” (i.e. intangible rights which are claimed/enforced through legal action, e.g. a right to sue for debts or civil wrongs, or the assertion of property rights).

Digital assets exhibit elements of each category, but do not neatly fit into either of these boxes. The Digital Assets Bill seeks to address this by introducing a third category of asset to sweep them up as follows:-

"A thing (including something digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither - (a) a thing in possession nor (b) a thing in action."

This would provide certainty that digital assets are capable of attracting the legal status and protections of other more traditional and tangible forms of asset classes, including within a transactional context.

Considerations for Lenders and Borrowers:

With the prospect of greater credence being afforded to the proprietary character of digital assets following the Digital Assets Bill, borrowers and lenders should consider the following implications:

• Digital assets as collateral for loans: The recognition of digital assets as ‘personal property’ could lead to requests to incorporate them into security packages (similarly to typical assets such as real estate, shares and IP assets). Lenders who are prepared to offer loans against digital assets may be able to attract customers who have built up their wealth digitally, likewise benefitting such borrowers with greater access to funding. Whilst the inclusion of high value digital assets within personal wealth calculations may bolster borrowers’ creditworthiness, they should be mindful of the higher risk profile they would attract for the reasons discussed below.
• Difficulty in quantifying value of digital assets: The inherent volatility of digital assets (being notorious for sometimes rapid price fluctuations and crashes in value) will require lenders to invest in appropriate risk management strategies. Closer monitoring of value/market trends over the life cycle of the loan in relation to agreed loan-to-value ratios, as compared with the traditional asset classes with oftentimes more stable and predictable value trends, would need to be factored in. Borrowers should be mindful that lenders would likely offset such valuation volatility by applying more expensive interest rates and perhaps offering only shorter-term associated loan agreements which may be prohibitive for them.
• Review of internal risk management procedures and strategies: Outside of fluctuating value risks, relying on digital assets as security would require thorough risk management processes in relation to cybersecurity vulnerability, susceptibility to fraud and ongoing regulatory uncertainty in the sector. Borrowers should be mindful that they would be subject to enhanced due diligence, credit checks and AML/KYC procedures prior to loan approval if using digital assets as collateral, and this may have an impact on timing and costs. Lenders may need to invest in considerably more sophisticated AI analysis software and staff (whether outsourced or ‘in-house’) with specific expertise in blockchain systems and markets to interpret data and risk-assess ongoing trends.
• Development of suitable precedent documentation: At the contractual stages, lenders would of course need to ensure finance documentation is fit for purpose for digital assets to be taken as collateral. Specific documentation precedents (such as loan agreements, security documentation and terms & conditions) would need to be developed incorporating relevant contractual terms, conditions, representations and warranties and anticipating an agreed approach for ‘event of default’ scenarios. Such drafting of and updates to precedent documents together with transaction-specific tailoring (accounting for the type of digital asset involved, as well as regulatory developments and developing market knowledge) would likely require ongoing specialist legal, financial and regulatory advice and input, potentially upping costs further.
• Perfection of security over and storage of digital assets: Capability of isolation, protection and storage of the assets will be a key consideration within the lender’s approval process prior to agreeing to take digital asset security. Whilst there are existing digital asset custodians already at market, with whom lenders could explore strategic alliances, an opportunity for larger lenders willing to invest in the costly technological infrastructure required may arise in launching ‘in house’ digital asset storage systems, enabling them to generate a new income source through custodial and service fees. This would likely, however, greatly increase lenders’ compliance workload, require close collaboration with regulatory bodies and have professional indemnity cover implications. Attention should also be given to any notification, consent and/or proprietary requirements to be fulfilled to perfect security (as well as before or in the event of enforcement); for example where the asset in question is a ‘token’ for a real asset like shares or real estate.
• Enforcement of security held over digital assets: Lenders will need to familiarise themselves with what needs to happen practically in order to realise security over specific forms of digital assets if an event of default occurs. Whilst traditional security assets such as property, shares and chattels can be repossessed and sold on in a more straightforward manner to recover outstanding liabilities, more technical authorisations and regulatory hurdles may apply prior to realising digital asset collateral. In some cases, digital assets may be stored in online wallets and on enforcement the lender is likely to need to take control over any such wallet. As such, future-proofing arrangements would need to be discussed, clarified and integrated into documentation prior to advancing any loan.
• Low potential lender uptake of digital asset-backed funding and interaction with existing loans/security: Borrowers should note that due to the factors already discussed it is likely that many lenders may be hesitant and/or lacking in the technological infrastructure to be able to advance digital asset-backed lending. If borrowers sought such a loan product with a new lender that their current one is unable to offer, they would need to consult with both the previous and new proposed lenders and their respective lawyers on the implications on any existing loans/security packages held with the original funder. Inter-lender priority arrangements and/or releases and refinancing of existing loans and security may be required, which would need to be clarified as soon as possible as delay may impact on timings for drawing down any new loan.

Final thoughts:

The potential enactment of the Digital Assets Bill represents a positive ‘move with the times’ towards the legal recognition of digital assets as personal property. Owners and service providers alike will likely welcome the update, with such recognition not only enhancing market confidence in the legitimacy of such assets, but also potentially catalysing further regulatory clarifications and the development of clearer guidelines for transacting such assets generally as well as in the realm of associated litigation.

It may be a while before we see crypto-backed lending take the market by storm, but there is certainly food for thought for lenders and cryptoasset owners to consider in the meantime.

If you would like any further information or advice, please contact Katherine Grant from our Banking & Finance team.

*This information is for guidance purposes only and does not constitute, nor should it be regarded as, a substitute for taking legal advice that is tailored to your circumstances.