What they are, how they are used and the law’s response are outlined by Syed Rahman and Faye Summers.

There is little doubt that the world of crypto tokens and smart contracts has been one of the big technical, financial and legal developments of recent years. There is, therefore, a need for many in law and finance to be taking a closer look in order to understand what these are and their possible effects. 

A crypto token is a representation of an asset or interest that has been tokenised on an existing cryptocurrency's blockchain. Crypto tokens and cryptocurrencies share many similarities, but cryptocurrencies are the native asset of a blockchain. Crypto tokens are often used to raise funds for projects and are usually created, distributed, sold and circulated through an initial coin offering (ICO) process, which involves a crowdfunding round.

Between 2012 and 2016, crypto token creation and ICOs increased. But around 2017, the number of token offerings skyrocketed as investors seemed to become aware of them and the possible increase in value that they promised. Developers, businesses and, unfortunately, scammers began creating tokens rapidly in attempts to take advantage of the fund-raising boom. This prompted regulatory agencies to begin issuing alerts to investors, warning them about the risks of ICOs. 

A smart contract is a self-executing contract with the terms of the agreement directly written into code. These contracts run on blockchain platforms (like Ethereum) and automatically enforce and execute the terms of an agreement when certain predefined conditions are met. With a smart contract, there is no need for intermediaries such as lawyers, notaries or other third parties who may otherwise be involved in the drafting and signing of a contract.

The link between smart contracts and crypto tokens

Smart contracts and crypto tokens are deeply interconnected. One of the most common uses of smart contracts is to create and manage crypto tokens. When a new crypto token is created, a smart contract is programmed with specific rules, such as how many tokens exist, who can transfer them, and what actions can trigger specific behaviours, such as minting or burning tokens.

Crypto tokens rely on smart contracts to handle transactions. When tokens are sent from one address to another, a smart contract is invoked to execute the transaction, ensuring that both parties' balances are updated correctly. This happens in a decentralised manner on the blockchain. The smart contract ensures that the sender has enough tokens to perform the transaction and that the tokens are successfully transferred to the recipient. None of this requires a central authority or intermediary.

Smart contracts are also important for governing token behaviour. They can define the rules relating to how tokens can be used. For example, they may include rules for who can mint, burn or stake tokens. These rules are written directly into the smart contract and are enforced automatically when the specified conditions are met. Smart contracts can also include additional logic that governs how tokens behave in different situations. For example, tokens might be locked into a contract until certain conditions are met (as with a vesting schedule for an employee’s tokens) or they may be tied to specific decentralised applications.

Smart contracts and tokens in use

The way that smart contracts are inter-related means that they are frequently seen together in a wide range of crypto scenarios.

Some of the most notable of these are:

• Ethereum and ERC-20 tokens: Ethereum is a popular platform for creating crypto tokens. It uses smart contracts to make and manage these tokens. These smart contracts follow a set of rules called ERC-20, which makes it easy to create and use such tokens. As a result, it is possible to create, send and manage tokens without needing any outside help – a situation that enhances both security and transparency.
• Non-Fungible Token (NFT) are like unique digital certificates that prove ownership of things such as digital art or collectibles. The unique features of such items are written into the computer programme that is the smart contract. It is the smart contract that ensures that each NFT is one-of-a-kind and cannot be easily copied; unlike regular cryptocurrencies. NFTs are also created and traded using smart contracts. This process enables artists to sell their work and buyers to feel secure that they own a genuinely unique digital item.
• DeFi (decentralised finance): DeFi allows people to lend, borrow and trade money without needing banks. This is all made possible by smart contracts, with special programmes allowing DeFi platforms like Aave and Uniswap to handle such matters, with transactions being transparent and secure because everything is done automatically and openly.

The law

The new, rapidly-evolving nature of smart contracts and tokenisation has led to the courts having to interpret the law in relation to concepts that did not exist when the vast majority of law was drafted.

This has led to a number of notable cases. These include:

• D’Aloia v Persons Unknown and Others [2024] EWHC 2342 (Ch). This case is significant as it is one of the first fully heard cases involving cryptoassets. It goes beyond earlier cases that primarily addressed interim remedies and demonstrates the common law’s ability to use innovative methods to address the challenges posed by the anonymous and decentralised nature of blockchain technology. The case involved the court allowing an order to be served on a defendant via an NFT. For businesses, it underscores the importance of prompt legal action and the potential for recovery of misappropriated assets. 
• Tulip Trading Ltd v Bitcoin Association for BSV & Others [2023] EWCA Civ 83. This case is being closely watched as its outcome could significantly affect the responsibilities of blockchain developers. A ruling that developers owe fiduciary duties could alter the dynamics of blockchain governance and impose new obligations on those who maintain and update blockchain protocols. Such an outcome would likely push developers even further towards keeping their identities secret, which will raise practical difficulties for any claimant. Businesses should monitor this case, as it may affect the legal recourse available in cases of lost or inaccessible cryptoassets.
• Piroozzadeh v Persons Unknown and Others [2023] EWHC 1024 (Ch). This is the first reported decision in which freezing injunctions relating to misappropriation of cryptoassets initially granted on a without-notice basis have been discharged by the High Court on their return date. It highlights the jurisdictional hurdles in cryptoasset recovery, particularly when dealing with entities operating outside the UK; which is significant as many developers and exchanges are notionally based offshore. It also emphasises the need to understand the legal jurisdictions involved in cryptocurrency transactions and the importance of considering such factors when engaging with foreign exchanges. It is also a salutary lesson in not parting with valuable cryptoassets without doing your due diligence on the recipient.

As the cases mentioned above indicate, smart contracts and tokenisation have presented a new challenge to the law. But this is being met in ways that go beyond addressing issues on a case-by-case basis.

One notable example is the Law Commission's "Digital Assets: Consultation Paper" (2022), which proposes reforms to accommodate the unique characteristics of cryptoassets while also aiming to ensure that English law remains relevant and effective in the digital age.

The Commission’s recommendations have resulted in the introduction of the Property (Digital Assets etc.) Bill, which originated in the House of Lords. The Bill provides that “A thing (including a thing that is 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).’’ As of April 2025, the Bill had passed its second reading in the House of Lords and was working its way through further parliamentary stages in order to become law.

Dealing with crypto tokens and smart contracts

As the world of tokenisation and smart contracts is unlikely to stop progressing – or at least changing – it would be foolish to dispense advice that may become out of date in the very near future.

There are, however, some principles that those who are involved – or are thinking of being involved – in this fast-developing sector should always bear in mind.

These are:

• Jurisdiction: A crypto token will need to be registered unless it meets certain criteria (which could be another article in itself) in order to qualify for an exemption. If a token is not registered on a regulated exchange, there is a higher than average risk that it could be a scam.
• KYC (know your client): The crypto world is no different from any other aspect of the financial world – you need to be making checks on what you are being offered and who is offering it. Look behind the team who have made the token and determine whether they are a legitimate business.
• Location: Be aware that tokens or smart contracts outside of the US or UK may be difficult to research. This should be a factor when considering the risks that may be associated with any potential opportunity.

While this is a sector that is new and exciting, some good, old-fashioned caution is certainly necessary.