Apr 2024

United Kingdom

Law Over Borders Comparative Guide:

Cryptoassets

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1 . Are cryptoassets (including, for example, cryptocurrencies, stablecoins and non-fungible tokens) defined and, if so, what are the major elements?

In the UK there is no universally accepted definition of “cryptoassets”. The UK’s Financial Services and Markets Act 2023 introduced a definition of cryptoassets into the Financial Services and Markets Act 2000 (FSMA) in the context of financial services regulations as “any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)”.

However, HM Treasury’s response on the “Future Financial Services Regulatory Regime for Cryptoassets” of 30 October 2023 (the “Cryptoassets Regulation Response”) suggested that the FSMA definition was too broad for the purposes of a regulatory regime for cryptoassets and indicated a narrower definition would be used in forthcoming legislation expected in 2024.

In November 2019, the UK Jurisdiction Taskforce (a body established by the UK Government, the Judiciary and the Law Society) (UKJT) published a Legal Statement on Cryptoassets and Smart Contracts (the “Legal Statement”) describing the novel features of cryptoassets, which include:

  • intangibility;
  • cryptographic authentication;
  • use of a distributed transaction ledger;
  • decentralisation; and
  • rule by consensus.

The Financial Stability Board Stablecoin Report distinguishes a stablecoin as “a cryptoasset that aims to maintain a stable value relative to a specified asset, or a pool or basket of assets”. The HM Treasury Update on Plans for Regulation of Fiat-Backed Stablecoins published on 30 October 2023 (the “Stablecoins Update”) indicated that it would expect to define fiat-backed stablecoins as “a cryptoasset that seeks or purports to maintain a stable value by reference to a fiat currency and by holding fiat currency, in whole or in part, as backing.” The definition will not be limited to particular currencies or even single currency stablecoins, however it does not include algorithmic or crypto-backed stablecoins.

There is no universal definition of a non-fungible token (NFT), however the Law Society of England & Wales explains a NFT as “a unique, non-divisible token, often linked to an object (e.g. a collectable, digital art or in-game asset) which uses blockchain technology to record ownership and validate authenticity. Currently used predominantly for digital collectables, digital art and, more recently, interactive entertainment”.

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2 . What are the major laws/regulations specifically related to cryptoassets?

On 30 October 2023, the UK Government published a series of reports outlining its responses to earlier consultations on the regulation of cryptoassets including the Cryptoassets Regulation Response and the Stablecoins Update. The UK Government confirmed its intention to regulate fiat-backed stablecoins and certain cryptoasset activities including issuance; exchange activities; investment and risk management; lending, borrowing and leverage; and safeguarding, administration and custody activities. Those undertaking such activities by way of business where services are being provided in or to the UK will need to be authorised by the Financial Conduct Authority (FCA) under FSMA. Legislation to address a financial services regulatory regime for cryptoassets and for fiat-backed stablecoins is expected to be put forward to Parliament in the course of 2024. 

Shortly after the UK Government’s publications, the FCA published a discussion paper (DP 23/4) on regulating stablecoins in which it proposed that existing FCA rules around areas such as governance and financial crime will apply to stablecoin issuers and custodians. 

A separate paper from the Bank of England (BoE) on the regulation of systemic payment systems using stablecoins suggested a “same risk, same regulatory outcome” approach: to the extent that systemic payment systems using stablecoins pose similar risks as other systemic payment systems, they should be subject to equivalent regulatory standards. In its paper, the BoE set out its proposals on the choice and management of backing assets, capital requirements, and UK presence requirements.

Under the current regulatory framework, certain cryptoassets and firms (including cryptoasset exchange providers, custodian wallet providers, and those marketing cryptoassets to UK consumers) may be subject to certain regulation including:

  • Anti-Money laundering regulations (under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017) (MLR). 
  • Financial promotions regime (under FSMA (Financial Promotion) (Amendment) Order 2023).
  • Firms carrying out regulated activities in the UK under FSMA (e.g. managing investments, issuing electronic money and arranging deals in investments relating to cryptoassets) need to be authorised under FSMA with the relevant regulatory permissions.

The UK Government also introduced the first financial market infrastructure sandbox through The Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023. The Digital Securities Sandbox will facilitate the use of digital assets in financial markets. UK established entities will be able to undertake in-scope activities (which include functions currently performed by central securities depositories, and the operation of MTFs or other specified trading venues) which must involve developing technology. Participants will be subject to limits and supervision set by the FCA and the BoE.

However, English law does not necessarily need statutory intervention to deal with cryptoassets. The courts of England & Wales have been agile in their response to multiple cases involving cryptoassets, accommodating them within the existing English legal framework and applying existing principles to cryptoasset disputes (see Question 11, below). 

The Law Commission (a statutory independent body which recommends law reform where it is needed) published its Digital Assets Final Report in June 2023 (“the Commission Report”) which supported a tripartite approach to digital assets including:

  • targeted legislative reform; 
  • continued development of common law through the courts; and 
  • guidance from a panel of industry specific technical experts. 

The Commission Report supported the common law as the “primary means by which crypto claims should be resolved” given the speed of change. 

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3 . How are different types of cryptoassets regulated?

Under the current regulatory framework, certain cryptoassets and firms (including cryptoasset exchange providers, custodian wallet providers, and those marketing cryptoassets to UK consumers) may be subject to certain regulation including:

  • Anti-Money laundering regulations (under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017) (MLR). 
  • Financial promotions regime (under FSMA (Financial Promotion) (Amendment) Order 2023).
  • Firms carrying out regulated activities in the UK under FSMA (e.g. managing investments, issuing electronic money and arranging deals in investments relating to cryptoassets) need to be authorised under FSMA with the relevant regulatory permissions.

See above, Question 2, and below, Questions 4 and 5 for further detail.

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4 . Is there an authorisation/licensing regime applicable to cryptoasset issuers/providers/exchanges and, if so, what are the requirements?

From 10 January 2020, cryptoasset exchange providers and custodian wallet providers offering services in the UK are required to register with the FCA under the MLR. Registration requires the submission of detailed information about the firm. The FCA will register a firm only if it is satisfied that the firm, its beneficial owners, officers, and managers are “fit and proper”. In order to achieve registration, and ensure ongoing compliance, registrants are required to implement various measures including:

  • Identifying money laundering and terrorist financing risks applicable to the business (“the Risks”).
  • Implementing appropriate policies, systems and controls to mitigate the Risks.
  • Depending on the size of the firm and nature of the business, appoint an appropriate Money Laundering Reporting Officer responsible for overseeing compliance and establish an internal audit function.
  • Conducting customer due diligence when entering into a business relationship or transaction including verifying a customer’s identity, any beneficial owners and the intended use of the account.
  • Apply enhanced due diligence measures where a customer presents as higher risk (e.g. in relation to politically exposed persons).
  • Conducting ongoing monitoring of customers and transactions, including sanctions screening.
  • Undertake screening of employees.
  • Keeping adequate records including Know Your Customer information, public keys of relevant parties, details of the nature, date and amount of transactions.
  • Reporting any suspicious activity to the National Crime Agency and implementing measures to manage suspicious activities, such as freezing or holding funds.

As explained above, the UK Government is expected to propose further legislation in 2024 to regulate a broader range of cryptoasset activities which will require a Part 4A authorisation under the FSMA. Those with existing MLR registration are expected to be able to apply for a Variation of Permission to extend their authorisation under the future regime, however this will require assessment of aspects of regulatory compliance not previously assessed under the MLR registration process, with further detail to be provided by the FCA in due course.

On 11 March 2024, the UK Government published a consultation on improving the effectiveness of the MLRs. The consultation, which closes on 9 June 2024, seeks views on aligning the MLRs registration and FSMA authorisation process, including the concepts of control and controllers, for cryptoassets and associated services that are covered by both the MLRs and FSMA regimes. See https://assets.publishing.service.gov.uk/media/65e9e1813649a2001aed6492/HM_Treasury_Consultation_on_Improving_the_Effectiveness_of_the_Money_Laundering_Regulations.pdf

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5 . Is the promotion of cryptoassets to consumers or investors regulated and, if so, how?

From 8 October 2023 all firms marketing cryptoassets to UK consumers, including firms based overseas, must comply with the financial promotion regime under section 21 of FSMA. Section 21 prohibits a person in the course of business from communicating “an invitation or inducement to engagement in investment activity”, which now includes qualifying cryptoassets.

“Qualifying cryptoassets” are defined as “any cryptographically secured digital representation of value or contractual rights that is transferable and fungible” and therefore includes most cryptocurrencies, including Bitcoin and Ethereum, but will not include NFTs.

The financial promotion regime is likely to apply to a broad range of marketing typically carried out in the crypto industry, including Initial Coin Offering white papers, tube and radio advertisements, websites, mobile applications and social media. The FCA have said that they “expect that most, if not all, cryptoasset firms with UK retail customers will be within scope of the regime”. 

There are currently four routes to legally promote qualifying cryptoassets:

  • The communication is made by a FCA authorised firm.
  • The communication is approved by a FCA authorised firm. At the time of writing, there are only three firms authorised to approve communications under route.
  • The promotion is made by a cryptoasset business registered with the FCA for the purpose of the MLRs.
  • The promotion otherwise complies with the conditions of an exemption in The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. However, the exemptions applicable to cryptoasset promotions are narrower than other asset classes. For example, there is no self-certified sophisticated investor exemption for cryptoasset promotions.

Other restrictions include the need to include fair and clear risk warnings; allowing a minimum 24-hour cooling off period for first-time investors; and a prohibition on incentives such as “refer a friend” or new customer bonuses. The FCA rules for cryptoasset financial promotions are set out in its Policy Statement (PS23/6) and it has since published further guidance (FG23/3) setting out its expectations of the communication and approval of such financial promotions.

Breach of section 21 of FSMA amounts to a criminal offence punishable by an unlimited fine and/or up to two years' imprisonment. The FCA have said that they “will take robust action against persons illegally promoting to UK consumers. This may include, but it is not limited to, placing firms on our warning list, taking steps to remove or block any illegal financial promotions such as websites, social media accounts and apps, and enforcement action.”

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6 . What anti-money laundering requirements apply to cryptoassets?

As outlined in the responses to Questions 2 and 4 above, cryptoasset exchange providers and custodian wallet providers offering services in the UK are required to register with the FCA under the MLRs and have various ongoing requirements under the regime, including undertaking Know Your Customer checks and ongoing monitoring of all customers.

From 1 September 2023, cryptoasset exchange providers or custodian wallet providers in the UK are subject to the “Travel Rule”. This requires crypto businesses to collect, verify and share information and account details of the parties to cryptoasset transfers with the counterparty. Sanctions screening must also be undertaken.

The Economic Crime and Corporate Transparency Act 2023 introduced amendments which adapted existing confiscation powers to enable law enforcement to seize, freeze, and recover cryptoassets more easily. The new options include a crypto wallet freezing order available in respect of UK-connected cryptoasset service providers.

Since 30 August 2022, cryptoasset exchange providers and custodian wallet providers are required to comply with the Office of Financial Sanctions Implementation’s reporting obligations. This means that they have an obligation to inform Treasury as soon as practicable if they know, or have reasonable cause to suspect, that a person is a sanctioned person or has committed an offence in connection with financial sanctions.

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7 . How is the ownership of cryptoassets defined or regulated?

English law traditionally categorises property as either a chose in possession or a chose in action. The difficulty with cryptocurrencies is that they do not fit squarely in either category since they are virtual, not tangible and therefore not capable of possession, nor do they embody any right capable of being enforced by action. 

However, the Legal Statement, which confirmed that cryptocurrencies can be treated as property under English law, has been subsequently endorsed by the English High Court in the case of AA v. Persons Unknown [2019] EWHC 3556 as representing an accurate statement as to the position under English law and has been cited in a number of subsequent cases. 

The Commission Report has also recommended legislation to confirm a third category of “thing” to which property rights can relate and which would encompass digital objects including cryptoassets. The Commission Report suggested that legislation would confirm the common law position but without defining hard boundaries of the third category of “things”. The Law Commission has now introduced a short draft bill to establish the third category of property which would encompass cryptoassets.

The Commission Report also considered the concept of control over cryptoassets and recommended that the definition of ownership and control be given flexibility and developed in English common law and through the creation of a panel of industry-specific technical experts, legal practitioners and judges to provide non-binding guidance on the factual and legal issues relating to control over cryptoassets.

Cryptoassets are also capable of being held on trust under English law, including where the underlying entitlements are (1) held on a consolidated unallocated basis for the benefit of multiple users, and (2) potentially even commingled with unallocated entitlements held for the benefit of the holding intermediary itself. 

The UKJT has also published a further legal statement on digital securities which concluded that cryptoassets can, in principle, be securitised and digital securities (whether debt, proprietary or equity securities) can be issued and transferred using blockchain or other DLT under English law. A Digital Securities Sandbox has since been introduced and is described above in Question 2.

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8 . How are Decentralised Autonomous Organisations (DAOs) treated?

There is no specific registration regime for DAOs in the UK. In November 2022, the Commission published a call for evidence for an upcoming consultation on the treatment of DAOs under English law. The Commission suggested that DAOs operating in the market exist on a wide spectrum (for example, the governance of a DAO may be determined by smart contracts or computer programs, or governance could be controlled by a limited class of token holders) and use a variety of different tools and organisational structures to mitigate risks.

DAOs without any formal centralised structure or registration are likely to be considered either an unincorporated association or general partnership under English law. Unincorporated associations and general partnerships do not have separate legal personality from their participants as a matter of English law and therefore members may be jointly and severally liable and generally will be unable to limit liability. 

In summary, an unincorporated association must:

  • consist of two or more persons with a common purpose other than making a profit;
  • have contractual relations between those persons (which may be express or implicit based on a clear understanding);
  • be governed by rules;
  • be non-temporary; and
  • not have a distinct legal personality.

General partnerships are governed by the Partnership Act 1890 and to exist must be:

  • a business;
  • carried on by persons acting in common; and
  • operating with a view to profit (even if profit is not actually realised).

A partnership may be express or be inferred from the parties’ conduct.

It is possible to structure DAOs in England using a range of different corporate structures to limit liability, e.g. by utilising limited liability partnership or company structures. Depending on the structure used, there will be varying incorporation requirements (such as registration with Companies House and regular filing requirements such as accounts) but such structures will generally have separate legal personality and may limit the liability of members.

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9 . Are there any particular laws or rules which apply in the event of the crypto bankruptcy or insolvency?

There is no particular regime governing crypto insolvency in the UK to date. The Commission Report considered that the allocation of losses in an insolvency will depend on the legal nature of the intermediated holding arrangement and the rights granted to users under it but favoured a broadly applicable pro rata approach to shortfall allocation in general terms. The UKJT recently launched a consultation on a legal statement to provide clarity to the market about how English insolvency law applies to digital assets and the legal statement is expected to be published shortly.

The Cryptoassets Regulation Response noted that, in the context of stablecoins, the UK Government intends to apply the insolvency provisions in Part 24 FSMA as these provisions provide the FCA with the same rights to protect consumers of crypto firms, and itself participate, in standard insolvency procedures (e.g. administration and liquidation) as it has for FSMA authorised firms and payment/e-money firms. For systemic payment systems, and service providers of systemic importance to those systems, which use digital settlement assets, the UK Government intends for the Financial Market Infrastructure Special Administration Regime to apply and relevant firms will be brought under the remit of the BoE and the Payment Systems Regulator.

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10 . Is a smart contract enforceable as a legal contract?

On 25 November 2021, the Law Commission published its advice to Government on smart legal contracts, concluding that the current English legal framework is clearly able to facilitate and support the use of smart legal contracts without the need for statutory law reform. That said, smart contracts should be distinguished from smart legal contracts. A smart contract is a computer program deployed on the blockchain to effect an outcome upon the occurrence of a triggering event (i.e. if X happens, do Y) and typically does not satisfy the formalities required to create a legally binding contract in English law. Smart legal contracts are legally binding agreements where some or all of the obligations are defined and/or enforced automatically by a computer program. In order for a smart legal contract to be legally binding, certain formalities must be met including:

  • an agreement (i.e. an offer and acceptance);
  • consideration;
  • intention to create legal relations; and
  • certainty of terms

The use of computer code in smart legal contracts can give rise to issues regarding whether these formalities are met. For example, where a transaction is effected by self-executing code, query whether this is reflective of agreement and/or an intention to create legal relations, or merely a consequence of two sets of code which are programmed to automatically interact as a result of an attempt to automate a process.

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11 . What recourse does a victim of crypto fraud have?

In order to ensure victims of crypto fraud are not left without remedy the English courts have been willing to accept jurisdiction and, apply English law and remedies to crypto fraud cases where:

  • damage was suffered in England;
  • England is the place where the cryptoasset owner is domiciled; and/or 
  • England is the place where control could be exercised over the cryptoassets.

The remedies available from the English courts include:

  • Freezing and proprietary injunctions. Such injunctions have been granted over cryptocurrencies including Bitcoin and NFTs. However, a note of caution: in the recent case of Piroozzadeh v. Persons Unknown and Others [2023] EWHC 1024 (Ch), the English court discharged an interim proprietary injunction obtained by a claimant against crypto exchange, Binance, given the availability to Binance of the bona fide purchaser for value defence. Binance explained that when a cryptoasset is deposited with it, it is “swept” into unsegregated wallet addresses where it is pooled together with the deposits of other users. The depositing user is therefore credited with the equivalent amount of the deposited cryptoasset as opposed to retaining its deposited cryptoasset and as such, any cryptoasset deposited with Binance is essentially purchased in exchange for an equivalent account credit. As a result of this sweeping and pooling mechanism, Binance argued that as a bona fide purchaser without notice of any fraud, any proprietary rights held by the claimant would be extinguished.
  • Third party disclosure orders. In October 2022, a new procedural gateway (paragraph 3.1(25) of Practice Direction 6B) was introduced to enable third party disclosure applications to be served out of the jurisdiction allowing a victim of a cryptoasset fraud to obtain information to identify a potential defendant and what has become of their property from crypto exchange even where the exchange is based overseas.
  • Alternative service. The English court has permitted alternative service of injunctive orders and claims in several crypto fraud cases by email and by airdropping a NFT into a known crypto wallet address. 
  • Third party debt order. The English court has also granted a third party debt order against a crypto exchange which held the misappropriated assets of the judgment debtor.
  • Delivery up order. In Jones v. Persons Unknown [2022] EWHC 2543 (Comm), summary judgment was obtained following the theft of bitcoin and the relevant exchange was held to hold the stolen assets as a constructive trustee. Delivery up of the bitcoin by the crypto exchange was ordered.

Claimants may also turn to other remedies including interim delivery up orders and search orders which could be a useful tool when seeking to ensure that property (e.g. crypto held in cold wallet storage or private keys/seed phrases granting access to a crypto wallet) is preserved pending trial. 

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12 . Are there any other ongoing legal or regulatory consultations or other legal frameworks in the pipeline relating to cryptoassets?

See Question 2 — further legislation dealing with a financial services regulatory regime for cryptoassets and fiat-backed stablecoins is expected during the course of 2024.

We are awaiting the consultation report from the Law Commission on DAOs following its November 2022 call for evidence. On 22 February 2024, the Law Commission issued a Call for Evidence to examine the question of “in which country’s courts should the parties litigate their dispute, and which country’s law should be applied to resolve it” when dealing with international digital assets disputes. Following the Commission Report, the Law Commission also issued proposed draft legislation wording to confirm the existence of a “third” category of personal property that will encompass crypto-tokens and other assets.

The UKJT is also expected to publish in 2024 a further legal statement addressing certain issues in the context of cryptoasset exchange and platform insolvencies. 

EXPERT ANALYSIS

Chapters

Australia

Emily Shen
Peter Reeves
Robert O'Grady

Bermuda

Andrew Chissick
Daniel Hayward-Hughes
Natalie Neto
Rachel Nightingale
Sara Hall
Steven White

British Virgin Islands

Andrew Chissick
Daniel Hayward-Hughes
Iain Tucker
Iona Wright
Jan Golaszewski
Sara Hall

Canada

Ana Badour
Barry Sookman
Heather Meredith
Hugo Babos-Marchand
Lori Stein
Shane D'Souza

Cayman Islands

Daniel Hayward-Hughes
Ian Mason
Jan Golaszewski
Jennifer Maughan
Sara Hall
Lucy Frew

Cyprus

Christopher Lytras
Leonidas Grivas

Czechia

Filip Murár
Luděk Chvosta

France

Hubert de Vauplane

India

Rohan Bagai
Shagun Badhwar

Italy

Alessandro M. Lerro

Portugal

Ashick Remetula
Carolina Nagy Correia
David Silva Ramalho
Luís Possolo
Márcia Tomás Pires
Nicole Fortunato
Vera Esteves Cardoso
Nuno Gundar da Cruz

Singapore

Stanley Tan
Yam Wern-Jhien

Taiwan

Eddie Hsiung

United Arab Emirates

Alishia K. Sullivan
Andrea Dougall
Katherine Seager

United States

Clara Krivoy
Sharix Alicea
Stephen Palley

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