Crypto assets have come to the forefront of society quickly. In an area where technology has surpassed the law in many jurisdictions, this guide aims to provide a current snapshot of the legal status of crypto assets around the world, current regulations, and forthcoming or proposed legislation.
Special thanks to Martin Sloan (Brodies) as well as the leaders of the TerraLex Technology & Digital Business Industry Sector Team and Finance & Banking Practice Group for developing the questions for this guide.
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The UK Financial Conduct Authority (FCA) defines crypto assets as "cryptographically secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically".
Crypto assets, including cryptocurrencies and non-fungible tokens, are recognised as legal personal property. Cryptocurrencies are not recognised as legal tender.
Crypto assets are not themselves regulated, although stable coins are prohibited. Some aspects of crypto assets are regulated; financial promotion regulations and advertising standards apply to crypto asset promotions, and exchanges and custodian wallet providers must be registered with the FCA and comply with FCA regulations such as anti-money laundering legislation.
Crypto asset advertising and promotion are regulated under the rules applying to financial promotions regulated by the FCA and the general advertising rules under the Advertising Standards Authority. Cryptocurrency exchanges and custodian wallet providers are required to register with the FCA and abide by FCA regulations. As crypto assets are considered to be property, they are also subject to the UK's sanctions regime, regulated by the Office of Financial Sanctions. All FCA regulated firms are required to be mindful of their existing obligations when managing funds containing crypto assets, including having appropriate systems and controls to prevent financial crime, being clear with customers about risks, addressing money laundering and source of wealth risks, and adequately protecting clients' assets that are held or managed by the firm.
In January 2020, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 were amended to require cryptocurrency exchanges and custodian wallet providers to register with the FCA and to comply with the requirements of CDD and transaction monitoring under those provisions.
While crypto businesses which are not operating crypto exchanges or providing custodian wallets are not required to register as a matter of course, crypto businesses which deal in certain types of tokens, such as security tokens, or undertake certain specified activities will have to seek a specific authorisation from the FCA to do business.
It remains a criminal offence, whether or not the individual or entity concerned is required to register with the FCA, to launder the proceeds of crime via cryptocurrency.
The use of blockchain in financial services, or Decentralised Finance (DeFi), is mostly unregulated and is not caught by the existing regulatory frameworks. The Bank of England is conscious of the need for regulatory reform, and the Bank for International Settlements has called for greater regulatory supervision globally.
For individuals, crypto assets are typically held for personal investment, usually for capital appreciation. As such, they will be liable to Capital Gains Tax upon disposal. Individuals are otherwise liable to pay Income Tax and National Insurance contributions on trading activity, including mining crypto assets or on crypto assets which they receive from their employer as a non-cash payment, for example.
Crypto assets will be property for the purposes of Inheritance Tax.
For businesses carrying out activities which involve exchange tokens (for example, bitcoin), there will be a liability to tax. The type of tax will depend on who is involved in the business and what activities are being carried out but are likely to include Corporation Tax, Income Tax / National Insurance Contributions, Stamp Taxes and VAT.
Yes, the English Commercial Court has confirmed the status of cryptocurrencies and other crypto assets such as non-fungible tokens, as property.
The English court takes a pragmatic approach to determining whether to take jurisdiction over a dispute relating to a crypto asset, but there is not currently a settled position on the test to be applied. At the date of writing the English court has reached different conclusions on whether jurisdiction should be determined by the crypto asset owner's place of domicile or physical residence; currently the judgments show that the court's conclusion on this point will be highly dependent on the facts of individual cases. The correct test to be applied on the issue of jurisdiction is likely to be clarified by an appeal court in due course.
The UK Law Commission has confirmed that smart contracts meet the requirements for the formation of a binding, enforceable contract under English law.
Generally, the value of crypto assets is considered to be too volatile to make them a reliable form of security. However, cryptocurrency lending platforms offer cryptocurrency-backed loans that are increasing in popularity. They are currently unregulated by the FCA, although the FCA has called for all cryptocurrency platforms to register with the FCA and comply with anti-money laundering regulations.
Share loss relief applies in circumstances where a deceased's shares are disposed of after Inheritance Tax has been paid, and the value of the shares has fallen. Although untested, the position taken by the UK tax authorities is that such relief is not available in respect of crypto assets which have fallen in value after Inheritance Tax becomes payable because crypto assets cannot be classified as "securities", within the meaning of the legislation.
The UK government has recently announced a range of potential amendments to the regulatory landscape to regulate crypto-related financial services in the same manner as their non-crypto equivalents.
The government also proposed to:
Consult on a “world-leading regime” for regulating trade in non-stablecoin cryptocurrencies
Ask the Law Commission to consider the legal status of decentralized autonomous organizations
Examine the tax treatment of DeFi loans and staking, which is currently inconsistent and unclear and explore other ways of enhancing the competitiveness of the UK's tax system to encourage development of the market.
Establish a Cryptoasset Engagement Group that will be chaired by ministers and host members from UK regulators and crypto businesses to work more closely with the industry. Explore the application of blockchain technology in issuing sovereign debt instruments.
Introduce a ‘financial market infrastructure sandbox’ to enable firms to experiment and innovate in particular by enabling Distributed Ledger Technology to be tested
Work with the Royal Mint on a Non-Fungible Token (NFT) this summer as an emblem of the forward-looking approach the UK is determined to take
The UK government have proposed a number of initiatives, as noted above, which are also intended to help set harmonised standards internationally. The Bank of International Settlements Innovation Hub is also headquartered in London and intends to work closely with the Bank of England on central bank digital currencies and new market infrastructures.
The English court is a particularly favourable forum for obtaining tracing and freezing relief over crypto assets that can help claimants recover stolen property, even where the perpetrators' identities are unknown. The English court has granted a number of disclosure orders and other injunctive relief against exchanges and persons unknown, including a worldwide freezing order against persons unknown.
Disclaimer: This guide contains summaries of general principles of law. It is not a substitute for specific legal advice and should not be relied upon in relation to the application of the law or subject matter covered.
