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UK Law and Legislation Surrounding Cryptocurrency

Governmental stance concerning the prominence of alternative currencies in circulation

by Fatima Freifer

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The term ‘cryptoasset’ is defined in the United Kingdom as “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology (DLT) and can be transferred, stored or traded electronically.” Similarly, other UK regulatory rules and guidance generally use the term cryptoasset (rather than virtual currency), so when referring to virtual currencies it includes all types of cryptoassets (as well as e-money tokens).[1]

UK cryptocurrency regulations allow users to buy and sell cryptocurrencies, but trading of cryptocurrency derivatives is prohibited due to recent regulatory moves by the UK’s financial regulatory authority, the FCA.

The UK is at the forefront of a global effort to understand, regulate and legislate around one of the most innovative sectors in finance that has emerged in recent years: virtual currencies.

What is cryptocurency?

Cryptocurrency is a type of virtual currency that is stored on a digital ledger.To function, cryptocurrency relies on distributed ledger technology, most commonly in the form of blockchain. In essence, a digital ledger is distributed to all network users, displaying all successfully completed transactions (similar to entries of credits and debits in an accounts ledger).

Copies of the same ledger are distributed publicly, and all copies are automatically updated with entries whenever a transaction occurs. This serves as a real-time record of ownership, increasing its security while also eliminating the need for a middleman because no bank or entity is required to maintain a single central ledger in order to process a transaction.

According to the Bank of England, because cryptocurrencies lack traditional definitional characteristics, they are not considered money and do not pose a systemic risk to the banking ecosystem’s stability. However, because the legal implications, regulation and status of crypto assets and currencies vary depending on their nature, type and usage, the FCA and the Bank of England have issued a variety of warnings and guidance about their use. These warnings are about the lack of regulatory and monetary protection, the status of cryptocurrencies as stores of value, and the risks of speculative trading and volatility.

UK Official Stance

Following an investigation into digital currencies and distributed ledger technology, the UK Treasury Committee published a report on “cryptoassets” in September 2018. In its report, the Committee advocated for the implementation of an appropriate and proportionate regulatory regime, with the goal of making the UK a global centre for cryptocurrency activity.

New regulatory powers were introduced in January 2020, allowing the FCA to oversee how cryptoasset businesses manage the risk of money laundering and counter-terrorist financing. UK cryptoasset businesses must now comply with the Money Laundering Regulations (MLRs) and register with the Financial Conduct Authority (FCA). The FCA does, however, continue to issue the following warnings:

Cryptoassets are regarded as extremely risky, speculative investments 

It is unlikely to have access granted to the Financial Ombudsman Service or the Financial Services Compensation Scheme upon the purchase of these types of cryptoassets (FSCS) If something goes wrong with the cryptoasset investment, one should be prepared to lose their money.

English law distinguished two types of property:

Items in possession: physical items

Items in use: a right capable of being enforced

Technically, cryptocurrency does not fall into either category; however, a legal statement issued in 2019 by the UK Jurisdictional Taskforce (“UKJT”) on cryptoassets and smart contracts stated that a strict interpretation would be inappropriate and that there were strong grounds for cryptocurrencies to be recognised as property.[2]

The legalisation of cryptocurrency as property has essentially created a new asset class that professional advisors and litigators must consider as part of an individual’s ultimate wealth and asset portfolio, including taking measures to protect and seize such assets.

Scope of Popularity Regarding Cyrptocurrency in the UK

Around 2.3 million people in the UK are thought to own a cryptoasset, with their popularity growing – but research suggests that understanding of what crypto actually is declining, implying that some users may not fully understand what they are purchasing. This raises the possibility that these products will be mis-sold.

Since the beginning of 2021, digital currencies have grown in popularity in the United Kingdom. While the UK government recognises the potential of cryptocurrency assets, it emphasises the need for a regulated crypto advertising structure to protect consumers.[4]

FCA chief executive Nikhil Rathi stated in an accompanying speech published at the launch of the FCA’s business plan that “more people see investment as entertainment – behaving less rationally and more emotionally, egged on by anonymous and unaccountable social media influencers.” He admitted that the regulator is “not used to engaging with” consumers in this age range, who are typically between the ages of 18 and 30, and that new digital technologies present new challenges for regulators, policymakers and society as a whole to address.[4]

The UK regulatory approach to cryptocurrencies is currently in flux, as evidenced by the Financial Conduct Authority’s recent publication of a Guidance paper (FCA). An Overview of UK Law and Regulation Regarding Cryptocurrency provides a current summary of the current position under English law, as well as a review of regulatory developments in Europe and elsewhere.

Conclusion

In the future, the UK is likely to deviate from the EU’s crypto-regulatory landscape to some extent. There is no specific UK crypto legislation on the horizon at the moment, but HM Treasury guidance issued in January 2021 via the UK Crypto Asset Task Force emphasised the UK’s intention to consult on bringing certain cryptocurrencies under the scope of ‘financial promotions regulation’ and to consider a ‘broader regulatory approach’ to crypto assets.

The report investigated regulatory options for stablecoins, which are currently prohibited by the FCA. The FCA’s subsequent report published in February 2021 echoed the call for regulatory flexibility: the potential introduction of stablecoin regulation is a sign that the regulator’s attitude toward cryptoassets may be changing.

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References

 [1]UK regulation of cryptoassets, https://www.lexisnexis.co.uk/legal/guidance/uk-regulation-of-cryptoassets

[2] What is the legal status of cryptocurrency in the UK?, Louise Hayward, 02.09.2021, https://www.moorebarlow.com/what-is-the-legal-status-of-cryptocurrency-in-the-uk/#:~:text=What’s%20the%20legal%20status%20of,is%20now%20considered%20’property‘.

[3] Cryptocurrency Regulations in the UK, July 2018, https://complyadvantage.com/insights/crypto-regulations/cryptocurrency-regulations-uk-united-kingdom/

[4] Government to strengthen rules on misleading cryptocurrency adverts, HM Treasury, 18 Jan, 2022 https://www.gov.uk/government/news/government-to-strengthen-rules-on-misleading-cryptocurrency-adverts