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Using crypto assets to purchase property

Posted on: September 27th, 2023 by AlexT

With the increasing adoption of crypto assets, it is inevitable that we will see a rise in interactions between this sector and more traditional asset markets, such as real estate.

An increased awareness of crypto assets, and their growing availability over the past decade have presented both individuals and enterprises with access to a risk-on environment, characterised by high risk and reward profiles. Consequently, numerous investors have experienced significant returns on their initial, sometimes modest, investments. One notable trend we have observed is the convergence of crypto wealth with the traditional real estate market, particularly in the form of crypto gains being utilised towards real estate acquisitions.

There are primarily two methods by which individuals and businesses are using crypto wealth to enter the real estate market.

The first and most common approach involves utilising the fiat proceeds from crypto gains to cover part or the whole cost of a property purchase. This approach aligns closely with established conveyancing practices.

The second approach entails the direct use of the crypto assets themselves to facilitate the property purchase. The property’s purchase price, whilst still being pegged to a fiat value, is not settled in fiat currency but rather in an agreed-upon amount of specified crypto assets.

Both approaches have their own complexities and advantages, including risk tolerance, market conditions and legal considerations.

 

Using fiat proceeds of crypto assets

The approach of using fiat proceed of crypto gains in property purchases is a method which strongly resembles established conveyance process, albeit with some nuances in the process brought on by additional financial planning and legal considerations. This is by far the most common method by which parties are utilising cryptoassets in order to purchase property.

Generally, the process will involve several key considerations.

Conversion to fiat

The first step of this process is to convert crypto assets comprising part or the entirety of a crypto assets portfolio into a fiat currency, as the British Pound Sterling.

This will usually occur through a centralised exchange and, given the volatility of the crypto markets, timing may be an important consideration.

Parties will often aim to convert their crypto assets at a peak value, so as to maximise the return into fiat. If substantial sums are being converted and off-ramped, then it is likely that it will be done in tranches and using multiple centralised exchanges to get the best rates and mitigate slippage.

It is also possible to convert cryptocurrencies into fiat currencies using OTC trades, facilitated by a specialised broker.

Banking considerations

Whilst banks and other financial institutions are undoubtedly more familiar with crypto assets than they were several years ago, it is still important to note that not all financial institutions are crypto friendly.

As such, when off-ramping substantial sums from an exchange to a bank account, it is vital to consider whether the bank in question is willing to accept the funds into the account, and buyers must be prepared for the bank to make enquiries about the source of funds in line with standard anti-money laundering and know-your-customer requirements.

Legal and tax implications

A conversion between crypto assets (e.g. Bitcoin to USDC) or a conversion from crypto assets into fiat is also likely trigger a tax liability, and crypto investors may be subject to capital gains tax or income tax, depending on the nature of the activity.

Solicitors assisting with the purchase of  property in such cases will be aware that they will be taking these fiat funds into their account in furtherance of the purchase. As such, they will have a responsibility to determine that these fiat proceeds of crypto assets activity is genuine and not illicit funds or an attempt to launder money.

In other words, the solicitor must be able to verify the source of funds – a key consideration  due to the sector specific knowledge that this requires. Before instructing solicitors with the conveyance of the intended property, potential buyers should ensure they are comfortable and able to verify source of funds coming by way of  crypto assets.

At Lawrence Stephens, our dedicated crypto asset and blockchain team within the firm works closely with our conveyancing department to be able to review and verify source of funds deriving from crypto assets activity seamlessly.

Application of the funds

Depending on how fiat funds are intended to be applied, if a cash amount is being used to cover the entire cost of the property, then standard conveyancing procedures will apply to the rest of this process.

However, if funds are intended to be used as a partial deposit, with the rest of the purchase price to be financed through a mortgage, lenders will likely require an overview of your finances including crypto assets gains.

Completion

Once the parties arrive at the completion stage, the buyer will transfer the fiat funds to their solicitors, as will the mortgage provider if applicable. The solicitors on either side will then ensure the timely transfer of funds and completion of formalities to record the transaction and change of ownership of the property.

 

Using crypto assets to purchase property

Whilst certainly a less common route to purchase property, it is also possible to utilise crypto assets themselves for a property purchase. Whilst this route to acquire property comes with additional considerations, complexities and advantages, it can often be a desirable option particularly for those with large crypto portfolios.

Agreement with seller

One of the main considerations and challenges with such an approach is finding a seller who not only has a property to sell that fits the requirements of the buyer, but is also willing to accept crypto assets as a form of payment.

Much like any other property purchase, parties will need to arrive at an agreed figure for the purchase price of the property and, even though cryptoassets will be used in the transaction, the purchase price agreed must be agreed in fiat currency. This is not just crucial for contractual clarity between the parties, but it is also important for the calculation of Stamp Duty Land Tax (SDLT) liability, if applicable.

Agreeing the crypto asset

Both parties will also need to agree the crypto assets to be used in the transaction, and this will require due diligence on the assets involved. It may also be necessary to the current regulatory environment to ensure there are no restrictions on using the crypto assets of choice. If a particular crypto assets was regulated, for example, then strictly speaking it would technically not be permitted to deal in the same without regulatory approval.

From the seller’s perspective, they will have undoubtedly have additional considerations for the crypto assets to be used, and may likely only want to deal in a crypto assets that has sufficient liquidity.

For example, assuming the purchase price of the property is agreed in the sum of £800,000, the parties will then need to agree which crypto asset (or assets) are to comprise the purchase price. In this example, we will assume that the parties agree to transact in Bitcoin and, as of September 2023, the value of 1 Bitcoin is approximately £20,000.

Due to the volatility of crypto assets, it is not uncommon for parties to reach their own agreed upon conversion rate for the crypto assets being used. In this example, if we assume that the parties agree that the Bitcoin used for the purchase will be valued at £19,500, the buyer will have to pay the seller 41.02 Bitcoin.

Due to the nature of using crypto assets in such a transaction, separate agreements may be required that addresses the particular characteristics of these assets. For example, given the volatility of crypto assets, both parties assume a market risk until the transaction is completed. To mitigate this, specific clauses can be inserted into agreements to address scenarios where the crypto assets value changes dramatically before completion.

Specialised mechanisms or escrow type services for the actual transfer of the crypto assets would also likely need to be agreed upon and catered for in a specific agreement. In typical transactions, buyers would usually send the purchase monies to their solicitors, who would then forward it over to the seller solicitors. In a crypto transaction, alternative mechanisms would need to be utilised to ensure that the transaction occurs properly, and payment is sent and confirmed to the relevant parties so subsequent steps in the conveyance procedure can take place.

Solicitors with expertise in crypto assets transactions are crucial in such instances, to ensure legal compliance and clarity.

Post-completion formalities

After the transaction is complete, the usual formalities such as land registration will follow, and these may require special annotation to indicate the use of crypto assets in the purchase. The land registry, in the past, has recorded the sale price of property in crypto assets.

SDLT may also be applicable and will usually be calculated in relation to the value of the crypto assets on the day of completion, as evidenced by reputable data sources.

From the seller’s perspective, they will want to ensure that they can continue to securely hold and access the crypto assets or convert them into fiat, depending on their intentions. Oversight in this regard could lead to difficulties in them accessing the proceeds of the sale.

 

Conclusion

The purchase of property using the fiat proceeds of crypto assets, or crypto assets themselves is not only feasible but can also be an attractive option for both buyers and sellers.

Such transactions are accompanied by a unique set of legal considerations that require specialised knowledge and understanding of the crypto assets sector; from due diligence on the crypto assets used and their liquidity, to understanding the additional legal mechanisms required to ensure a compliant and clear transaction, the process necessitates an expert legal perspective.

Our crypto assets team is equipped with specialised knowledge in the crypto asset sector, enabling us to guide clients through each step of this innovative transaction method. If you are contemplating diving into the world of property purchases via crypto assets, we are here to assist and advise.

A brief guide to the different types of cryptoassets

Posted on: September 20th, 2023 by AlexT

It is a common misconception that the existence of crypto assets was ushered in by the arrival of Bitcoin in 2009. In reality, the concept of digital or cryptographic currencies significantly predates Bitcoin, and there were several attempts to create a digital, decentralised form of currency before Bitcoin, for example eCash and HashCash. However, whilst Bitcoin was not the first attempt at a cryptocurrency, it was the one that solved certain key issues, such as double spending and decentralisation, more effectively than its predecessors. In this sense, it was undoubtedly the cryptocurrency that propelled crypto assets into mainstream recognition.

Since the introduction of Bitcoin, the world of crypto assets has grown exponentially, and the market now consists of tens of thousands of different crypto assets, each with their own functionalities, supposed use cases, and legal implications.

Are coins the same as tokens?

From a legal and regulatory perspective, the terms coins and tokens can and are used interchangeably in relation to crypto assets, and both terms essentially have the same meaning when used in this context.

However, in crypto centric terms, Coins and Tokens have very different meanings.

Coins are usually used to refer to those crypto assets which act as native crypto assets to their own blockchain. For example, Bitcoin on the Bitcoin blockchain, or Ether on the Ethereum blockchain. Coins are usually intended to function as a digital store of value or medium of exchange.

Tokens, on the other hand, are crypto assets that operate on an existing blockchain network instead of their own. Whilst tokens can also be used in a similar fashion to coins, they are often created to fulfil different purposes to coins, for example to raise funds or give access to particular services. Some examples of tokens include Shiba Inu, Tether, and Basic Attention Token.

So, whilst most of the regulatory language in the UK refers to “tokens”, it should be remembered that this is not a reference to the crypto specific definition of a token, and is essentially used as a technologically neutral term in a legal and regulatory context.

Altcoins and memecoins

An altcoin is simply a designation given to any crypto assets which is not Bitcoin (and arguably Ether).

Many altcoins are designed to be used for a specific purpose or to address limitations and innovate upon existing blockchains. One of the first altcoins was Litecoin, which was forked (or simply put, an offshoot) from the Bitcoin blockchain, and offers faster transaction times than Bitcoin.

Memecoins are another subset of crypto assets that often originate from an internet meme or joke, yet can attract serious following and price appreciation.

Memecoins often do not aim for any specific functionality or utility, and primarily gather attention through social media, viral marketing and online community engagement. They represent a fascinating microcosm within the crypto assets world and can sometimes evolve into more refined projects with defined aims and utilities.

An example of a memecoin is Dogecoin, which experienced significant growth in a relatively short period of time, reaching a value of $0.68c at its all time high in May 2021, meaning it had a market cap of around $88 billion.

Stablecoins

Despite the name, most stablecoins are usually tokens utilising existing blockchains – another quirk of usual crypto lexicon!

One of the endemic characteristics of crypto assets is that they are extremely volatile, and while this volatility can be beneficial, it is one of the characteristics that makes crypto assets unsuitable as a medium of exchange or store of value. Stablecoins exist to address the problem of volatility by pegging their value to an external reference, for example a commodity such as gold, or a fiat currency such as the US dollar.

Whilst all stablecoins maintain their value by some external reference, there are different types of stablecoins.

Some stablecoins are said to be fiat-collateralised – in other words, they are said to be backed one-to-one by reserves of fiat currency. An example of such a stablecoin would be USDC. For every USDC token in existence, there is an equivalent amount of fiat US dollar held in reserve.

Other stablecoins are crypto-collateralised and so they are backed by a reserve of other crypto assets. They utilise smart contracts that automatically adjust the collateral to maintain a stable value. An example of one such stablecoin is DAI.

Some stablecoins are commodity-collateralised and reference the value of a physical commodity such as gold or silver and aim to maintain a peg to that value. For example, Tether Gold is said to be collateralised to gold.

There also exists stablecoins that are not backed by any collateral at all but aim to use algorithms to control their supply and demand and maintain a stable value. There has been increasing criticism of algorithmic stablecoins, particularly since the collapse of Luna and Terra USD in May 2022.

It is a noteworthy point that many jurisdictions are developing central bank digital currencies (CBDC’s) and some have already been implemented such as the eNaira in Nigeria. They are digital, similar to crypto assets, and their value tends to be fixed to their country’s fiat currency much like a stablecoin. However, CBDC’s should not be confused with crypto assets, particularly as CBDC’s are controlled by a central bank or monetary authority, while crypto assets are typically decentralised.

Governance tokens

Governance Tokens are a type of crypto asset that allows holders to vote on decisions related to a particular platform or protocol. They act as a bridge between platform creators and the community of users and allow for an element of democratisation.

Examples of governance tokens include the maker token (MKR), issued by MakerDAO. One MKR token is equivalent to one vote, and token holders vote on several issues including appointing team members and modifying fees.

Fan tokens

Fan tokens are another form of crypto asset that, in essence, represents membership of a fan club of a particular sports team, artist or celebrity. They often allow their holders to access fan membership perks such as voting on decisions, merchandise designs and rewards. They also often grant holders access to privileges such as exclusive content and ticketing privileges.

Football clubs such as FC Barcelona, Manchester City and PSG each have dedicated fan tokens.

Non-fungible tokens (NFT’s)

Non-fungible tokens (NFTs) are a form of crypto asset that represents ownership or proof of authenticity of a unique item or piece of content. They are best thought of as assets that have been tokenised via a blockchain, and they are inherently unique in themselves, such that they are not interchangeable.

For example, a particular ETH coin is essentially no different to another ETH coin, and so they are interchangeable on a one-to-one basis. However, comparing two NFT’s, even though they may look the same will have independent and unique characteristics.

NFT’s can be used to tokenise a wide variety of assets from art and music, to real estate and event tickets.

Popular examples of NFTs include the Bored Apes Yacht Club collection and Cryptopunks.

The legal definition of crypto assets that has been adopted in the UK includes NFTs, and this allows for them to be interpreted within the same framework as other crypto assets which are deemed to constitute property. From a regulatory perspective, an NFT can be unregulated or regulated depending on the rights and obligations that attach to the NFT.

The High Court in England has already demonstrated its forward-thinking approach by allowing the service of legal documents via NFTs. As well as highlighting the flexibility of NFTs, this also highlights the English judicial system’s openness to integrate emerging technologies into practice.

Tokenised Real-world Assets

Another growing subset of assets within crypto assets are tokenised assets that represent a share in a real-world asset, such as real estate, a luxury watch or handbag, vintage cars, and art. These usually utilise NFTs and allow for expensive assets to be broken down into smaller, easily traded units.

The legal and regulatory treatment for these can be complex and very much depend on the nature of the underlying asset which the token represents.

Conclusion

The landscape of crypto assets is diverse and ever evolving, encompassing a range of asset types, many of which fall into one or more of the above categories.

Understanding and appreciating the legal intricacies of these various assets is imperative for both individual and institutional participants in this rapidly growing sector. As a UK-based law firm with a particular specialism in crypto assets, Lawrence Stephens is uniquely positioned to provide expert guidance and innovative solutions to investors, creators and holders alike.

Please do not hesitate to contact our team who will be happy to discuss and identify your needs.

What are crypto assets and how are they regulated?

Posted on: September 14th, 2023 by AlexT

In the age of the Digital Revolution, terms such as ‘crypto assets’, ‘cryptocurrency’, ‘tokens’, and ‘blockchain’ have become increasingly common in everyday conversations, as well as in financial, technological, and legal discourse. Despite their growing presence, adoption and relevance, misconceptions and ambiguity continue to surround this novel asset class.

Perhaps these misconceptions and ambiguity can be explained by the nuances in the terminology, which often amalgamate traditional financial and technological terms.

The terms ‘crypto assets’, ‘cryptocurrency’, and ‘crypto tokens’ are often used interchangeably, yet each has its own specific implications and considerations.

Whilst ‘cryptocurrency’ is perhaps the most commonly recognised catch-all term for this group of assets, it is somewhat of a misnomer as they do not possess all of the properties of a traditional currency (also called ‘fiat currency).

Fiat currencies are typically used as a medium of exchange for goods and services. They can also be used as a store of value and as a unit of account. They are most often issued by central banks or monetary authorities.

In contrast, cryptocurrencies are not yet widely accepted as a medium of exchange, and their inherent volatility makes them unsuitable as a unit of account. Cryptocurrencies are said to be ‘decentralised’ as they are not issued by or subject to governments, central banks or monetary authorities. However, a point should be made to contrast this with Central Bank Digital Currencies (CBDC’s), which are digital forms of fiat currency issued by central banks, and are often mentioned in the same discourse as cryptocurrencies.

For these reasons, the term ‘crypto assets’ is a more accurate catch-all term that we choose to adopt.

What are Crypto assets?

Essentially, they are digital assets that use cryptography for security, and utilise a form of distributed ledger technology, such as a blockchain, to record and store transactions. The wide definition of ‘crypto asset’ adopted in the UK also encompasses crypto assets such as NFT’s.

Blockchain is the underlying technology that enables the secure and decentralised functioning of crypto assets. A blockchain is a type of digital ledger that is distributed across a network of computers known as nodes, where no one single entity has control of the data.

Each block contains a list of transactions which are cryptographically linked to the previous block, which functions to create a secure and immutable record of transactions.

The decentralisation aspect of crypto assets is one of their most appealing design features. It means that they are not subject to governmental or monetary policy interference, nor are they susceptible to any single point of failure, and it also enables a number of use cases for crypto assets.

Popular and well-known crypto assets include Bitcoin, Litecoin, Ether, and Cardano, although there are now tens of thousands of crypto assets in existence.

Treatment of cryptoassets in the UK

As the adoption of crypto assets continues to grow, they have presented novel and unique challenges to governments, monetary bodies, and international regulators. One of the main challenges in regulating crypto assets is that they are global in nature and exist without borders. As such, different national regulators have taken inconsistent approaches towards their treatment of crypto assets, and it is very much a sector that is in a near-constant state of regulatory and legislative flux.

Crypto assets are not subject to any blanket prohibition or ban in the UK, in contrast to what has been seen in other parts of the world such as China. Rather, the UK government and regulators have openly recognised the substantial benefit and use cases of crypto assets and blockchain technology, which has made the UK a ‘friendly’ jurisdiction for start-ups and established companies alike, looking to develop, create, implement, and explore this space.

Aside from an outright ban on the marketing, distribution or sale of crypto-derivative products to retain consumers, there are no specific prohibitions on the use, purchase or trading of crypto assets in the UK.

The legal status of crypto assets in the UK is that they are treated and viewed as property. While there is continuing academic and legal discussion on this classification, which does not neatly fit with crypto assets, the view that crypto assets constitute property has been accepted several times by the High Court. This has provided much-needed legal clarity as to the status of cryptoassets, and how they are to be treated under existing laws and frameworks. This approach by the High Court has meant that England and Wales have emerged as a favourable forum for resolving crypto assets disputes, as the legal clarity provided allows for the application for well-established laws to this emerging asset class.

Are cryptoassets regulated in the UK?

The UK has positioned itself as a key participant in shaping the regulatory landscape for crypto assets, with bodies such as the Financial Conduct Authority (FCA) taking steps to define and further classify crypto assets.

Broadly speaking, the current FCA regulatory regime refers to crypto assets by way of a token taxonomy, which then dictate whether a cryptoasset is regulated or unregulated.

Security tokens and e-money tokens are regulated by the FCA, whereas exchange tokens and utility tokens are considered unregulated tokens.

  • Security Tokens: These are crypto assets with characteristics causing them to meet the definition of a Specified Investment as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. An example of a security token is a crypto asset that represents shares in a company or functions as a debt instrument.

A security token essentially grants the holder financial rights, akin to a share or a bond, and crypto assets which exhibit characteristics and functions of a security token would be regulated.

  • E-money tokens: These are crypto assets which meet the definition of e-money and are subject to the Electronic Money Regulations 2011, and fall within the scope of regulation.
  • Utility Tokens: These are crypto assets which essentially act as digital coupons for the service, application or ecosystem they are associated with. They do not confer ownership rights (unlike security tokens) and nor do they represent an investment in the issuer. They are often used as a means of exchange for goods or services, or to acquire access to a particular service or application. Utility tokens are unregulated – examples include Basic Attention Token (BAT), Filecoin (FIL), and Axie Infinity (AXS).
  • Exchange Tokens: These include crypto assets that are used in a similar way to traditional fiat currency as a means of exchange, although they do not meet the criteria to be considered a currency. Similar to Utility tokens, they do not grant the holder any ownership rights or rights associated with specified investments. They are often held as speculative investments, as well as a means of exchange. Exchange tokens are unregulated, and examples include Bitcoin (BTC) and Ether (ETH).

The FCA takes a substance over form view in relation to crypto assets. In other words, if a crypto asset has the substance of a traditional financial instrument, regardless of whether it is in digital form, it will fall under the FCA’s regulatory ambit.

Crypto assets lacking the characteristics of a traditional financial instrument, including those like Bitcoin, Ether, and other various utility and exchange tokens, are not currently regulated. It is also prudent to note that even if a crypto asset is unregulated by the FCA, certain activities relating to or involving those crypto assets may trigger other regulatory regimes.

The prevailing sentiment appears to be indicating increasing regulation and oversight into the crypto sector, driven by concerns in relation to consumer protection, stability of the financial markets, and various financial scandals that have happened within the crypto sector in recent years. There is an ongoing consultation which proposes to bring crypto assets within the scope of existing legislation by considering them as a specified investment under the Financial Services and Markets Act (Regulated Activities) Order 2001. The consultation process remains underway, and its outcomes will significantly influence the future regulatory framework for crypto assets.

Conclusion

The landscape of crypto assets and their regulation is complex, rapidly evolving, and varies across jurisdictions. The implications for individual investors and crypto asset enterprises are substantial. The complexities of crypto assets covered in this article only scratch the surface, and it is essential to seek out expert advice in order to ensure that guidance is tailored to one’s situation.

Steven Bernstein discusses private ownership of businesses in Law360

Posted on: January 23rd, 2023 by Maverick Freedlander

Steven Bernstein, Senior Director in the Corporate and Commercial department and co-founder of Lawrence Stephens, argues that some companies fare best when owned privately, in Law360.

Steven’s comments were published in Law360, 20 January 2023.

Discussing Seraphine Group PLC’s £15.3M Takeover by Mayfair Equity Partners LLP, Steven commented: “From my perspective, it’s an interesting example that maybe not every business is well suited to be on the public market…

“And then there are some businesses that are just better owned privately, because there’s just a greater degree of flexibility, and you can make quicker decisions without the scrutiny that comes from being in a public space.”