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Posts Tagged ‘crypto assets’

How the UK Can Back Crypto Innovation with Action

Posted on: June 27th, 2025 by Alanah Lenten

We now find ourselves at a critical crossroads in the evolution of financial technology. While the UK once made bold proclamations about becoming a global crypto asset hub, real progress has stalled, and the lack of regulatory clarity is beginning to weigh on investment, innovation, and job creation. In an era where blockchain, artificial intelligence, and quantum computing are converging to reshape global economies, the UK must act decisively or risk falling behind forward-thinking jurisdictions such as the US, Singapore, and the UAE.

While recent developments from the Financial Conduct Authority (FCA) – including the publication of a crypto roadmap and the UK Treasury preparing draft legislation to provide clarity on qualifying crypto assets, including stablecoins, which will fall under the remit of the Financial Services and Markets Act 2000 –  indicate progress, the pace of change remains too slow.

The UK has a golden opportunity to define a forward-looking, globally competitive framework for digital assets, but this demands bold leadership, joined-up policymaking, and a clear national strategy that puts emerging technologies at the centre of economic growth. In a joint letter to government, Matt Green, Head of Blockchain and Digital Assets and Technology Disputes at Lawrence Stephens, together with leading industry bodies, outlined a series of proposals to help the UK realise this potential. The article below explores their key recommendations in more detail.

Laying the groundwork for growth

According to the FCA, around 12% of UK adults, approximately seven million people, now own digital assets. Despite this, only 8% of global venture capital funding in the space went to UK-based firms in the past year. The US, by comparison, attracted a staggering 76%. If the UK is serious about becoming a leading force in the digital economy, it must close this investment gap with urgency.

At present, a fragmented approach to digital asset regulation is inhibiting progress. A new wave of global strategies led by national governments eager to capture the economic benefits of blockchain and Web3 is leaving the UK at risk of playing catch-up. From Dubai to Washington, governments are launching clear action plans, appointing envoys, and rolling out incentive programs to attract high-potential digital firms.

A clear path to digital leadership

That’s why a coalition of leading trade bodies, including the UK Cryptoasset Business Council, Global Digital Finance, The Payments Association, techUK and Lawrence Stephens has come together to call on the Government to implement a clear digital asset strategy. Representing both pioneering start-ups and established multinational firms, we believe the UK can and should be at the forefront of responsible innovation.

There are four key steps the UK can take to realise this ambition:

1. Appoint a blockchain special envoy

Just as the US government has appointed a high-profile blockchain envoy to spearhead policy alignment and investment attraction, so too must the UK. A dedicated envoy would serve as a strategic bridge between government, regulators, and industry, driving consistency, championing innovation, and positioning the UK as a premier destination for blockchain-related investment. The envoy would also play a crucial global role, representing the UK on the international stage and securing collaboration opportunities with leading digital nations.

2. Launch a government-led Digital Asset Action Plan

Like the coordinated approach seen in artificial intelligence, the UK should implement a comprehensive strategy for digital assets and blockchain technology. This could include a white-glove concierge service to support scale-ups, integration of blockchain into public services, and the development of a globally competitive tax and investment landscape. Targeted incentives would enable the UK to attract and retain the world’s most promising digital firms, ensuring job creation and long-term economic benefit.

3. Recognise the convergence of emerging technologies

Emerging technologies rarely operate in silos. Blockchain, quantum computing, and AI are increasingly interdependent, and together they promise to redefine industries from finance and defence to supply chains and public healthcare. For example, blockchain can add transparency and trust to AI systems, while AI can optimise blockchain functionality. These technologies working in harmony offer the potential to deliver transformative public services, from decentralised property registries to secure NHS data transfers. The UK must actively foster collaboration across these disciplines to maximise impact and support innovation at scale.

4. Create an industry-government engagement forum

Effective policymaking must be informed by those at the forefront of innovation. To that end, we propose the creation of a high-level industry-government-regulator taskforce, designed to ensure close collaboration and continuous dialogue across sectors. This would enable agile policymaking that reflects the rapidly evolving nature of digital technologies and ensures the UK remains ahead of the curve.

Unlocking long-term economic value

The potential economic impact of digital assets and blockchain is immense. A recent PwC report projects that blockchain could add £57 billion to the UK economy over the next decade. Globally, it could boost GDP by £1.39 trillion by 2030. Sectors like logistics, finance, health, and public services stand to gain the most, particularly through improved transparency, faster data transfers, and streamlined transactions.

Meanwhile, the UK’s legal infrastructure is increasingly ready to support these developments. The Law Commission’s recent endorsement of a new ‘third category’ of property to account for digital assets is a significant step forward, strengthening the legal foundation for cryptoassets, tokenised securities, and carbon credits. In doing so, the UK is proving it has both the legal and technological credibility to lead on digital assets.

Now is the time to act

The UK’s digital asset economy is already the largest in Europe, with £172 billion in on-chain transactions last year. Yet without bold, strategic intervention, we risk being eclipsed by more proactive nations. As innovation accelerates and geopolitical dynamics shift, the UK must seize its moment.

With the right leadership, a coherent regulatory environment, and an ambitious vision for innovation, we believe the UK can cement its status as a global hub for digital assets and blockchain technology.

Now is the time to move from ambition to action.

If you have queries on the above, please contact Matt Green. 

Read the other articles in this edition here : The Fineprint – Edition 1 – July 2025 – Lawrence Stephens

How to protect your crypto assets

Posted on: May 30th, 2025 by Natasha Cox

Director and Head of Blockchain and Digital Assets, Matt Green, comments on the recent series of attempted kidnappings of crypto entrepreneurs and discusses how to best protect assets stored on the blockchain, in The Next Web.

Matt’s comments were published in The Next Web, 29 May 2025, and can be found here.

“Despite the industry pining for decentralisation, much of the data points towards identifiable individuals with either massive wealth or access to third parties’ wealth. Simple blockchain analytics openly identifies addresses holding fortunes, and once those addresses are associated with named individuals (data triaging and clustering can unmask a pseudonymised  address), then criminals can see very clearly that a person holds significant wealth. Imagine your bank balances are posted online and through analysing open source data, the world can see it’s your account.

“In terms of crypto holders, the only thing stopping criminals gaining access is human error or force so kidnapping aims to break down the integrity of that human led security.

“The nature of blockchains means balances and addresses are public. In the same way van stickers read “no tools are kept in this vehicle”, it might be worth making a conscious effort to show a single person under duress is incapable of giving access to crypto holdings. Having clear statements about Multi-Sigs (Multi-Signature wallets) would likely deter kidnappers, who would have to pursue multiple individuals to make gains.”  

To out more about our work on blockchain, crypto and digital assets, please click here

Crypto recovery – navigating the first 72 hours

Posted on: May 23rd, 2025 by Natasha Cox

When a person goes missing, the first 72-hours are mission critical.

The same urgency applies if you have been hacked, scammed or are the victim of a theft- even more so if the loss are crypto assets. Quick and decisive action in the immediate hours will significantly mitigate the risk of those assets being obfuscated and dissipated and assist with recovery.

Crypto scammers are particularly ruthless, often deploying all manner of sophisticated tactics. From straightforward account compromises and theft with no direct interaction, to elaborate social engineering, often gaining trust through dating websites, fake investment platforms, or social media, their ultimate aim is to deprive a rightful owner of crypto assets.

Discovering that you have been the victim, regardless of the methodology used, can be emotionally draining as well as financially devastating. Clarity of thought and rational action can often give way to absentmindedness. This can lead to victims continuing to pay the bad actors, or fake recovery firms who are one and the same.

In the circumstances this is entirely understandable.

The appropriate next steps can vary depending on the specific circumstances, however our recommended action plan is detailed below and applies to most scenarios:

  1. Secure your communications

Often, particularly in cases where victims have been socially engineered, your email addresses and social media accounts will likely have been compromised as the result of the hack.

Most mainstream email providers will allow you to see a log-in history which details the IP address and location of all log-in attempts. Consider if any are unrecognisable.

If there are any suspicious log-ins, it is likely that your email address has been compromised and your communications may be monitored by the scammers. This could also impact other personal and financial accounts linked to your email, such as online shopping accounts, bank accounts and social media profiles. Credit ratings and access to future baking facilities may also be affected.

In this case, it is vital that you immediately change the password for your email, and then for all other accounts held online.

In addition, we recommend that you set up a new, secure email address immediately and avoid logging into any accounts you suspect may have compromised. You should divert any personal and critical emails to your new account, and ensure that you update your email address across your online shopping, social media and bank accounts.

It is important that you notify your bank and or cryptocurrency exchange of your new email address, which replaces the old one, and ensure to communicate that no instructions are to be taken from the old email address.

  1. Cease communications strategically

In cases where scammers have maintained prolonged contact, they may continue to reach out to you. Let them remain unaware you know this is a fraudulent scheme. If they know that you are aware, there is a heightened risk that they will take steps to obfuscate their trail and dissipate assets, which can make asset recovery more complicated.

If you can, you should look to cease communication strategically without encouraging further interaction. One approach might be to indicate you will be unavailable or away for a few weeks. This will hopefully give you and your legal team time to investigate and trace the assets, write to any centralised exchanges who may be in receipt of those assets, and put them on notice of the theft and request that they freeze those accounts pending further legal action.

In short, the longer the scammers believe that their scam is undetected, the better.

You should then immediately begin collating a detailed record of all previous communications, including requests for payments, emails, phone calls, text messages, social media interactions, transaction details, wallet addresses and transaction hashes etc. Accurate records are crucial for any subsequent legal action and investigations. If you have been directed to a webpage during your interactions with the scammers, you should ensure to take screenshots of these pages in case they disappear.

Evidence of what jurisdiction they may be in is also vital. For example, note of their telephone number and dialling code (e.g. +44 for UK) or mention of a registered office (even if untrue) will help dramatically.

  1. Report to law enforcement

As soon as possible, you should report the theft to the police and Action Fraud – or equivalent law enforcement agencies. Make sure you keep a copy of your report, as well as any crime reference numbers provided.

It is important that you engage with your local police force as much as possible, and obtain a direct liaison and contact details. Action Fraud is only a database, and your query will not progress unless the police investigate.

Try not be discouraged or frustrated if the police cannot offer much help. Police resources, expertise, and capacity to deal with crypto related crimes can vary considerably, and officers may lack immediate familiarity with blockchain technology, or the complexities involved

Even if the police are unable to offer much direct assistance, formally reporting the incident is a crucial step as it creates an official record that supports any subsequent legal and recovery actions you may take with the support of your legal team.

  1. Device management and evidence preservation

Given that so much of our lives are conducted online and contained within personal devices such as laptops and mobile phones, it is crucial to exercise heightened caution if these devices may have been compromised.

If you notice unusual behaviour or unexpected activity on your devices (for example, unprompted command prompt windows opening up for split seconds, or excessive system resources being used when your device does not appear to be doing much) then this may be an indication your device may be compromised.

This is more likely if the scammers have previously taken remote control of your device under the pretence of assisting you through services, like AnyDesk.

As tempting as it may be, avoid formatting or performing factory resets at this stage. Evidence preservation is vital, particularly as forensic digital examination of your devices could yield critical information, instrumental in tracing and recovering the stolen assets. Formatting or resetting the device risks destroying potentially valuable evidence which often indicates the attack vectors used by the scammers and can be a useful part of the puzzle in identifying who they may be.

If your budget permits, obtaining new, uncompromised devices for interim use is recommended.

  1. Secure remaining crypto assets

It may be that the scammers have only targeted or been able to target specific parts of your crypto holdings. However, if your devices or email/social media accounts have been compromised, it is likely they know much more than you think – including what centralised exchange accounts and wallet addresses you have that they may wish to target next.

As such, you should immediately access and review all centralised exchange accounts you may hold online, and cold storage where applicable. Update your details held at these accounts, including email, contact information and passwords.

It is also crucial to strengthen your two-factor authentication and carefully review transactions to identify any activity you do not recognise which may be indicative of that account being compromised.

If you are holding any assets on these accounts, consider creating new, secure self custodial wallets on uncompromised devices and transferring remaining assets between multiple wallets.

If you have previously staked assets, check to see whether these remain staked or have been unstaked without your knowledge and are in any cooldown period. If unstaking has been initiated, try to take steps to ensure the unstaked assets can immediately be sent to your new, secure wallets as soon as possible.

  1. Engage with experts

Engaging promptly with specialist lawyers experienced in crypto asset disputes, particularly asset tracing on blockchains and recovery, can be vital ensuring the swift tracing and recovery of your assets.

Your legal team will quickly be able to identify suitable independent blockchain tracing specialists who will be tasked with conducting an initial tracing report to follow the movement of your crypto assets and their traceable proceeds. You will need to provide proof that you owned the assets (such as statements) as well as relevant transaction hashes or addresses as this will form the basis of asserting your proprietary claim to those assets. This is essential in recovering such assets.

Scammers typically seek to convert stolen crypto assets into cash, often using centralised exchanges as their off-ramp. The first step in any successful crypto asset recovery matter is identifying the exchanges used. These exchanges will have established payment rails which allow them to enable the transfer of fiat funds and are crucial to their business operations. 

As these payment rails exist within a regulated environment, banks must be comfortable with the funds handled by these exchanges. Consequently, exchanges are subject to a degree of regulatory oversight and compliance mechanisms to satisfy the requirements of typically highly regulated banking entities.

Once an investigator can identify exchanges which have received the stolen assets, your legal team should then enter into dialogue to place them on notice that they have received the proceeds of crime and request they take specific actions. These include freezing the relevant accounts to secure any assets held within, as well as requesting disclosure of any onward transfers and withdrawals from that account which can be used to further trace the stolen assets with a view to recovery.

This draws a line in the sand – the exchange is now aware of the issue and any funds held at or subsequently deposited at that account must now be frozen.

  1. Seek emotional support

Recognising that you have fallen victim to a scam can trigger intense emotional distress, anxiety, and feelings of isolation. It is important to recognise you are not alone and that these feelings, while overwhelming, are a common response to what can be a very personal breach of privacy, trust and security.

If you find yourself in such a position, consider reaching out to supportive friends and family. Whilst there are also online communities offering support to victims, you should treat these with caution, as these can present attractive hunting grounds for scammers seeking to exploit those at their most vulnerable.

If you find your emotional state severely impacted or you are feeling persistent low, anxious or overwhelmed, it is essential to seek professional medical or mental health support.

As outlined above, acting quickly and methodically within the immediate hours and days after discovering a scam or can significantly improve the prospects of recovery and limit the broader financial and emotional damage.

For more information on our services relating to technology disputes, please click here. For our cryptoassets services, please click here

Matt Green Co-Signs Industry Letter to Support Innovation in Digital Asset Sector

Posted on: April 10th, 2025 by Natasha Cox

Director and Head of Blockchain and Digital Assets, Matt Green, recently co-signed a letter to the UK government alongside a coalition of leading UK and global trade bodies in the crypto digital assets sector, on behalf of techUK.

Addressed to Varun Chandra, the Prime Minister’s Special Adviser on Business & Investment, the letter cites recent geo-political events as key reasons as to why the UK should continue to advance its digital asset and blockchain policy to ensure that it becomes a premier jurisdiction for crypto investment and innovation.

Matt and his fellow signatories put forward a number of practical recommendations to the government, including the following:

  • Appointing a ‘blockchain’ special envoy to drive policy alignment and innovation
  • Developing a Government Action Plan for digital assets and blockchain technology
  • Recognising the synergy between blockchain, quantum computing, and AI
  • Establishing a high-level forum for industry-government-regulator engagement

Click here to read their letter in full.

This news was covered by The Times, CoinTelegraph, Binance, Digit News, Finextra, Crypto News, Bloomingbit, Tron Weekly,  FX Street, Trading View and Block Weeks.

For more information on our Blockchain and Digital Assets services, click here

Registering as a crypto asset business

Posted on: January 5th, 2024 by AlexT

Whilst crypto assets are currently generally unregulated in the UK, businesses that provide certain crypto asset services are required to register with the Financial Conduct Authority (FCA) – the UK’s main financial regulatory body.

For businesses operating within the crypto industry, FCA registration represents a critical compliance milestone, and has been a requirement for cryptoasset businesses operating in the UK since 10 January 2020.

If crypto assets are unregulated, why is there a requirement for FCA registration?

On 10 January 2020, the EU’s 5th Anti-Money Laundering Directive came into effect, which was implemented in the UK by way of amendments to the existing Money Laundering Regulations (MLR).

The effect of the directive being implemented was that, amongst other things, it sought to provide a legal definition of cryptocurrency. It also detailed the types of entities and business operations involving cryptoassets that would be subject to Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations akin to traditional financial institutions.

This directive also appointed the FCA as the supervisor of UK cryptoasset businesses under the MLR.

These regulations require that all businesses that conduct activities, by way of business that fall within its scope, to comply with anti-money laundering and counter-terrorist financing regulations, which includes registering with the FCA.

It is important to note, however, that there is a distinction between being ‘authorised’ by the FCA and being ‘registered’. Successful registration with the FCA as a cryptoasset business shows that the business follows an appropriate level of AML and CTF measures and safeguards,  while complying with the regulations in a manner acceptable to the FCA. It also serves as a mark of credibility in what has, at times, been an industry characterised by a number of bad actors.

As such, FCA registration can enhance the reputation of the business in the eyes of potential customers. However, consumers should be aware that being registered with the FCA does not mean that they will be protected by the Financial Services Compensation Scheme should something go wrong.

What type of crypto asset businesses fall within the scope for registration?

Currently, the following types of crypto asset business activity would fall within the scope for registration with the FCA under regulation 14A of the MLR 2017:

  • Exchanging, or arranging or making arrangements with a view to the exchange of, cryptoassets for money or money for cryptoassets;
  • Exchanging or arranging or making arrangements with a view to the exchange of, one cryptoasset for another;
  • Operating a machine which utilises automated processes to exchange cryptoassets for money or money for cryptoassets (e.g. Crypto ATMs) and;
  • Providing services to safeguard and/or administer cryptoassets or private cryptographic keys to hold on behalf of customers in order to hold, store and transfer cryptoassets.

Registering with the FCA

Registering with the FCA is an involved process and requires significant preparation and understanding of the regulatory requirements. Once a business has determined it falls within the scope of registration, it is then necessary for them to demonstrate that the business has in place a robust financial crime control framework which is compliant with the requirements of the MLR.

This framework should encompass a comprehensive business-wide financial crime risk assessment, tailored to your business model. Essentially, this should demonstrate how a specific business could be manipulated or be used as a conduit for financial crime.

The FCA will expect businesses to identify all risks pertaining to their business model and, as perturbing as some applicants might find this process, being upfront in identifying risks will not weaken an application. Rather, the accurate and detailed identification of risks will make it more likely that the frameworks built around a business model (and in support of a business’ application) are fit for purpose.

As part of the application the business will also be required to provide clear governance structures, customer risk assessment methodologies, policies for due diligence and suspicious activity reporting, as well as financial crime prevention training procedures. Businesses are also required to appoint a Money Laundering Reporting Officer (MLRO) with relevant knowledge and experience.

The FCA will also expect to see a business plan and forecast in support of an application. This plan should include details of the business model, key individuals and responsibilities, sources of liquidity, details of the customer journey and flow of funds.

Since the Travel Rule requirement for cryptoassets came into effect on 1 September 2023, cryptoasset businesses must demonstrate compliance with this. The requirements of the Travel Rule are contained within the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulation 2022, and require relevant businesses such as exchanges or custodian wallet providers to collect, verify and share information relating to cryptoasset transfers.

As with any application with a regulatory body, the process should not be contentious, and businesses should be aware that the FCA is not actively trying to catch them out or deny an application. A collaborative approach inevitably yields more positive feedback.

Despite this, however, the application process can be long winded and subject to delays. It is not uncommon to have different case handlers and multiple requests for information provided previously which can cause dissatisfaction with applicants.

As such, a well-prepared and presented application is inevitably more likely to succeed and so engaging with an advisor can provide valuable insights and improve the chances of a successful registration. Therefore, as the FCA itself recommends, seeking independent legal advice can be key in presenting a well prepared and informed application.

Will registering with the FCA ‘future proof’ a business?

Currently, relevant crypto asset businesses are subject to limited financial services regulation, primarily aimed at anti-money laundering and counter-terrorist financing obligations. However, subject to governmental consultations, the future regulatory landscape will become more widely applicable, and the government anticipates implementing the legislation required to develop this regulatory regime in 2024.

Businesses wishing to undertake activities involving cryptoassets by way of business will, under this new regulatory environment, be required to obtain authorisation from the FCA. This is because it is intended that certain cryptoassets will be brought within the scope of the definition of ‘specified investments’ and, therefore, the activities in relation to these cryptoassets will be regulated as opposed to the cryptoassets themselves.

It is envisaged that this regulatory regime will be specific to certain types of cryptoassets depending on the regulated activity, and there will be more precise criteria set out in secondary legislation to determine whether a cryptoasset and activity is within the regulatory scope.

As well as existing regulated activities being applicable in relation to cryptoassets, there are also additional proposed activities specific to cryptoassets which will fall within the scope of future regulation, including:

  • Safeguarding and/or administration (custody) activities;
  • Issuance, payment and exchange activities;
  • Investment and risk management activities;
  • Lending, borrowing and leverage activities and;
  • Validation and governance activities.

 As such, carrying out regulated activities involving cryptoassets by way of business will require authorisation by the FCA under part 4A of the Financial Services and Markets Act (FSMA), and this will equally apply to firms already registered with the FCA under the MLR.

At Lawrence Stephens, our team is adept at assisting diverse businesses in harnessing the potential of cryptoassets. With our bespoke legal insights, we ensure your cryptocurrency adoption journey is seamless, safeguarded, and aligned with the developing digital finance sector.

Asim Arshad and Ricardo Geada discuss crypto’s legitimate use in The Times

Posted on: November 23rd, 2023 by Maverick Freedlander

Senior Associate Asim Arshad and Director Ricardo Geada discuss the importance of crypto and its legitimate use cases, while contextualising the technology’s misuse, in The Times.

Asim and Ricardo’s article was published in The Times, 23 November 2023, and can be found here.

It is critical for regulators, officials and the public at large to differentiate between the technology of crypto assets and its potential misuse. A broad-brush approach due to the actions of a few is misleading, short-sighted, and indicates a limited understanding of the technology, thus hampering its development as a powerful force for progress and financial inclusion.

Collaboration should be key in any strategy to combat crypto’s misuse, and UK authorities should more actively engage with other regulatory bodies overseas in order to share insights and intelligence to address crypto-related crimes, while fostering the growth of legitimate crypto businesses. The misuse of crypto assets should not overshadow its broader, legitimate applications.

Contrary to common misconception, it is crucial to understand that most blockchains are inherently pseudonymous, rather than anonymous. Every transaction on public blockchain is recorded on a transparent ledger, making the transaction history traceable. This traceability can serve as a powerful tool for law enforcement. This perpetual audit trail enables authorities to trace illicit activities back to their source.

The UK’s ambition to position itself as a global hub for crypto innovation is commendable, and is one of the main reasons that growth of crypto in the UK has far outpaced the likes of the US, Germany and Japan in recent years. However, striking a balance between robust regulation and fostering innovation is crucial. Overly stringent regulations, arguably like we are seeing with the new crypto asset financial promotions regime, might stifle the growth of the sector, pushing innovators and investors towards more accommodating jurisdictions instead.

The emergence of crypto-related crimes underscores the need for a comprehensive educational push. Regulatory bodies, in conjunction with the industry itself, need to work towards educating law enforcement agencies, financial institutions, and the general public in what is a nascent and constantly developing technology.

It is also crucial to recognise that the relevance and utility of crypto assets differ across global contexts. For someone in a developed, politically stable country, the urgency or use case of crypto may not be plainly obvious. However, for individuals in countries with economic instability, hyperinflation, or restrictive financial systems, crypto offers a lifeline and can serve as an alternative financial system, providing financial inclusion and allowing people to preserve their wealth against devaluing local currencies. Dismissing crypto merely based on their irrelevance to certain regions or occasional misuse overlooks their broader potential and global impact.

Understanding and leveraging the technology of crypto assets and their underlying blockchains require a nuanced approach that recognises their potential use cases as well as the need for adequate regulation to mitigate misuse.

For more information on our Blockchain and Digital Assets services, click here

Crypto assets for businesses

Posted on: November 1st, 2023 by AlexT

The business landscape is continually evolving, with technology being a major catalyst for fostering progress, increasing capabilities, and maintaining a competitive edge.

Among the recent innovations capturing the interest of businesses is the rise of crypto assets and the blockchain technology that underpins them. Major brands such as Microsoft and Sotheby’s, as well as independent companies from travel agencies to cafés, are increasingly adopting crypto assets and harnessing their potential, seeking to position themselves to benefit immensely from these distinctive digital assets.

What’s in it for businesses?

One of the main appeals of crypto assets is the swift and transparent payment transaction mechanism that they provide. In an age where cash payments are on a significant decline, the ability to facilitate fast, transparent and secure payments is appealing to consumers and businesses alike.

Additionally, transactions with crypto often attract fewer charges compared to traditional payment methods. Crypto assets do not require intermediaries to facilitate transactions and the elimination of these intermediaries like banks and payment gateways in favour of a decentralised verification system (in other words, the blockchain) minimises the costs associated with traditional payment processing. Also, by merit of being exclusively digital, crypto assets negate the need for physical payment infrastructures such as card machines.

An undeniable upside for businesses adopting cryptocurrency payment is virtually zero risk of chargebacks. With every transaction confirmed and immortalised on the blockchain forming a secure, tamper-proof and transparent record, they cannot be reversed. Consequently, businesses no longer need to wrestle with drawn-out, expensive chargeback processes.

Adopting crypto assets also offers a broader customer outreach. By bypassing traditional financial institutions, businesses can access the 1.7 billion unbanked population globally, as well as the 1.2 million unbanked individuals in the UK. Allowing for crypto asset payment also caters to the growing population of crypto asset enthusiasts,  granting a unique selling proposition amidst a competitive market.

Moreover, due to the borderless nature of crypto assets, such transactions do not require conventional currency conversions and can be sent to or from anyone in the world with a smart device and internet connection. This makes crypto assets an ideal form of payment for businesses that wish to expand their operations into new jurisdictions, without the usual friction points involved in optimising cross border payments.

What are the challenges for businesses?

Whilst there are a number of advantages for businesses, integrating crypto assets as a form of payment is not without its risks. One such risk comes from the fact that crypto assets are extremely volatile, and it is not unheard of to have massive fluctuations in a crypto assets value over a relatively small time frame of days and hours. This volatility can present challenges for businesses in being able to predict how much it will generate from crypto asset payments, and it can also expose the business to losses if the value of its crypto assets falls. In the same vein, it can also present opportunities for gains if there is an increase in the price action of a crypto asset.

For example, a retailer may sell an item for 0.035 Bitcoin (BTC), which at the time of writing is around £766. In the days after the sale the value Bitcoin may increase, such that 0.035 BTC is now worth £800. On the flipside, the value of BTC may decrease, such that the 0.035 BTC is now worth £735.

Another challenge is security. Whilst crypto assets are secured utilising complex cryptographic algorithms, they aren’t invincible against cyberattacks, phishing or fraudulent schemes. Thus, businesses using crypto assets need to be proactive in establishing robust cybersecurity defences and countermeasure procedures.

The developing regulatory environment around cryptocurrencies presents another challenge. As the legislative and regulatory landscape is still maturing, businesses adopting crypto assets as a form of payment may need to comply with unforeseen regulatory requirements and make an effort to stay informed of ongoing developments in this area.

However, with diligent planning and careful strategies, these challenges and risks can be substantially offset and mitigated.

What must businesses consider?

For businesses considering crypto asset integration, an effective policy and strategy should take into account the specific nature and operation of the business, its goods/services, geographical scope, and clientele. Particular consideration should be given the following points:

  • Choice of crypto assets: Given the plethora of cryptocurrencies available, it is important to consider which crypto assets in particular should be allowed to facilitate payment for the business. Important points to consider here would be the crypto assets stability, liquidity, popularity, and confirmation times.
  • Payment processing: It may be worth trying an external payment processor who can simplify the process of crypto asset acceptance, albeit at a cost. Alternatively, it is entirely possible to set up your own crypto payment processing system, but will require some technological expertise and knowledge.
  • Formulating guidelines: Businesses adopting crypto assets should have defined guidelines addressing transaction disputes, and refund mechanisms. There should also be procedures in place for handling price volatility, for example, through stablecoins or immediate fiat conversion upon receipt.
  • Continuous transaction oversight: Businesses allowing crypto asset payments will need need to be able to track, record, and report transactions for tax compliance. Crypto assets are taxable, and businesses will need to consider whether they choose to hold crypto assets on their balance sheet as an asset, or if they would rather liquidate the crypto assets to fiat upon receipt or at regular intervals.
  • Selecting an appropriate digital wallet: Considering the scale of operations, anticipated crypto holdings, and security requirements is vital when choosing a digital wallet. There are a variety of different wallets including cold wallets, hot wallets, custodial wallets, non-custodial wallets, multi-sig wallets and many other variations. It is important for businesses to choose a wallet which is compatible with their needs, and which they are confident with and able to keep secure.

How Lawrence Stephens can assist with your crypto challenges

While venturing into the world of crypto assets does bring its set of challenges and intricacies, the potential benefits are substantial. As with any business decision, prudent planning, accompanied by knowledgeable legal consultation, is key to ensure regulatory compliance and adept risk management.

At Lawrence Stephens, our team is adept at assisting diverse businesses in harnessing the potential of crypto assets. With our bespoke legal insights, we ensure your cryptocurrency adoption journey is seamless, safeguarded, and aligned with the developing digital finance sector.

Cryptoassets and taxation

Posted on: October 11th, 2023 by AlexT

For UK traders, investors and businesses dealing with crypto assets, it is important to understand the complex tax implications for this rapidly evolving sector. For many industry participants, the line between fact and fiction regarding the taxation of crypto assets is blurred, often leading to confusion.

Having clarity and understanding on the UK’s approach to the taxation of crypto assets is therefore vital for individuals and businesses to better plan their transactions and strategy, thereby optimising their tax burden.

The tax treatment of Crypto assets in the UK

The UK’s tax authority, HMRC, recognises that there are a number of different types of crypto assets, and have adopted a taxonomy that aligns closely with the FCA’s regulatory position. However, the tax treatment of crypto assets is dependent on the nature and use of the assets in question, as opposed to their classification.

To put to rest a common misconception, HMRC does not consider the buying and selling of crypto assets to be comparable to gambling. Whether a transaction can be properly characterised as gambling will be a question of fact and will instead be considered on a case-by-case basis.

Importantly, HMRC does not consider crypto assets to be currency, and therefore treats them as a traditional asset for tax purposes. Consequentially, profits made from crypto asset activities are taxable.

What taxes are applicable?

For individuals dealing with crypto assets, the two main types of tax applicable would be Capital Gains Tax (CGT) and Income Tax.

Capital Gains Tax

Capital Gains Tax is essentially a tax on the profit made when an asset that has increased in value has been sold or disposed. It is the gain that is made which tax is applied against, rather than the whole amount that it has been sold for. For example, if you bought Bitcoin at £16,000, and later sold for £25,000, the gain on which tax would be applied would be £9,000.

Disposal of crypto assets does not just include selling the crypto asset for fiat, but also trading it for another crypto asset, spending it on goods or services, or gifting it.

There is also an annual tax-free allowance, for such instances. For the 22/23 tax year, this allowance is £12,300, and for 23/24 it is £6,000. This means that gains up to the amount of the annual allowance are not subject to any CGT.

If the profits exceed this amount, then CGT will be payable on the amount above the tax-free allowance, with the rate payable depending on your taxable income.

Income tax

In some instances, crypto assets, and activities relating to them, can be treated as income in nature; for example, payment for services with crypto assets, receiving crypto assets as employee remuneration, or earning crypto assets from mining or staking activities.

In other circumstances, trading crypto assets may also be subject to income tax, especially if the trading activity is particularly frequent and regular. Again, whether an individual’s trading activity would constitute treatment as income for taxation purposes will be highly fact dependent and assessed on a case-by-case basis.

Crypto assets received by an airdrop might also be liable for income tax if the individual has taken an action in exchange for the airdrop, for example promoting or moderating the socials for a particular project.

In relation to mining or staking taxes, if the activity is professional in nature profits may be subject to income tax under trading income rules. If the activity is more casual, it would likely be subject to income tax as miscellaneous income.

If crypto assets are mined, then the amount of tax will be based on the value of the crypto asset at the time it was mined. If the mined crypto asset is later sold and its value has increased, there may also be CGT applicable on the profit made from the increase in value.

The rate of income tax payable would be dependent on the individual’s income for the particular tax year.

It is therefore important to keep detailed records of crypto asset transactions, as it is possible to reduce the gain, and therefore the tax burden, by deducting allowable costs such as transaction fees.

Cryptoasset tax treatment and businesses

For businesses engaged in crypto asset activity, the tax treatment would depend on the nature of activities and transactions. A business involved in crypto asset activity may be liable to pay a number of different taxes such as CGT, Corporation Tax, Income Tax, VAT, and Digital Services Tax. For example, if a business’s primary function is the trading of crypto assets, then profit and losses will be subject to corporation tax at the applicable rate.

The tax treatment of businesses will depend on the particular facts of its activities, and will take into account a range of factors.

Lost crypto assets

If the private key to a crypto asset wallet is lost, HMRC does not view this as a disposal of the asset. Whilst you may have lost access to the crypto assets within the wallet, you still technically own the assets.

However, in situations where there’s no realistic chance of recovering the crypto assets, it may be possible to file a negligible value claim and seek relief for a capital loss.

Gifts

Gifting crypto assets is viewed by HMRC as a disposal, and therefore will attract a tax liability in the form of CGT. In other words, you would be subject to CGT on the difference between what you originally paid for the crypto asset and its market value at the time it was gifted.

However, there are advantageous carve-outs when it comes to gifting crypto assets to your spouse or civil partner, as transfers between spouses/civil partners are not usually subject to CGT at the time of the gift.

Rather, the recipient takes on the original cost basis and will then be liable for any CGT if they later sell or dispose of the crypto assets.

Conclusion

Taxation and crypto assets can be a complex and nuanced area, with many considerations, and failure to report crypto gains or losses could lead to penalties and interest charges on unpaid tax liabilities.

It is therefore important to note that, although the nature of cryptoassets and the decentralised framework in which they operate allows for pseudonymity, HMRC has invested significant time and effort to ensure cryptoasset tax compliance.

HMRC has been known to request customer information from centralised exchanges, and also utilises technology and analytics to analyse data and transactions which can establish connections between cryptoasset wallets and transactions and the individuals behind them. 

With this in mind, it is imperative that individuals engaged in the crypto sector seek professional advice to ensure that tax liability is calculated correctly and is optimised in line with their strategy and objectives.

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.