In an article first published in the 2 February edition of Yorkshire Post in print and online (subscription required), Commercial Litigation and Fraud associate Ed Holmes considers developments in regulation of cryptoassets in the UK, and recent actions taken by the authorities relating to their use.
On 1 February the Treasury announced ground-breaking plans to regulate cryptoassets, in an attempt to balance the competing interests of technological innovation with necessary protection for consumers and business. With a proposed aim of making the UK “home to the most open, well-regulated, and technologically advanced capital markets in the world”, the government looks to beat the EU to the punch on introducing comparative crypto legislation, planned for 2024.
The UK consultation proposes phased legislation: firstly to regulate and thus legitimise fiat-backed ‘stablecoins’ (tokens with a value linked to traditional currencies), which it considers to have immediate “potential to become widely used as a form of payment”. The second phase would expand to broader cryptoassets which come with more potential risk for the consumer, but also “greater opportunities to support the UK’s growth agenda”. This would affect higher risk activity by customers and providers using cryptoassets where either or both are based in the UK, and would extend to trading and investment in crypto, operating exchange platforms and lending or borrowing.
This comes on top of moves that were taken last year by the FCA to increase restrictions on advertising crypto.
With a new regime on the horizon, officials are also enforcing the current laws more forcefully: HMRC has targeted cryptoasset trading platforms to locate individuals who may be liable to pay tax on crypto gains.
In February the FCA and West Yorkshire police broke new ground in Leeds after raiding several sites believed to be housing crypto ATM operators, which are currently illegal in the UK, in order to launder cash. This raid was the first of its kind and another recent signal that the UK authorities are finally starting to flex their muscles and seeking to impose greater restrictions on the largely unregulated crypto sector.
Meanwhile, the English courts have for some time been dealing with novel issues raised by crypto. Several years ago they accepted that crypto can be treated as property, enabling victims of fraud to obtain urgent remedies such as freezing injunctions to stop their stolen crypto from disappearing. More recently, the courts have even permitted the service of legal proceedings via NFT (non-fungible token).
Earlier this month the Court of Appeal potentially re-opened the door to claims against blockchain software developers in relation to duties alleged to be owed to Bitcoin owners. Tulip Trading Limited claims to have lost its “private key” to Bitcoin worth around $4billion as a result of a hack and argues that the software developers should implement a patch to enable it to recover its Bitcoin.
These will all be welcome developments to those who have long warned about the dangers of the unregulated, high risk crypto space. However, the devil will be in the detail and it remains to be seen how the rest of the world will respond to what is undoubtedly a global issue. On the other hand, crypto purists who see the technology as a means to escape the traditional global financial system and enable the direct exchange of financial services will be less impressed.
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