Cryptoassets are often depicted as inhabiting an online wild west. A place where people can thrive off uncertainty and a lack of regulation. This is starting to change in the UK. A Legal Statement made by the UK Jurisdiction Taskforce of the LawTech Delivery Panel (UKJT) and subsequent case law has introduced greater cryptoasset certainty under English Law.

Legal Status of Cryptoassets in the UK

In the ten years since Bitcoin was born, there has been a proliferation of cryptoassets. These include Litecoin, Ethereum, Ripple, Zcash and many more.

The term cryptoassets, rather than cryptocurrencies, is preferred by the UK regulatory authorities as it is more neutral and captures the broader range of tokens that are not just designed to act as a means of exchange (to which cryptocurrency typically applies, such as Bitcoin).

Although the area is plagued with a lack of accepted definitions, in this blog, “cryptoasset” is used in the sense of the Financial Conduct Authority’s (FCA) category of “exchange token” as distinct from “security tokens” or “utility tokens” which provide similar legal rights and obligations to traditional securities and money.

Definition of “exchange token”

In broad terms, the FCA has created a framework by categorising cryptoassets based on their intrinsic structure, as well as their designed use. On its webpage on cryptoassets, the FCA explains that cryptoassets such as Bitcoin are classified as unregulated “exchange tokens”, which:

“… are usually decentralised and designed to be used primarily as a medium of exchange. We sometimes refer to them as exchange tokens and they do not provide the types of rights or access provided by security or utility tokens, but are used as a means of exchange or for investment.”

More broadly, cryptoassets are considered to be “virtual assets”, as defined by the Financial Action Task Force (FATF) in their report Guidance for a risk based approach to virtual assets and virtual asset providers. Unsurprisingly perhaps, related regulation has been introduced at a national level; in some jurisdictions, at least.

Various concerns have been raised at the supranational level about what these virtual assets mean for the global financial system and data protection authorities; Libra, for example, being the latest, and so far greatest, crypto-bogeyman.

Uncertainty

What is surprising is that, despite the speed with which virtual assets have infiltrated the financial system (for example, there are already futures and exchange-traded notes in Bitcoin), the fact is that in England, and in many other jurisdictions, quite what a cryptoasset is remains unclear and unresolved.

The fundamental question of “what is a Bitcoin?” is far from new, and has been addressed recently both in the High Court and in the City of London Law Society’s (CLLS) submissions to the UKJT in relation to cryptoassets, distributed ledger technology (DLT) and smart contracts.

These submissions have now been responded to by a UKJT statement.

The Legal Statement

A legal statement published by UKJT in November 2019, says that cryptoassests are capable of being property which can be owned. While this Legal Statement is not binding, it will give market participants greater certainty around crypto transactions. Recent case law has enhanced such certainty.

The UKFT did not sought to define the term cryptoasset, saying that it would not be a useful exercise to do so given the rapid development of technology. Instead it focused on identifying the key features of a cryptoasset, and on answering key questions to do with ownership, transfer and whether under English law cryptocurrencies constitute “property”. Further:

  • Despite being property, cryptoassets are not things in possession because they are “virtual” and cannot therefore be possessed.
  • The novel and distinctive features possessed by some cryptoassets (intangibility, cryptographic authentication, decentralisation, rule by consensus) do not disqualify them from being property).
  • Cryptoassets are not disqualified from being property as pure information, or because they might not be classifiable either as things in possession or things in action.
  • A private key is not in itself to be treated as property because it is information.

In summary, the UKJT concluded that cryptoassets have all the legal characteristics of property and are, as a matter of English legal principle, to be treated as property.

AA v Persons Unknown [2019] EWHC 3556

In October 2019, a hacker bypassed the firewall and anti-virus software of a Canadian insurance company, encrypting its computer systems. The unknown hacker demanded $1,200,000 in equivalent Bitcoin in exchange for the decryption software.

The claimant, a cybercrime insurer of the Canadian company, paid the ransom by purchasing Bitcoin and transferring the amount into a Bitcoin wallet. Following recovery of the encrypted files, the claimant took steps to recover the ransom amount, which was traced back to a wallet linked to and controlled by Bitfinex, a cryptoexchange operated by two British Virgin Island entities.

The claimant subsequently issued various proceedings seeking, amongst other things, a proprietary injunction over the Bitcoins that had been traced back to the wallet controlled by Bitfinex.

Judgement

Given that proprietary injunctions can only be granted over property, the court had rule on whether or not Bitcoins constituted property under English Law.

The court considered in detail the UKJT’s “compelling” analysis (Legal Statement) of the proprietary status of intangible assets, which concluded that, although having many novel and unique characteristics, cryptoassets may be objects of property rights. The Court emphatically approved this approach.

Having accepted that cyrptoassets constituted property, the Court determined that all other requirements for a proprietary injunction were met and granted the injunction. This was the first time the courts have applied, and accepted, the analysis set out in the legal statement.

The International Perspective

Cryptoassets are usually not confined to a single jurisdiction and so the international picture remains a relevant consideration. This remains very fragmented. Even on a regional basis. The two questions to consider are whether cryptoassets are defined as legal tender and whether their exchange is legal. Cryptoassets and exchange are illegal in China for example. In the US cryptoassets have in some states been treated as legally substitutable for currency whilst cryptoexchange is legal, subject to state regulation.

Data Protection

Libra offers an example of how regulators will seek to protect data in the context of cryptoassets. Especially when such assets are linked to other forms of personal data. Such as a social media account.

Data protection authorities from around the world, including the UK’s Information Commissioner’s Office (ICO) and the European Data Protection Supervisor, have called for more openness about the proposed Libra cryptocurrency and infrastructure. On 5 August 2019, they issued a statement to Facebook and 28 other companies behind the project (the Libra Network) asking for details of how customers’ personal data will be processed in line with data protection laws.

Libra is a project to create a global cryptocurrency using blockchain technology, with Facebook as a founding member (through its subsidiary, Calibra). The Information Commissioner, Elizabeth Denham, noted that;

“Facebook’s involvement is particularly significant, as there is the potential to combine Facebook’s vast reserves of personal information with financial information and cryptocurrency, amplifying privacy concerns about the network’s design and data sharing arrangements”.

The statement notes that the ICO “are supportive of the economic and social benefits that new technologies can bring, but this must not be at the expense of people’s privacy”.

It asks a set of detailed, non-exhaustive questions of the Libra Network, for example, about the provision of clear and transparent information, informed consent, data sharing, use of processors, data privacy impact assessments, and how privacy policies and standards will work consistently across multiple jurisdictions.

The signatories note that they will work together to assert strong privacy safeguards at a global level.

Caution still advised

UKJT’s Legal Statement and subsequent case law should encourage continued innovation and improve market confidence for those in the global financial services market. As can be seen in the ICO statement it is in regulators interest to encourage the economic advantages of cryptoassets. But caution is still advised.

Investors should be wary of the international uncertainty in the regulation of cryptoassets and consider seeking specific legal advice for individual projects. If a business is looking to offer services which involve cryptoassets then data protection should also be considered.

If you have any questions on the issues raised in this article please get in touch.