01 Nov 2021

The Legal 500: Blockchain Country Comparative Guide 2021 - UK chapter

The Blockchain Country Comparative Guide aims to provide an overview of the law and practice of blockchain law across a variety of jurisdictions. This chapter relates to UK law.

 

Blockchain Market Overview

  1. Please provide a high-level overview of the blockchain market in your jurisdiction.  In what business or public sectors are you seeing blockchain or other distributed ledger technologies being adopted? What are the key applications of these technologies in your jurisdiction?

Distributed ledger technologies (“DLT”) are emerging in diverse sectors across the United Kingdom (“UK”), from financial technology to security, energy, entertainment, healthcare, cryptocurrency trading, transport and logistics, real estate and the ‘Internet of Things’. Financial services is a key area of strength and focus, as both financial institutions and government bodies explore the potential efficiencies that blockchain could bring to the clearing process, identity checks, settlement systems and payment systems. The COVID-19 pandemic and the developing conversation around environmental, social and corporate governance (“ESG”) concerns have also galvanised exploration into new uses of blockchain.

There are currently, however, few applications which are developed beyond a proof of concept stage. While there has been a degree of engagement with cryptocurrencies on the retail side—with cryptocurrency trading companies reportedly dominating the UK retail blockchain industry—this uptake is yet to translate into more than a handful of retailers accepting cryptocurrency as a means of payment. On the wholesale side, financial institutions have exhibited a degree of latency, owing perhaps in part to the legacy reputational issues surrounding the Bitcoin blockchain and uncertainty about how legal and regulatory frameworks will apply.

Despite this, some financial institutions have begun to take more decisive steps towards using the technology—particularly now that the UK’s financial regulators are moving towards establishing a clear regulatory regime in this area—and we have observed an increasing number of use cases being trialled in the market. The government itself is considering the introduction of a central bank digital currency (“CBDC”), which could be built on DLT.

Perhaps the most concrete gains to date are to be found outside of financial services in the area of supply chain management, as businesses seek to increase transparency, coordination and efficiency across their supply chains, and both businesses and individuals increasingly place a premium on the responsible and ethical resourcing of products and assets. The soaring use of non-fungible tokens (“NFTs”) in the art world is also considered by many to be a blockchain success story. 

The blockchain market is likely to evolve now that the UK has left the European Union (“EU”). The UK government has emphasised that Britain will be the natural global home of new and innovative financial services after Brexit, and there are many who believe that the UK will be in a unique position to boost its financial services industry by positioning itself as a blockchain jurisdiction.

  1. To what extent are tokens and virtual assets in use in your jurisdiction? To what extent have non-fungible tokens become a feature in your jurisdiction? Please mention any notable success stories or failures of applications of these technologies.

The majority of projects utilising blockchain in the UK remain in their infancy, although many appear promising. In the financial services sphere, a good number of firms have passed through the Financial Conduct Authority’s (“FCA”) Regulatory Sandbox (discussed in further detail at question 7 below), to test how DLTs might improve existing processes such as the issuance of short-term debt instruments.

A number of large-scale international blockchain projects involving global financial institutions also have a UK nexus. A notable example is the Diem payment system, first launched as the Libra payment system by Facebook Inc., which seeks to offer stablecoins in a number of jurisdictions including the UK in a manner that complements existing fiat currencies. Stablecoins are discussed further at question 8 below.  Another key example is Fnality International, a UK-based project which is backed by a consortium of financial institutions led by UBS, and which is developing tokenised versions of five major fiat currencies (CAD, EUR, GBP, JPY and USD). In June 2019, 14 major financial institutions (including Lloyds and Barclays) invested £50 million in Fnality, and the project hopes to be commercialised at some point in late 2021.

Some UK-based banks have also invested in blockchain technologies. For instance, in December 2020 Standard Chartered announced that it would partner with Northern Trust to launch Zodia Custody, a cryptocurrency custodian targeted towards institutional investors which is expected to begin operations in London in 2021. As we discuss at question 14, however, many mainstream financial institutions remain sceptical of cryptocurrency investments.

Encouraging progress has also been made in other sectors. Established industry players have been exploring how they might use blockchain to their advantage, such as UK energy supplier Centrica which has been investigating how peer-to-peer energy trading on a blockchain platform could reduce customer bills. In 2018 UK oil and gas company BP—together with other major oil and gas firms—launched a blockchain platform based in London to facilitate crude oil trading, and in 2021 the consortium announced its intention to expand the platform’s coverage to include petrochemicals.

The UK has also proven fertile ground for a number of successful start-ups including: Provenance, a digital platform which seeks to provide businesses with greater transparency by tracking products along supply chains; Zamna, a blockchain-powered service which streamlines airport check-ins by enabling airlines or government agencies to verify identities in a streamlined manner; and Medicalchain, a decentralised platform that enables the secure, fast and transparent exchange and use of medical data. Automakers, particularly of electric vehicles, are also harnessing blockchain technology in order to ensure that the materials and individual components they use are ethically sourced. For example, Volvo is using blockchain technology to track the supply of cobalt from the mine into the car itself.

The UK government and various regulators have themselves trialed the integration of blockchain technologies into their own processes, which we discuss further at question 6 below.

To date UK activity in the area of NFTs—unique records on a public blockchain capable of being traded and which represent ownership of a digital asset—remains fledgling. Having erupted into popular consciousness in March 2021, when digital artist Beeple sold an NFT representing his piece ‘Everydays: The First 5,000 Days’ at Christies in New York for $64.9m, NFTs have made waves globally at auction houses and dangle the promise of putting control back into the hands of digital creators. UK success stories include Benxine’s Oscar-nominated documentary “Claude Lanzmann: Spectres of the Shoah”, which in March 2021 became the first motion picture, documentary and Academy Award-nominated film to be minted and auctioned as an NFT. Ian Ranson, an associate in our IP and Tech group, takes a deeper dive into the world of NFTs and digital art in his piece A Digital Picture is Worth a Thousand Ether: NFTs and Digital Art.

As yet, there have been no heavily publicised failures of blockchain technologies in this jurisdiction. This is likely a by-product of the nascent nature of blockchain-related applications here in the UK.

  1. To what extent has blockchain technology intersected with ESG (Environment, Social and Governance) outcomes or objectives in your jurisdiction?

Blockchain technology has, through its link to cryptocurrencies like Bitcoin, garnered a reputation of being antithetical to ESG goals. Primarily, this is due to the carbon-intensive mining process and the increased risk of money laundering and fraud associated with cryptocurrencies.

However, as recognised in a report published in 2018 by the United Nations Principles for Responsible Investment network, blockchain technology can facilitate secure decentralised transactions, reduce instances of fraud, and increase transparency and efficiency in multi-party transactions—all of which could feasibly assist in the advancement of ESG goals.  There has been progress, moreover, in the market to make the carbon-intensive mining process more environmentally sound. This can be seen through the increasing number of blockchain-based systems moving away from the proof-of-work process to less energy intensive consensus methods such as proof-of-stake, and the increasing focus on powering DLT through the use of renewable sources and carbon-offset. For instance, UK-listed Argo Blockchain recently became the first publicly-traded climate positive cryptocurrency mining company.

In the UK, the benefits of blockchain technology to ESG are perhaps most evident in the social and governance spheres. For example, Proxymity—a digital proxy voting platform live in the UK market—uses blockchain technology to connect and authenticate an issuer company and its investors and shareholders, with the intention of making the AGM voting process more efficient, accurate and transparent. There have, moreover, been a number of collaborations between public sector bodies such as the Foreign, Commonwealth and Development Office and UK Aid and tech companies with the aim of using blockchain to help solve issues of supply chain transparency and manage logistics across humanitarian and aid funding.

In respect of the ‘E’ in ESG, the positive contribution of blockchain technology can most clearly be seen in respect of ESG reporting, where two prominent challenges are: (i) the lack of a consistent global set of measures and certifications that can be used by all market participants to measure and report their ESG risk and impact; and (ii) the lack of infrastructure through which this data can be shared in real-time. Distributed ledgers, through their creation of an immutable, real-time and verifiable shared database, have the capability to address these challenges. Currently, many of the projects aiming to deploy blockchain technology specifically with the goal of improving ESG data reporting are at the pilot stage, and will require integration with additional technology to be of practical use.

The Bank of England (“BoE”) has also signalled that if the UK adopts a CBDC (which may be based on DLT, as further discussed at question 7 below) this could play a role in the transition to a net zero economy. In a speech delivered in June 2021, a representative of the BoE identified that a UK CBDC network might process payments more efficiently and at lower energy intensity, and further noted that a CBDC may offer enhanced data and analytics which could enable the BoE to configure its payment system to maximise its energy efficiency.  

While a nascent trend, we expect the intersection of blockchain technology with ESG outcomes to continue to develop across 2021/2022.

  1. Has COVID-19 provoked any novel applications of blockchain technologies in your jurisdiction?

The UK government and many UK-based businesses have explored the potential uses of DLT since the onset of the COVID-19 crisis in 2020.

At the government level, Innovate UK—a government-led agency that supports businesses in developing and realising the potential of new ideas—awarded a number of grants to develop blockchain-based solutions for challenges arising from the COVID-19 pandemic. This included a grant to BlockMark Technologies in June 2020 to develop a register enabling independent verification of personal vaccination records, and a grant in November 2020 to eTEU to develop blockchain-based solutions to help UK businesses solve supply chain challenges caused by the pandemic.  

Blockchain also had a role to play at the frontline of the pandemic. In January 2021, two hospitals in England turned to blockchain technology to monitor the supply and cold storage of vaccine supplies, seeking to optimise record-keeping and data-sharing across supply chains. Two companies were involved in this process: Everyware, a digital asset tracking and monitoring provider, provided temperature-sensitive monitoring sensors that logged information on platforms provided by Hedera Hashgraph, a Texas-based DLT provider.

On the financial services side, in May 2020 the FCA launched its “Digital Sandbox” pilot, which was intended to provide enhanced support to innovative firms tackling challenges caused by the pandemic. 28 organisations were selected to take part in the 11-week pilot, which covered three broad areas exacerbated by the pandemic: scams and fraud, consumer vulnerability and SME financing.

Looking to the future, in June 2021 techUK—a technology-focussed trade association—launched a new campaign “blockchain reimagined”. In the upcoming months, this will explore the potential uses of blockchain in supporting the UK economy through COVID-19 and beyond, and will also consider cyber security and the connection between blockchain and climate change.

 

Legal and regulatory framework

  1. Please outline the principal legislation and the regulators most relevant to the use of blockchain technologies in your jurisdiction. In particular, is there any blockchain-specific legislation or are there any blockchain-specific regulatory frameworks in your jurisdiction, either now or envisaged in the short or mid-term?

There is no blockchain-specific legislation or regulatory rules addressing blockchain technologies in the UK. The FCA has, however, prohibited the marketing, distribution or sale—in or from the UK—to all retail clients of derivatives and exchange traded notes (“ETNs”) that reference certain types of unregulated, transferable cryptoassets. These rules came into force on 6 January 2021 and we discuss them further at question 11.

It is incorrect to assume that applications of blockchain that sit outside of this ban are similarly outside the scope of existing legal and regulatory regimes. There are several touch points where—depending on the precise nature of the application—existing frameworks will be engaged.

An immediate example of such a touch point is the fifth Money Laundering Directive as implemented in the UK (“MLD5”), the majority of which came into force in January 2020. This explicitly references the blockchain architecture surrounding cryptocurrencies, bringing  virtual currency exchange platforms and custodian wallet providers within the scope of anti-money laundering regulation such that they are required to implement anti-money laundering (“AML”) and counter terrorist financing (“CTF”) policies, controls and procedures, and are subject to reporting requirements.

Other areas of UK law which are technology neutral but which may be engaged by a blockchain application include data protection, property, tax, insolvency, privacy, intellectual property and rules regarding financial promotions (which may be engaged on an Initial Coin Offering or “ICO”).

Applications of blockchain technologies may also fall within the perimeter of investments and activities regulated by the FCA and the Prudential Regulation Authority (“PRA”). In April 2018 the FCA confirmed that cryptocurrency derivatives are capable of being financial instruments under the Markets in Financial Instruments Directive II and so dealing in, arranging transactions in, advising or providing other similar services in relation to derivatives that reference either cryptocurrencies or tokens issued through an ICO could require authorisation from the FCA. The FCA has, moreover, confirmed that certain types of cryptoassets will fall within its regulatory regime (discussed in further detail at question 10 below).

Even where cryptoassets fall outside of this perimeter, regulated firms undertaking activities involving unregulated cryptoassets may still be subject to regulatory rules in respect of those activities. It is notable that cryptocurrencies such as Bitcoin are currently only regulated in the UK for money laundering purposes, as referenced above.

Casting forwards, there are signs that the UK’s legal and regulatory regimes may be expanded to embrace a broader range of blockchain applications in the near future. In particular, Her Majesty’s Treasury (“HMT”) is currently considering: (i) bringing the promotion of certain unregulated cryptoassets within the scope of the financial promotions regime; and (ii) expanding the regulatory perimeter to include more categories of cryptoassets, with a particular focus on stablecoins. Both of these developments are discussed in further detail at question 8, below.

  1. What is the current attitude of the government and of regulators to the use of blockchain technology in your jurisdiction?

To date, the UK government and regulators have taken a balanced and flexible approach to the use of blockchain technology. Both have recognised that this technology has the potential to deliver significant benefits and have voiced support for its development. Both have also, however, stressed the need for caution, emphasising the importance of managing the range of risks observed in the cryptoasset market and of ensuring that the UK financial markets remain safe and transparent.

It is this measured approach which saw the FCA announcing an £11 million digital marketing campaign to warn young retail investors of the risks of investing in cryptoassets in July 2021, while also supporting tests of blockchain technology within its Regulatory Sandbox. Or indeed, the BoE undertaking analytical work to evaluate the risks and opportunities involved in the creation of a UK CBDC (discussed at question 7 below) while repeatedly warning about the potential systemic risks posed by cryptoassets.

The Kalifa Review—an independent report on the UK fintech sector commissioned by the government and published in February 2021—stressed the ongoing strategic importance of blockchain technology to the UK fintech market. This is suggestive of blockchain’s continuing relevance to the government’s tech agenda.

Finally, both the UK government and regulators have explored how blockchain might be used to improve their own internal processes, signalling their interest in this technology. For example, in addition to the examples relating to the COVID-19 pandemic highlighted at question 4, Her Majesty’s Land Registry (“HMLR”) has been looking at the possibility of tokenising UK real estate on a blockchain to reduce friction in real estate transactions, and in April 2019 demonstrated an end-to-end proof of concept real estate transaction using blockchain technology that took less than 10 minutes to complete. In January 2020, Her Majesty’s Revenue and Customs (“HMRC”) sought expressions of interest from vendors for a blockchain analytics tool to aid in catching cybercriminals trading in cryptocurrencies.

  1. Are there any governmental or regulatory initiatives designed to facilitate or encourage the development and use of blockchain technology (for example, a regulatory sandbox or a central bank digital currency initiative?)

There are several initiatives in the UK designed to encourage the development of blockchain technology, concentrated in the financial services sector.

In particular, there are a number of government and regulatory schemes which nurture start-ups and established businesses utilising blockchain. In 2018, Innovate UK announced that it would invest £19 million in projects based on emerging technologies such as DLT, and in 2019 the government reported that it had invested over £10 million through Innovate UK in a wide variety of DLT-related projects. On the regulatory side, the FCA has developed a number of fintech incubators, including its Regulatory Sandbox, which allows businesses to test innovative products and services with real consumers in a controlled environment. The FCA also has an Innovation Hub, a means by which new and established businesses can introduce innovative financial products and services to the market with support from the FCA.

The BoE has a Fintech Hub through which it seeks to understand what fintech means for the stability of the financial system, the safety and soundness of financial firms and its ability to perform its operational and regulatory roles. In the realm of data privacy, in 2019 the Information Commissioner’s Office launched a sandbox to support organisations who are developing products and services that use personal data in innovative and safe ways, including organisations that utilise blockchain.

In addition to this sandboxed support, changes are being made to the UK payments infrastructure which will facilitate the wider adoption of blockchain technology. In April 2021, the BoE launched a new omnibus account as part of its Real-Time Gross Settlement (“RTGS”) service, enabling it to support a wider range of innovative payment systems including those using DLT.

The UK may, moreover, ultimately place a distributed ledger at the heart of its economy. The BoE has invested significant resources into understanding whether a CBDC should be introduced in the UK as a complement to physical banknotes. A UK CBDC may—although will not necessarily—use DLT. In March 2020 the BoE launched a discussion paper on the opportunities and challenges presented by the introduction of a CBDC in the UK, and this was followed by a paper in June 2021 focussing on new forms of digital money (including a retail CBDC). These papers were complemented by the launch of a CBDC Taskforce by the BoE and HMT in April 2021, which will coordinate the exploration of a potential UK CBDC.

A final decision on whether to introduce a UK CBDC, and whether DLT would feature in its design, is still pending.

  1. Have there been any recent governmental or regulatory reviews or consultations concerning blockchain technology in your jurisdiction and, if so, what are the key takeaways from these?

In July 2020 HMT launched a consultation on proposals to bring the promotion of certain “qualifying cryptoassets” within the scope of the financial promotions regime. A “qualifying cryptoasset” is defined as “any cryptographically secured digital representation of value or contractual rights” that uses a form of DLT and which is fungible, transferable and does not fall within other regulated buckets, such as e-money, and is not a central bank currency. Responses are currently being considered.

At a high-level, such a change would mean that in the UK most unrestricted marketing or promotion of exchange tokens (such as a cryptocurrencies) and utility tokens would be a criminal offence unless approved by an authorised person under the Financial Services and Markets Act 2000 (“FSMA”). When carried out by an authorised person, the marketing or promotion would need to be clear, fair and not misleading and comply with other rules governing promotions of financial products. The aim is to protect consumers from misleading advertising and trading in these assets without adequate information as to the relevant risks. The proposed change is currently only focussed on promotions, but the FCA notes that further analysis is required to determine whether it is appropriate for the FCA to regulate cryptoasset trading activities themselves. The outcome of the consultation is expected to be published in late 2021.

In January 2021, HMT launched a consultation focusing on the regulation of cryptoassets and stablecoins. Stablecoins are a type of cryptoasset that aim to maintain a stable value relative to a specified asset, or a pool or basket of assets. Building on the FCA’s categories of regulated tokens, described in further detail at question 10 below, HMT proposes to add a new category known as “stable tokens” (i.e. stablecoins), and to introduce a regulatory regime for such tokens when used as a means of payment. This regime would cover firms issuing stable tokens and firms providing services in relation to them, either directly or indirectly to consumers.

HMT has stated that this represents the first step in an incremental, phased approach to the regulation of cryptoassets, and it will consider the case for regulating a broader set of cryptoassets in the future. The implications of stablecoins becoming widely used as a trusted form of sterling-denominated payments by households and non-financial businesses were also considered by the BoE in its paper on digital money published in June 2021, referenced at question 7.

At the consumer level, in June 2021 the FCA published research exploring consumer attitudes to, and patterns of usage of, cryptocurrencies. The FCA’s estimate for consumers holding cryptocurrency has risen to 2.3 million (up from 1.9 million in 2020), and 78% of adults in the UK said that they had heard of cryptocurrency. The FCA also identified that overall understanding of cryptocurrencies was declining, suggesting that some consumers might not fully understand what they are buying.

Finally, in December 2020 the Law Commission—a statutory independent body that keeps the law of England and Wales under review and recommends reforms—launched a Call for Evidence on smart contracts to provide an accessible account of the current law and set out how it will, or may, apply to smart contracts. This was followed by a Call for Evidence in April 2021 on digital assets which sought views about, and evidence of, the ways in which digital assets are being used, treated and dealt with by market participants (in addition to the potential consequences of digital assets being “possessable”). This builds on the work of the UK Jurisdiction Taskforce (“UKJT”), a body which brings together the Judiciary, the Law Commission of England and Wales and technology and legal professionals. In November 2019, the UKJT published a legal statement which sought to provide answers to critical legal questions as regards the status of cryptoassets and smart contracts under English and Welsh private law. Both of these Law Commission papers are a prelude to further discussion, and may give rise to legal reform in future.

These are in addition to the consultations and reviews identified at questions 6 and 7 above, that is: (i) the ongoing discussion surrounding the introduction of a UK CBDC; and (ii) the Kalifa review of UK fintech, published in February 2021. The latter set out a series of proposals for how the UK could extend its competitive edge over other leading fintech hubs and create the right framework for continued innovation, while supporting UK firms to scale.

  1. Has any official guidance concerning the use of blockchain technology been published in your jurisdiction?

In June 2018 the PRA wrote to CEOs of UK-authorised banks, insurance companies and large complex investment firms to emphasise the risks associated with cryptoassets—namely high price volatility, relative illiquidity, and concerns related to misconduct and market integrity—and set out those risk strategies and management systems that the PRA considers most appropriate to cryptoasset business activities. These include firms considering the risks relating to crypto-exposures in their capital and solvency assessments, and ensuring they have an appropriate risk management approach.

In July 2019 the FCA published guidance in a Policy Statement (FCA Policy Statement 19/22, (“PS19/22”)) seeking to clarify the regulatory perimeter for market participants carrying on activities in the cryptoasset market. The aim of the guidance is to enable participants to be clear on where they are conducting activities that require authorisation, and it is explored in further detail at question 10.

In March 2021 HMRC, the UK’s tax authority, published a dedicated HMRC Manual on the taxation of cryptoassets for individuals and businesses (including sole traders and partnerships), updating guidance previously published in December 2019. This new manual largely reflects pre-existing guidance, although it does include a broadening of the categories of cryptoassets covered, new topics such as the practice of ‘staking’ and new analysis on crypto-derivatives. HMRC’s approach to the taxation of cryptoassets is considered at question 10.

In July 2020 the Joint Money Laundering Steering Group (or “JMLSG”, which encompasses the leading UK financial services trade associations) updated its guidance on the prevention of money laundering and terrorist financing in the UK financial services sector to include new guidance for cryptoasset exchanges and custodian wallet providers. This guidance was approved by HMT in August 2020.

This guidance is in addition to EU guidance which—although the UK has now left the EU—should continue to be relevant, as well as that produced by international bodies such as the Financial Action Task Force, the Financial Stability Board and the International Organization of Securities Commissions (“IOSCO”). For example, in October 2021 IOSCO published guidance on how its principles for financial market infrastructures might apply to systemically important stablecoin arrangements, including the entities integral to such arrangements.

 

Cryptocurrency

  1. What is the current approach in your jurisdiction to the treatment of cryptocurrencies for the purposes of financial regulation, anti-money laundering and taxation?  In particular, are cryptocurrencies characterised as a currency? 

For the purposes of financial regulation, the FCA has adopted three categories for the classification of cryptoassets: (i) exchange tokens, which are not issued or backed by a central authority and are intended to be used as a means of exchange; (ii) security tokens, which are tokens amounting to a debt and/or an equity interest in an undertaking; and (iii) utility tokens, which can be exchanged by the holder for the use of a digital resource (such as use of a network, digital storage, computing power or an application). The classification of a particular cryptoasset will depend on the features of the particular asset and may change over time. Cryptocurrencies (such as Bitcoin or Litecoin) are generally classified as exchange tokens.

The FCA’s current position, articulated in PS19/22, is that exchange tokens (including most cryptocurrencies) and most utility tokens are usually outside the FCA’s regulatory remit. However as referenced at question 11 below, in October 2020 the FCA published new rules—which took effect from 6 January 2021—banning the marketing, distribution or sale to retail consumers of derivatives and ETNs that reference certain types of cryptoassets. Additionally, utility tokens which amount to “e-money” may be regulated under the UK’s E-Money Regulations, and the UK’s Payment Services Regulations may apply to international money remittance where exchange tokens are used. As referenced at question 8, HMT is currently considering whether the regulatory perimeter should be expanded to bring exchange tokens and utility tokens within the remit of the FCA, and further, whether there should be a new category of regulated stable tokens. At the moment, most cryptocurrencies would fall outside the scope of financial regulation in the UK, apart from AML regulations.

MLD5, the majority of which came into force in the UK on 10 January 2020 via amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), requires all cryptoasset exchanges and custodian crypto-wallet providers to comply with AML regulations, including registering with the FCA, implementing identity and other AML checks. They must also clearly disclose to customers where a cryptoasset activity is not covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme (as most cryptocurrency transactions will not be so covered).

For tax purposes, cryptoassets (including cryptocurrencies) are generally regarded by HMRC as capital assets that are subject to capital gains tax (“CGT”). Therefore, subject to various exemptions and deductions, when a cryptoasset is disposed of (including where it is used to purchase something, where it is sold for a fiat currency or where it is exchanged for another cryptoasset), any increase in value (by reference to Pounds Sterling) over the period that the asset was held, will be a capital gain on which the person or entity disposing of the asset will have to pay CGT. Any loss of value over that period will be a capital loss which can off-set any other capital gains the person or entity may have.

For VAT, in line with the Court of Justice of the European Union’s decision in the 2014 Skatteverket v David Hedqvist case, the position adopted by HMRC is that the exchange of a cryptocurrency for a fiat currency is a transaction that is exempt from VAT (as are financial services provided by a cryptocurrency exchange in facilitating the exchange of a cryptocurrency for a fiat currency or other exchange tokens). Where a cryptocurrency is used to pay for goods and services, VAT will still be chargeable in the normal way on the supply of those goods or services, but will not be due on the supply of the cryptocurrency itself. Cryptocurrency received from mining activities or other rewards for participating in a cryptocurrency network is not generally subject to VAT, but the receipt will usually be taxed as income (either as trading income or miscellaneous income).

If the cryptoasset activities of a person or business amount to taxable trading, any trading profits will be taxable as income. Transactions involving cryptoasset exchange tokens that are undertaken by businesses may, depending on the activity being undertaken, attract further taxes such as PAYE, National Insurance contributions and Stamp Taxes (for example, if an employee is paid in exchange tokens, this will normally give rise to the same PAYE/national insurance obligations as a cash payment).

On the question of characterisation, the dominant (although by no means the only) view in the UK appears to be that cryptocurrencies are not considered to be “currency” or “money”. This is, at least, the position adopted by the Cryptoassets Taskforce, a grouping announced in March 2018 that encompassed HMT, the FCA and the BoE, and which sought to provide a roadmap for the UK’s policy and regulatory approach to cryptoassets and DLT in financial services in a report published in October 2018. This point has not yet received judicial attention and may be subject to change, although the view of the Cryptoassets Taskforce is persuasive.

However, in UK law the consequences of cryptocurrencies not being characterised as currency are less significant than one may assume. For example, while cryptocurrencies are treated as capital assets for tax purposes, this is similar to the approach taken in the UK to all foreign currency. Subject to various exemptions (such as certain personal expenses) and deductions, when foreign currency is disposed of (spent), changes in the value of that currency by reference to Pounds Sterling will be treated as capital gains or losses for the purposes of CGT. Additionally, in terms of asserting or exercising legal rights over cryptocurrencies, much more turns on whether or not a cryptocurrency can be characterised as property (considered further below) than whether it is characterised as currency.

  1. Are there any prohibitions on the use or trading of cryptocurrencies in your jurisdiction?

There are currently no specific prohibitions on the use or trading of cryptocurrencies in the UK.

However, the FCA has instituted a ban—which took effect from 6 January 2021—on the marketing, distribution or sale to retail clients of certain investment products (such as derivatives and ETNs) which reference cryptoassets. The FCA is of the view that retail consumers cannot reliably assess the value of these products because: (i) the underlying cryptoassets have no reliable basis for valuation; (ii) there is a prevalence of abuse and financial crime in the secondary market for cryptoassets; (iii) there is extreme volatility in cryptoasset prices; and (iv) retail consumers have an inadequate understanding of cryptoassets and there is a lack of a clear investment need for investment products referencing cryptoassets. The FCA has estimated that the harm to retail consumers that could be reduced by implementing this ban in the UK is in the range of £75 million to £234.3 million per year.

Additionally, as discussed in more detail in questions 8 and 10: (i) the MLRs require cryptoasset exchange providers and crypto-wallet providers to register with the FCA, comply with AML checks and make certain disclosures to customers; and (ii) HMT is also currently considering feedback on its proposal to regulate promotions of certain cryptoasset investments.

  1. To what extent have initial coin offerings taken place in your jurisdiction and what has been the attitude of relevant authorities to ICOs?

There are no outright prohibitions on launching an ICO in the UK, although, depending on the particular ICO, various regulations may apply (as further described in question 13 below).

In terms of the UK market, in the peak period of ICOs in early 2018, according to a report by PWC in collaboration with Crypto Valley, the UK was in the top 5 countries globally (based on funding volume) for launching ICOs. In line with the global trend, the market for ICOs declined significantly during 2018—the so-called “crypto winter”. However, more recently the market appears cautiously to be growing again, with the focus shifting away from ICOs involving the launch of unbacked cryptocurrencies towards more stablecoins, security tokens and utility tokens. The associated emergence of decentralised finance (“DeFi”) is considered in further detail at question 18.

The advent of ICOs has seen the UK authorities adopt a relatively sceptical approach, urging caution on the part of investors. In September 2017, the FCA issued a consumer warning about the risks of ICOs advising consumers that ICOs are “high-risk, speculative investments” and that “[y]ou should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g. business plan, technology, people involved) and prepared to lose your entire stake.”  The warning goes on to highlight that this is an unregulated space, there is no investor protection, the value of tokens tends to be extremely volatile, there is a high potential for fraud, there is usually inadequate documentation for many of these projects and many of the projects are very early stage, meaning “[t]here is a good chance of losing your whole stake.” 

The House of Commons Treasury Committee echoed such sentiments in its September 2018 report on cryptoassets, emphasising that “[c]rypto assets and ICOs are extremely risky” and the PRA and the Cryptoassets Taskforce share largely the same concerns. Indeed, as highlighted at question 9, the PRA has written to the CEOs of banks, insurance companies and designated investment firms to emphasise the risks associated with cryptoassets, enjoining firms to consider the risks relating to crypto-exposures in their capital and solvency assessments, and ensure they have an appropriate risk management approach.

  1. If they are permissible in your jurisdiction, what are the key requirements that an entity would need to comply with when launching an ICO?

ICOs as such are not regulated in the UK, in that there are no overarching laws imposing legal and/or regulatory requirements on the activity of launching or running an ICO. As a result, whether an ICO will be subject to regulatory requirements is determined on a case-by-case basis. It is worth highlighting that all ICOs will be subject to generally applicable laws such as those concerning taxation, the sale of goods, trading standards, and laws preventing the deception of consumers/investors.

Where an ICO is of a cryptocurrency which functions like Bitcoin or Litecoin—that is, an exchange token—the UK’s regulatory perimeter is not engaged (as further detailed at question 10 above), and no regulatory requirements apply (aside from AML requirements). Subject to the application of the UK’s E-Money Regulations, the position is the same for utility tokens. Where a utility token does constitute e-money, however, the issuance may itself be a regulated activity for which authorisation or registration is required. A known problem that has been reported, moreover, is that security tokens are occasionally dressed up as utility tokens.

Organisations looking to raise money by means of an ICO would usually be looking to do so by way of selling debt and/or equity (i.e. shares in, or a right to profits of, the organisation). In these cases, the token will almost certainly be regarded as a security token and thus subject to financial regulation as a security. This means that the issuer will have to comply with, for instance, AML requirements, restrictions on financial promotions, and may be required to comply with prospectus and disclosure and transparency obligations. A company will not usually need regulatory permissions to act as an issuer of its own security tokens, but other market participants involved in an ICO, such as consumer advisers and brokers, may require authorisation or registration.

It is possible that further regulatory requirements will be imposed on ICOs in future. The House of Commons Treasury Committee, in its report published in September 2018, recommended that the FCA should be given more power to control how crypto-exchanges and ICO issuers market their services by bringing the activities they perform into the regulatory perimeter. Finally, as discussed in question 8, in July 2020 HMT published a consultation paper proposing that the FCA’s regulatory perimeter be expanded to include the promotion of certain cryptoassets, which would increase the regulation around ICOs in the UK.

  1. Is cryptocurrency trading common in your jurisdiction?  And what is the attitude of mainstream financial institutions to cryptocurrency trading in your jurisdiction?

According to the BoE in a submission from May 2018, cryptocurrencies are not widely accepted as a means of payment in the UK, with no major UK high street or online retailer accepting the most common cryptocurrency Bitcoin. While the BoE estimates that around 500 independent stores do accept Bitcoin, this amounts to an average of less than one per town in the UK.

Investment and trading in cryptocurrencies is likely somewhat more common, though, with a number of large cryptocurrency exchanges offering direct exchange of Pounds Sterling for Bitcoin and other cryptocurrencies. Coinbase, a leading crypto wallet provider and exchange platform reportedly has over 100,000 daily active users in the UK and BitcoinPoint, through a deal with cash machine operator Cashzone, allows Bitcoin holders to sell their Bitcoin at over 18,000 ATMs in the UK. It is therefore relatively simple for individuals and organisations to buy and trade cryptocurrencies. While the pseudonymity afforded by most cryptocurrency networks means it is difficult to compile geographical statistics on cryptocurrency investment, FCA consumer research published in June 2021 indicates that 4.4% of the general population currently own cryptocurrencies, which amounts to approximately 2.3 million adults in the UK.

The Cryptoassets Taskforce also observed in its October 2018 report that while a number of online cryptoasset exchanges operate in the UK, only around 15 of a global market of 206 were headquartered in the UK. Of these 15, the 12 with visible trading activity accounted for around 2.66% of daily global trading volumes. The FCA has, moreover, sent a strong signal that cryptoasset exchanges operating in the UK must engage with its processes and comply with its rules: in June 2021 the FCA banned Binance—the world’s largest cryptocurrency exchange—from undertaking any regulated activities in the UK without its written consent, after finding that Binance was “not capable of being effectively supervised”.  It is yet to be seen whether this ban will influence other cryptoassets exchanges’ decision to operate in the UK.

Mainstream financial institutions have remained fairly sceptical of cryptocurrency investments. This may also be influenced by the PRA’s warning to the CEOs of UK-authorised banks, insurance companies and large complex investment firms discussed at question 9 above. The BoE in March 2018 observed that systematically important UK financial institutions had negligible exposure to cryptoassets and to the ecosystem around them. Further, in April 2021, the leading UK bank NatWest announced that it would not engage customers whose main business involves cryptocurrency transactions and in June 2021 announced that it would limit transactions to cryptocurrency exchanges. These announcements followed fellow leading UK bank HSBC’s announcement that it would not accept incoming transfers from cryptocurrency exchanges.

It has also been suggested that COVID-19 has increased the appetite for cryptocurrency, in particular Bitcoin, with high profile investors turning to it as a hedge against potential inflation—Bitcoin has seen a staggering price increase during the pandemic of roughly 680% from a price of around USD 6,400 at the start of lockdown in the UK on 23 March 2020 to a price of around USD 43,500 on 26 September 2021.  Alongside this increased interest in cryptocurrencies, there has been an uptick in levels of cyber scams and criminals requesting cryptocurrency as methods of payment for ransomware attacks or payment for fake goods on fraudulent websites. There are also reports of an influx of cryptocurrency investment scams, where scammers are impersonating crypto traders or crypto exchanges promising investors high returns in exchange for buying cryptocurrency such as Bitcoin. The FCA has issued warnings about cryptoasset-related investment scams.

 

Other tokens, virtual assets (including crypto-securities)

  1. Are there any relevant regulatory restrictions or initiatives concerning tokens and virtual assets other than cryptocurrencies (e.g. trading of tangible property represented by cryptographic tokens)?

Aside from the ban on investment products referencing cryptoassets and the proposed regulation of cryptoasset promotions (highlighted at questions 8 and 11 above), there are no prohibitions in the UK on issuing or trading virtual assets. In many cases virtual assets other than cryptocurrencies will amount to securities which will be subject to financial regulation by the FCA.

As discussed in more detail at questions 8 and 9 above, UK regulators are taking a keen interest in cryptographic tokens and virtual assets, undertaking consultations and publishing numerous reports. The FCA’s Regulatory Sandbox, the BoE’s Fintech Hub and the data protection sandbox of the Information Commissioner’s Office (discussed in question 7 above) also represent some practical initiatives taken by regulators/public sector bodies that are designed to facilitate innovation in this area in the UK.

  1. Are there any legal or regulatory issues concerning the transfer of title to or the granting of security over tokens and virtual assets?

Whether UK law recognises title to tokens and virtual assets (and thus permits legal transfer of that title), and whether security (such as a charge or lien) can be granted over tokens and virtual assets, largely turns on whether tokens and virtual assets are considered property under UK law.

The current trend points towards tokens and virtual assets being recognised as property in UK law.

The main challenge from an English legal perspective stems from the fact that the common law traditionally only recognises property as either real property (land) or personal property, with all personal property being either a chose in possession (tangible property) or a chose in action (an intangible legal right to possess something that can be enforced by an action in a court). Because of this, English courts have historically refused to recognise information or data (other than intellectual property rights subsisting in that information or data) as property, as they are neither tangible nor are they a legal right capable of being enforced. Cryptographic tokens and virtual assets simply exist as information or data on a distributed ledger or blockchain, with anyone who knows the relevant private key (itself simply information/data) having the ability to deal with those tokens or virtual assets. It is therefore possible to reason by analogy that they are not property for the purposes of English law.

However, it is recognised that tokens and virtual assets have many of the characteristics of property. A classic statement at common law of key characteristics of property comes from Lord Wilberforce in the 1965 case of National Provincial Bank v Ainsworth: property “must be definable, identifiable by third parties, capable in its nature of assumption by third parties and have some degree of permanence or stability”. A virtual asset such as Bitcoin, for example, is readily seen as having all of these characteristics.

Several more recent court decisions support the view that English law may recognise tokens and virtual assets as property. In the 2012 case Armstrong DLW GmbH v Winnington Network Ltd, the High Court of England and Wales (“EWHC”) recognised EU carbon trading allowances as property. This was despite the fact that they were are not a chose in possession and do not neatly fit into the category of a chose in action. Instead, it is possible they are “some form of ‘other intangible property’”. In the 2019 Singaporean case of B2C2 Ltd v Quoine Pte Ltd, common law principles similar to those in England and Wales were applied to find that virtual currencies could be regarded as property under Singaporean law. In 2019, in an unreported interlocutory decision in Robertson v Persons Unknown, Justice Moulder of the EWHC granted an asset preservation order over 80 Bitcoin, showing that the English courts are open to recognising virtual assets as property for certain purposes. In December 2019, in AA v Persons Unknown, Justice Bryan of the EWHC found that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction. This decision, which does not constitute definitive legal authority as it relates to an interim application, was reached on the basis that the UKJT’s legal statement on cryptoassets and smart contracts was found to be an accurate statement as to the position of cryptoassets under English law. In December 2020, in Ion Science Ltd v Persons Unknown, Mr Justice Butcher of the Commercial Court found that there was at least a serious issue to be tried that Bitcoin and other cryptoassets are property under English common law, in line with the UKJT’s position. This decision is also interim and does not constitute definitive legal authority.

In its legal statement—published in November 2019—the UKJT concluded that cryptoassets like Bitcoin are to be treated in principle as property under English law, as they “possess all the characteristics of property set out in the authorities” and are not otherwise disqualified. The UKJT suggested that cryptoassets can be regarded as intangible personal property (whether or not they meet the definition of a chose in action), and should be treated as such, in principle. This means that, under English law, security can likely be granted over virtual assets in generally the same way as it is granted over other intangible property.

 

Smart Contracts

  1. How are smart contracts characterised within your legal framework? Are there any enforceability issues specific to the operation of smart contracts which do not arise in the case of traditional legal contracts?

There is at present no definitive authority demonstrating that smart contracts are legally binding and enforceable under English law, neither in the form of a test case nor legislation. However, a degree of certainty was introduced by the publication of the UKJT legal statement referred to elsewhere in this publication.

As noted at question 8, the Law Commission published a Call for Evidence relating to smart contracts in December 2020, closing in March 2021, which sought views on the law relating to smart contracts (including in relation to relevant definitions, the formation of such contracts and their interpretation), scoping and possible uncertainties or gaps. It has also since launched a digital assets project, building on the conclusions of the UKJT legal statement and looking in particular at whether digital assets should be “possessable”. At the time of writing, we await the outcome of these initiatives. 

The prevailing view is that it should be possible to enter into a binding smart contract as long as the usual requirements for a valid contract under English law are met, namely, an offer and acceptance; an intention to create a legal relationship; certainty of terms; and each party giving something of benefit, referred to as “consideration”.

The UKJT concluded that the ordinary rules and interpretative principles of English contract law can, and should, apply to smart contracts, including those written entirely in computer code. It notes in its Legal Statement that: “a Smart Contract is capable of satisfying those requirements just as well as a more traditional or natural language contract, and a Smart Contract is therefore capable of having contractual force”.

One important interpretative difficulty with this approach is whether, and how, smart contracts might be avoided in cases of frustration, mistake or fraud. The automatic, self-executing and immutable nature of smart contracts gives rise to doubts as to whether they could be void, voidable and rescinded under English law, either by the parties or the courts.

Another challenge is the application to smart contracts of English legal rules which require certain documents to be “signed” or “in writing”. On this point, the general consensus, supported by the Legal Statement of the UKJT, is that a statutory “signature” requirement can be met by a private key, or where the code element of a smart contract is recorded in source code.

There is no requirement under English law for parties to a contract to know each other’s real identity and, as such, a smart legal contract between anonymous or pseudonymous parties ought to be capable of giving rise to binding legal relations. There may be practical problems in an enforcement scenario where one party is unable to identify a named defendant for the purpose of proceedings where the smart contract is not performed, or is performed incorrectly.

Outstanding questions around the development of on-chain dispute resolution mechanisms, were raised in a report published by the Law Society and the Tech London Advocates' (“TLA”) Blockchain Legal and Regulatory Group. The UKJT has since published the Digital Dispute Resolution Rules with a view to enabling the rapid resolution of blockchain and crypto legal disputes by offering users a procedural framework and a choice of either arbitration or expert determination.

The data governance challenges associated with the creation of correctly performing smart contracts are also discussed in the TLA report and more generally by commentators.

  1. To what extent are smart contracts in use in your jurisdiction?  Please mention any key initiatives concerning the use of smart contracts in your jurisdiction, including any examples relating to decentralised finance protocols.

A number of important UK initiatives are in progress, indicating that smart contract technology is maturing.

Many UK financial services market participants, including trade associations, are proponents of the mainstream adoption of smart contract technology. The International Swaps and Derivatives Association (“ISDA”), for example, has argued that smart contracts can play a role in the derivatives market and has published a series of guidelines that aim to support technology developers by promoting compliance with existing legal, regulatory and commercial standards, many of which are reflected within the existing ISDA documentation architecture. The pace of adoption of ISDA’s Common Domain Model, a machine-readable and machine-executable data model for derivatives products, processes and calculations, is also accelerating.

As noted in question 6, HMLR (and its Digital Street unit) continues to explore the use of blockchain, distributed ledgers and smart contracts in the land registration and property buy-sell process. 

Firms that have participated and that continue to participate in the FCA Regulatory Sandbox are using smart contracts for a variety of purposes, including to automate payments, transfer assets, provide fully automated, decentralised flight delay insurance, or facilitate charitable donations. Please refer to question 7 above for further details.

In March 2020, the British Standards Institute published a draft publicly available specification on smart legal contracts which was intended to provide some universal technical parameters to assist organisations wishing to develop or adopt smart contracts, or to digitise their conventional contracts. 

It is worth noting a few other important smart contract projects, albeit not UK-specific. One of the most popular smart contract implementations is Ethereum which allows contracts to be written in a bespoke programming language, Solidity. There is also the R3 consortium's Corda, which aims to enable the codification of smart contracts and to provide a decentralised ledger that is authoritative and immutable. As highlighted at question 6, in 2018 HMLR announced that it was working with R3's Corda platform to investigate potential uses of blockchain, and in April 2019 demonstrated an end-to-end proof of concept real estate transaction using blockchain technology that took less than 10 minutes to complete.

There has been a steady increase in the adoption of decentralised finance, or DeFi, applications, many of which leverage smart contract functionality to facilitate a range of use cases, such as margin trading, lending and borrowing. One example of a DeFi product is Uniswap, an automated liquidity and trading protocol in a system of non-upgradeable smart contracts on the Ethereum blockchain. It has been reported that PayPal is considering how to integrate smart contract and DeFi applications into its platform.

Please also refer to question 1 above for prominent examples of applications of blockchain technologies in the UK.

 

Enforcement and judicial consideration

  1. Have there been any governmental or regulatory enforcement actions concerning blockchain in your jurisdiction?

The UK authorities have acknowledged the need, and have shown willingness, to take measures to protect consumers from harm arising from the deployment of blockchain technologies. By way of example, and as considered more fully in question 11, the FCA banned the sale, marketing and distribution to all retail consumers of all derivatives and ETNs that reference unregulated transferable cryptoassets, from 6 January 2021. Most recently (as referenced at question 14) in June 2021 the FCA found that the world’s largest cryptocurrency exchange, Binance, was “not capable of being effectively supervised” and that it appeared to be selling banned crypto derivatives, and imposed requirements on them.

In June 2020, the Secretary of State for Business, Energy and Industrial Strategy in the UK successfully petitioned the EWHC to wind up a company that facilitated an online cryptocurrency trading platform. This followed enquiries by the Insolvency Service which found that at least 108 clients claimed they had lost in total just under £1.5 million using the trading platform.

The UK’s Economic Crime Plan 2019-2022, published in July 2019, contemplates taking action to ensure cryptocurrencies are not used for money laundering and other illicit activity and will involve going “beyond the requirements set out in [MLD5], bringing all relevant cryptoasset businesses into AML/CTF regulation in January 2020. This will aim to not only meet the latest international standards but provide one of the most comprehensive responses globally to the use of cryptoassets for illicit activity.” As discussed in questions 5 and 10, since January 2020 the FCA has had regulatory powers (including investigation and sanctioning powers) to supervise cryptoasset businesses for money laundering and counter-terrorist financing purposes.

UK law enforcement authorities have increasingly identified cases of cryptoassets being used to launder proceeds of offline crime. In June 2021, it was reported that detectives in the Economic Crime Command team of the UK’s Metropolitan Police had seized around £114 million worth of cryptocurrency as part of an ongoing money laundering investigation, making the confiscation the largest of its kind in the UK at the time. This was swiftly followed by the seizure of cryptocurrency worth almost £180 million in London. 

The proposed expansion of the UK’s legal and regulatory regimes to cover a broader range of blockchain applications (further described at question 8 above) may result in an increase in enforcement activity.

Please also refer to question 6 above for details of the current attitude of the UK government and regulators to the use of blockchain technology.

  1. Has there been any judicial consideration of blockchain concepts or smart contracting in your jurisdiction?

There is limited case law authority concerning blockchain technology in the UK. However, as discussed in more detail at questions 16 and 17, the UKJT has considered legal questions relating to cryptoassets, including whether they constitute property under English law and the validity of smart contracts.

In the 2019 case of Ang v Reliantco Investments Ltd the EWHC held that it had jurisdiction to hear a case between a Cyprus-based trading platform that included Bitcoin futures, and one of its retail customers, Ms Ang, because she was classified as a consumer under the Brussels I Regulation (recast) (EU) 1215/2012 (which enables a consumer to bring proceedings in the courts of the member state in which they are domiciled). This case concerned the procedural question of claiming jurisdiction, rather than a substantive question.

The judgment in Ion Sciences Ltd v Persons Unknown (unreported, 21 December 2020), a case relating to an alleged initial coin offering fraud, further reinforces the view that cryptoassets can be treated as “property” under English law and capable of being subject to a proprietary injunction.  The court also gave guidance as to the lex situs of cryptoassets and made available effective remedies from the English court in order to assist recovery of cryptoassets.

As noted in question 10 above, the Court of Justice of the European Union accepted in the 2014 case Skatteverket v David Hedqvist that no VAT is payable on an exchange of cryptocurrency for a national currency. Various UK tax cases have acknowledged the findings in the Hedqvist case.

The Singapore Court of Appeal did not come to a final position on the treatment of cryptoassets as property for the purposes of being held in trust in B2C2 v Quoine, referenced at question 16 above. However, Menon CJ referred to the UKJT legal statement and commented that: "there may be much to commend the view that cryptocurrencies should be capable of assimilation into the general concepts of property”. We refer in question 16 to the decision in Robertson v Persons Unknown, in which the EWHC granted an asset protection order over Bitcoin, to the decision in AA v Persons Unknown in which the EWHC found that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction and to the decision in Ion Sciences Ltd v Persons Unknown in which the Commercial Court found that there is at least a serious issue to be tried that Bitcoin and other cryptoassets are property under English common law.

On 8 April 2020, the High Court of New Zealand issued a judgment concluding that cryptocurrencies are a species of intangible personal property capable of being the subject matter of a trust. This judgment also referred to, and generally followed the reasoning set out in, the UKJT legal statement.

The Financial Markets Law Committee has considered questions of governing law and the application of conflict of laws rules, proposing several potential solutions (‘Distributed Ledger Technology and Governing Law: Issues of Legal Uncertainty’ (March 2018)). In April 2021, the UKJT published its Digital Dispute Resolution Rules, offering parties to smart contracts the option to incorporate dispute resolution clauses. These rules aim to facilitate resolution through arbitration or expert determination, noting that either of these options offer greater flexibility than litigation and for technical experts to be appointed, enabling more effective and efficient resolution.

 

Other generally-applicable laws or regulations

  1. Are there any other generally-applicable laws or regulations that may present issues for the use of blockchain technology (such as privacy and data protection law or insolvency law)?

As noted above in question 5, the UK has not legislated specifically in relation to blockchain, DLT or cryptoassets, with the exception of the FCA ban on the marketing, distribution or sale to retail clients of derivatives and ETNs referencing certain types of cryptoassets. A number of areas of law may yet, however, be engaged by a blockchain application.

A notable issue for all UK or EU blockchain applications is their interaction with data protection legislation, including the UK version of the EU General Data Protection Regulation (“GDPR”), in particular, the question of whether blockchain technology meets the requirements for personal data erasure. As noted in the Kalifa Review, the requirement for all data to be “necessary” for the purpose for which it is collected also makes it difficult for firms to experiment with personal data sets, including using AI. Please refer to our 2019 paper March of the Blocks for further detail and our article The Collapse of Cryptography? Considering the quantum threat to blockchain for consideration of whether the rise of quantum computing threatens the ability of blockchain solutions to respect the fundamental principles of data protection and privacy. 

Please also see question 5 above for details of how the UK AML framework applies to blockchain.

Another source of uncertainty is how to treat cryptoassets for the purposes of insolvency proceedings. Difficult questions in this context may also include how to trace cryptoassets in cases where the debtor does not disclose their existence and how to dispose of them.

  1. Are there any other key issues concerning blockchain technology in your jurisdiction that legal practitioners should be aware of?

As suggested at question 1 above, the blockchain market is likely to evolve now that the UK has left the EU. There are indications that the end of the Brexit transition period is starting to galvanise the UK into positioning itself as a more blockchain-friendly jurisdiction.

International (including UK) antitrust authorities are increasingly showing an interest in the potential risks of anticompetitive conduct associated with the use of blockchain technology, including the potential for information sharing and co-ordination, among other things.

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Ben Kingsley
Partner at Slaughter and May
Duncan Blaikie
Partner at Slaughter and May
Ian Ranson
Associate at Slaughter and May
Emily Bradley
Senior Professional Support Lawyer at Slaughter and May
Selmin Hakki
Senior PSL at Slaughter and May