Blockchain Market Overview
- 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”) have been applied in diverse sectors across the United Kingdom (“UK”), from financial technology to security, energy, entertainment, healthcare, cryptocurrency trading, transport and logistics and real estate. 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 and settlement and payment systems. The conflict in Ukraine (with accompanying concerns that cryptoassets will be used to evade sanctions) and increasing awareness of environmental, social and corporate governance (“ESG”) issues have further galvanised conversation around how DLT is deployed.
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. A report from Checkout.com published in April 2022, which found that 30 per cent of UK shoppers intended to use cryptocurrencies as a means of payment in 2022, suggests that this could change—although turbulence in the crypto markets that emerged in May 2022 (a ‘crypto winter’) may change this story yet again. 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 in addition to pronounced market volatility.
Despite this, some financial institutions have begun to take more decisive steps towards engaging with DLT and cryptoassets—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, and has announced its ambition for the UK to become a global hub for cryptoasset technology and investment.
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 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.
- 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 6 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 have a UK nexus. A notable example is Fnality International, a UK-based project backed by a consortium of financial institutions led by UBS, 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 company received further, significant investment from the clearing giant Euroclear in March 2022.
Some UK-based banks have also invested in blockchain technologies. For instance, Standard Chartered has partnered with Northern Trust to launch Zodia Custody, a cryptocurrency custodian targeted towards institutional investors. Many mainstream financial institutions remain, however, sceptical of cryptocurrency investments.
Encouraging progress has been made in other sectors, with established industry players exploring how best to leverage blockchain technologies. UK energy supplier Centrica 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 London-based blockchain platform to facilitate crude oil trading, and in 2021 the consortium announced its intention to expand the platform’s coverage to include petrochemicals. 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 has used blockchain technology to track the supply of cobalt from the mine into the car itself.
Further, the UK has 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.
The UK government and various associated bodies have themselves trialed the integration of blockchain technologies into their own processes, which we discuss further at question 5.
Most recently, there has been a maelstrom of activity in the UK in the area of NFTs. NFTs can be defined as unique records on a public blockchain capable of being traded, which commonly represent ownership and/or validate authenticity of an associated digital asset. Across 2021-22 Team GB became the first Olympic team to launch an NFT collection; the UK government announced plans to issue an NFT through the Royal Mint; Wimbledon launched an NFT collection to celebrate the centenary of centre court; and Selfridges became the world’s first retail outlet to sell NFTs from a physical exhibition space in their London store. Despite the proliferation of these innovative projects, however, reports suggest that NFT sales have been declining throughout 2022, and many commentators are questioning whether an NFT bubble has been burst.
As yet there have been no heavily publicised failures of blockchain technologies in this jurisdiction, although the crypto winter that emerged in May 2022 bankrupted a number of crypto firms on the international stage. These firms included Celsius, a cryptocurrency lender based in New Jersey, Voyager Digital, a cryptocurrency brokerage and lending firm listed in Toronto, and Three Arrows Capital, a crypto hedge fund domiciled in the British Virgin Islands. Investigations into the Singapore-incorporated Terraform Labs—the collapsed cryptocurrency operator behind the stablecoin TerraUSD and its sister coin, Luna, which both tumbled in May and heralded the current crypto winter—are ongoing.
- 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. This reputation stems from: (i) the perception that cryptoassets harbour an increased risk of money laundering and fraud; and (ii) the carbon-intensive mining process that underpins blockchains making use of a ‘Proof of Work’ (“PoW”) consensus mechanism, including the pre-eminent Bitcoin network.
On the former charge, as recognised in a report published in 2018 by the United Nations Principles for Responsible Investment network, blockchain technology can in fact facilitate secure decentralised transactions, reduce instances of fraud, and increase transparency and efficiency in multi-party transactions—all of which could feasibly assist in advancing ESG goals.
On the latter, there has been a shift towards making use of the more energy efficient Proof of Stake (“PoS”) blockchain consensus mechanism. Most notably, in September 2022 prominent blockchain platform Ethereum transitioned to a PoS consensus mechanism in a change referred to as ‘The Merge’, announcing that this reduced Ethereum’s energy consumption by 99.95%. Both PoW and PoS consensus mechanisms provide a means of ensuring the integrity of the blockchain ledger in the absence of a trusted central authority. At a high level, under the PoW consensus mechanism energy-intensive computing power is relevant to the ability to validate transactions, whereas under the PoS consensus mechanism it is the amount of staked cryptoassets that will be relevant to the ability to validate transactions. Please refer to our blog post Merging Crypto and ESG for more context.
The tussle between PoW and PoS, long-debated in crypto circles, was propelled into the political arena in 2022 during the thrashing out of the new EU Regulation on markets in cryptoassets (or “MiCA”). Rowing back from a de facto ban on cryptoassets underpinned by a PoW consensus mechanism (because of their environmental footprint), significant cryptoassets service providers will now be required to disclose their energy consumption. In the UK, His Majesty’s Treasury (“HMT”) has acknowledged the disquiet surrounding the environmental impact of certain cryptoassets. HMT will reflect green commitments in an upcoming consultation paper which is set to bring a wider range of cryptoasset activities within the regulatory perimeter, which is expected later in 2022.
Beyond lively discussion of consensus mechanisms, the positive contribution of blockchain technology to environmental objectives 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 6) this could play a role in the transition to a net zero economy. In a speech delivered in June 2021, a BoE representative 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.
Despite discussion often focusing on the ‘E’ in ESG, in the UK the benefits of blockchain technology 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.
While a nascent trend, we expect the intersection of blockchain technology with ESG outcomes to continue to develop across 2022/2023.
- 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?
For several years the legal approach to blockchain and cryptoassets largely involved applying existing areas of law to this novel technology. Increasingly, however, legislation and regulation is designed with cryptoassets in mind.
As we describe at question 9, HMRC has developed a tax regime to accommodate cryptoassets. Money laundering legislation, moreover, now explicitly references the blockchain architecture surrounding cryptocurrencies. The fifth Money Laundering Directive as implemented in the UK via amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), the majority of which came into force in January 2020, brought 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 registration and reporting requirements. From August 2022 these requirements were extended to include an FCA change of control approval process, and the Economic Crime and Corporate Transparency Bill progressing through Parliament will provide additional powers to law enforcement so they are able to more quickly and easily seize and recover cryptoassets which are the proceeds of crime or associated with illicit activity such as money laundering, fraud and ransomware attacks.
From a sanctions perspective, and against the backdrop of Russia’s invasion of Ukraine (which, according to blockchain data platform Chainalysis, precipitated a surge in stablecoin usage in Russia), in March 2022 it was confirmed that financial sanctions regulations do not differentiate between cryptoassets and other forms of assets. Moreover, on 30 August 2022 cryptoasset exchange providers and custodian wallet providers were brought within scope of sanctions reporting obligations. Looking to the future, from September 2023 the so-called ‘travel rule’ places information sharing requirements on certain cryptoasset transfers.
More broadly the UK financial regulators, the FCA and Prudential Regulation Authority (“PRA”), under the auspices of HMT, appear to be departing from their self-proclaimed ‘technology neutral’ approach, and are formulating blockchain-specific regulation. In this vein, the FCA has 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 10. This trend accelerated in 2022 as HMT welcomed in the new year by announcing that, in a bid to enhance consumer protection, it will bring a wider range of cryptoassets within scope of the UK’s financial promotions regime (as discussed further at question 7).
Most recently, in April 2022 HMT broadcast the government’s intention to bring activities that issue or facilitate the use of stablecoins used as a means of payment (including custodial activities) into the UK regulatory perimeter on the basis that certain stablecoins have the potential to become a widespread means of payment. This represents an evolution of the FCA’s prior approach to cryptoassets, which was to retrofit them into pre-existing regulated categories (as further described at question 7). Further proposals regarding the expansion of the regulatory perimeter to accommodate a broader range of cryptoasset activities are expected later in 2022 and in 2023.
- 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 issue advice to consumers emphasising the risks of investing in cryptoassets in May 2022, and place a consumer warning on its website in September 2022 about interacting with prominent cryptocurrency exchange FTX, while also supporting tests of blockchain technology within its Regulatory Sandbox. In a similarly balanced fashion, the BoE has undertaken analytical work to evaluate the risks and opportunities involved in the creation of a UK CBDC (discussed at question 6) while repeatedly issuing warnings about the potential systemic risks posed by cryptoassets to financial institutions and core financial markets.
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, as is an inquiry launched by the Treasury Committee across July-September 2022 into the role of cryptoassets in the UK. This examined the potential risks and opportunities associated with the use of cryptoassets, their impact on social inclusivity and the possible need for regulatory change in future.
Finally, the UK government and associated bodies have explored how blockchain might be used to improve their own internal processes, signalling interest in this technology. For example, His 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, His 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. Most recently, following the outbreak of the COVID-19 pandemic, 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 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.
- 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 as well as established businesses utilising blockchain.
On the investment side, government-led Innovate UK (introduced at question 5) continues to invest in DLT-based projects; in January 2022 it awarded a six figure grant to TAG TrustNet, which aims to make digital advertising market more accountable, responsible and efficient by leveraging DLT. In terms of practical support, the FCA and the Information Commissioner’s Office (focusing on data privacy) host sandboxes to support organisations that are developing innovative products and services, including those that make use of blockchain technology. From a policy perspective, the BoE maintains a Fintech Hub (first launched in 2018) through which it seeks to understand how fintech developments may affect systemic stability and the safety and soundness of firms, and in 2022 the FCA ran ‘CryptoSprint’ events in May and June, which sought industry views around the current market and the design of an appropriate regulatory regime.
In April 2022 HMT announced several proposals designed to make the UK a global hub for cryptoasset technology and investment. These included: (i) the creation of a financial market infrastructure sandbox, in conjunction with the BoE and the FCA, to enable firms to experiment and innovate with technologies like DLT in providing the infrastructure services that underpin markets; and (ii) the formation of a Cryptoasset Engagement Group chaired by the Economic Secretary, which will convene key figures from the regulatory authorities and industry to advise the government on issues facing the cryptoasset sector.
Getting into the fabric of payments, 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 service, enabling it to support a wider range of innovative payment systems including those using DLT. Furthermore, the UK may 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. Thinking on this issue has been progressing steadily over the past couple of years; in March 2020 the BoE launched a discussion paper on the opportunities and challenges presented by the introduction of a UK CBDC, and this was followed by a BoE paper in June 2021 focussing on new forms of digital money (including a retail CBDC), responses to which were published in March 2022. These papers have been framed 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. In this context, it is striking that in January 2022 the House of Lords Economic Affairs Committee published a report on the feasibility of introducing a CBDC which concluded that there is no convincing case for why the UK needs a CBDC, noting that it could present significant challenges for financial stability and the protection of privacy. The BoE and HMT are expected to launch a consultation assessing the case for a UK CBDC later in 2022. If a UK CBDC is greenlit, the earliest launch date would be in the second half of the decade.
- 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 the past year there have been a number of consultations appraising the opportunities and risks associated with blockchain technology, and how these might be addressed via legislation and regulatory rules.
In January 2022 HMT published the results of its consultation, launched in July 2020, on proposals to bring the promotion of ‘qualifying cryptoassets’ within scope of the financial promotions regime. Under this regime, most unrestricted marketing or promotion of in-scope financial products is a criminal offence unless approved by an authorised person under the Financial Services and Markets Act 2000. Currently only some cryptoassets, like those with characteristics akin to share or debt instruments, are subject to financial promotions rules. In its January 2022 consultation response, HMT has confirmed that the financial promotions regime will be expanded to capture a much wider array of cryptoassets, including those that are currently unregulated and used as a means of investment (like bitcoin). Notably, it is expected that NFTs will not be captured by the regime, as it is proposed that only fungible cryptoassets will fall within the definition of ‘qualifying cryptoasset’.
In response to the government’s proposals the FCA launched its own consultation on strengthening financial promotion rules for high risk investments (including cryptoassets) in January 2022. The FCA will make final rules for cryptoasset promotions once the relevant legislation has been put forward by HMT.
Another stream of work that has occupied HMT pertains to stablecoins, a type of cryptoasset that aim to maintain a stable value relative to a specified asset, or a pool or basket of assets. In January 2021 HMT launched a consultation focusing on the regulation of cryptoassets and stablecoins, and this was followed by the announcement in April 2022 that activities that issue or facilitate the use of stablecoins used as a means of payment (including custodial activities) will be brought within scope of regulation. This expansion of the perimeter, which will be achieved primarily by amending existing electronic money and payments legislation, has been deemed necessary on the basis that certain stablecoins have the capacity to become a widespread means of payment, including by retail customers, driving consumer choice and efficiencies. The Financial Services and Markets Bill 2022-2023 will enact this change.
Springing from this consultation response, HMT put out an additional consultation across May to August 2022 on the government’s proposed approach to managing the failure of systemic ‘digital settlement asset’ firms—where the definition of digital settlement asset includes stablecoins together with wider forms of digital assets used for payments/settlements—by way of a modified Financial Market Infrastructure Special Administration Regime.
HMT has stated that this regulatory absorption of (certain) stablecoin activities represents the first step in an incremental, phased approach to the regulation of cryptoassets. In keeping with this proactive approach, the government intends to consult later in 2022 on regulating a wider set of cryptoasset activities in view of their continued growth and uptake worldwide. This will likely be complemented by the outcome of the Treasury Committee’s inquiry into the role of cryptoassets in the UK, which concluded in September 2022 and which is described further at question 5.
In August 2022, the UK Jurisdiction Taskforce (“UKJT”, a body which brings together the Judiciary, the Law Commission of England and Wales and technology and legal professionals) published for consultation a ‘Legal Statement on Digital Securities’. This statement explores the way in which English law can support the issue and transfer of equity or debt securities on blockchain and DLT systems, and focuses on equity or debt securities constituted or evidenced by reference to a blockchain or distributed ledger rather than conventional securities whose performance is linked to, or which are collateralised by, digital assets. This follows a UKJT statement published in 2019 on the legal status of cryptoassets and smart contracts (discussed further at question 15), and publication of the Digital Dispute Resolution Rules in April 2021 (discussed at question 16).
Finally, in July 2022 the Law Commission—a statutory independent body that keeps the law of England and Wales under review and recommends reforms—published a consultation paper which contains provisional law reform proposals to ensure that the law recognises and protects digital assets, including cryptoassets. The consultation paper examines how existing personal property law does, and should, apply to digital assets, and among other things advocates for the explicit recognition of a third category of personal property (distinct from things in possession and things in action) which is better able to accommodate the unique features of digital assets. Such targeted reform offers additional certainty on the concept of ownership with respect to virtual assets, and may prove an important stepping stone in the wider UK government strategy of making the UK a global hub for crypto-asset related industries. Responses to the consultation are requested by 4 November 2022, and the consultation is described in further detail at question 15.
- Has any official guidance concerning the use of blockchain technology been published in your jurisdiction?
In July 2019 the FCA published its landmark cryptoasset guidance in Policy Statement (“PS19/22”), which seeks to clarify the regulatory perimeter for market participants carrying on activities in the cryptoasset market, and which is explored in further detail at question 9.
The financial service regulators have also issued guidance in the form of letters and notices. In an update to its letter of June 2018, in March 2022 the PRA wrote to CEOs of UK-authorised banks, insurance companies and large complex investment firms to ensure that where firms do have exposures to crypto they understand the PRA’s expectations around risk management and measurement against the existing prudential framework. Elements of the existing framework that the PRA expects firms to consider when measuring and mitigating risks resulting from crypto activities include strong risk controls, robust new product approval processes and the full Pillar 1 framework.
In parallel, the FCA published a notice to all FCA regulated firms reminding them of their existing obligations when they are interacting with or exposed to cryptoassets and related services. The notice covers, among other things, systems and controls, robust new product approval processes, prudential considerations and custody considerations. The notice also reaffirms the importance of guidance set out in an FCA Dear CEO letter from June 2018 which addressed cryptoassets and financial crime, and which sets out appropriate steps or actions for firms such as developing staff knowledge and expertise on cryptoassets.
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 updated manual largely reflects pre-existing guidance, although it does include a broadening of the categories of cryptoassets covered, and includes 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 9.
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, the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions. For example, the BCBS is in the process of producing a set of standards on the prudential treatment of banks’ cryptoasset exposures.
- 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?
The UK regulatory authorities have opted for a taxonomy of cryptoassets, rather than cryptocurrencies, as this captures a broader range of tokens than just those designed to act as a means of exchange in online transfers (to which the term cryptocurrency typically applies). 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 its features and may change over time as the cryptoasset market develops. In addition to this taxonomy, activities that issue or facilitate the use of stablecoins used as a means of payment are to be brought within scope of regulation, as described at question 7.
Cryptocurrencies (such as bitcoin or litecoin) are generally classified as exchange tokens. Some may, however, also fall within the specific definition of a stablecoin when it is defined by legislation expected in 2023, or could amount to “e-money” and be regulated under the UK’s E-Money Regulations. Where a cryptocurrency is an exchange token, the FCA’s current position (articulated in PS19/22) is that such exchange tokens will fall outside the FCA’s regulatory remit. This position may, however, be subject to change following HMT’s proposed consultation on cryptoassets which is expected later in 2022 (referenced at question 5). Additionally, the UK’s Payment Services Regulations may apply to international money remittance where exchange tokens are used. As further described at question 7, most cryptocurrencies are likely to fall within the financial promotions regime when it is expanded.
As observed at question 4, all cryptoasset exchanges and custodian crypto-wallet providers must comply with AML regulations, including registering with the FCA, implementing identity and other AML checks, and will need to comply with sanctions reporting obligations. 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 direct taxation purposes, cryptoassets (including cryptocurrencies) are generally regarded by HMRC as capital assets that are subject to the capital gains regime. 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 cryptoasset will be chargeable to tax. Any loss of value over that period will be a capital loss which may be capable of being used to off-set other taxable 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 which is a supply of services for VAT purposes but is nonetheless 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. Where cryptoassets which are not a cryptocurrency or other exchange token are used to pay for goods and services, the VAT treatment will depend on the nature of the cryptoasset concerned.
Cryptocurrency received from mining activities or other rewards for participating in a cryptocurrency network is not generally subject to VAT (generally, either on the basis that the activity of mining is not an economic activity for VAT purposes or there is no customer for VAT purposes for the mining service), 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, under English 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 may be treated as capital gains or losses for tax purposes. 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.
- 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 at questions 4, 7 and 9: (i) cryptoasset exchange providers and crypto-wallet providers are required by the MLRs to register with the FCA, comply with AML checks and make certain disclosures to customers, and are subject to sanctions reporting; and (ii) HMT has confirmed its intention to expand the financial promotion regime to bring within its scope the promotion of certain types of cryptoassets that are currently unregulated, as ‘qualifying cryptoassets’, and to bring activities that issue or facilitate the use of stablecoins used as a means of payment within the perimeter. Some cryptoassets may, moreover, already fall to be regulated as security tokens or where tokens amount to e-money.
- 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 initial coin offering (“ICO”) in the UK, although, depending on the particular ICO, various regulations may apply (as further described in question 12 below).
In terms of the UK market, in the peak period of ICOs in early 2018 a report by PwC in collaboration with Crypto Valley found that 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, a so-called “crypto winter”. Since 2018 the market has been growing again, with 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 17. However, the impact of the most recent crypto winter, which emerged in May 2022, is yet to be fully understood.
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 8, 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 and robust new product approval processes.
- 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 that is not a stablecoin—the UK’s regulatory perimeter is not currently engaged (as further detailed at question 9 above), and no regulatory requirements apply aside from AML and sanctions requirements and, in future, the financial promotions regime. 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. Casting forwards, as detailed at question 7, issuance of stablecoins used as a means of payment will require authorisation.
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, 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, particularly in light of HMT’s consultation on cryptoassets expected later in 2022.
- Is cryptocurrency trading common in your jurisdiction? And what is the attitude of mainstream financial institutions to cryptocurrency trading in your jurisdiction?
Investment and trading in cryptocurrencies is increasingly common in the UK, 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 indicated that 4.4% of the general population currently own cryptocurrencies. This had reportedly risen to 10% by August 2022, which amounts to approximately 6.7 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 sent strong signals 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”. In September 2022 the FCA published a warning to those seeking to engage with FTX, a prominent cryptocurrency exchange, on the basis that the firm is not authorised by the FCA and appears to be targeting people in the UK. As a counterbalance, however, in August 2022 Crypto.com received authorisation from the FCA to operate as a cryptoasset service provider in the UK. It is yet to be seen whether this authorisation will encourage other cryptoasset exchanges to operate in the UK.
Mainstream financial institutions have also remained fairly sceptical of cryptocurrency investments. This may be influenced by the PRA’s warning to the CEOs of UK-authorised banks, insurance companies and large complex investment firms discussed at question 8 above, and the BoE’s continuing statements that current applications of cryptoassets have become a financial stability concern (most recently in July 2022). The leading UK bank NatWest announced that it would not engage customers whose main business involves cryptocurrency transactions in April 2021 and subsequently has 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.
This institutional scepticism may also reflect an uptick in levels of cryptoasset-related investment scams and criminals requesting cryptocurrency as methods of payment for ransomware attacks or payment for fake goods on fraudulent websites. Between April and September 2021, the FCA’s ScamSmart saw a 49% increase in reported cryptocurrency scams compared to the previous six months. The FCA has issued several warnings about cryptoasset-related investment scams.
Other tokens, virtual assets (including crypto-securities)
- 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)?
In addition to the ban on investment products referencing cryptoassets described at question 10, the financial promotions regime, sanctions regulations, AML and CTF legislation and the regulatory perimeter may be engaged by cryptoasset arrangements (see questions 7 and 10 for further details). HMT’s proposed consultation on cryptoassets, expected later in 2022, may increase restrictions further.
As discussed in more detail at questions 7 and 8, UK regulators and the Law Commission are taking a keen interest in cryptographic tokens and virtual assets. The FCA’s Regulatory Sandbox, the BoE’s Fintech Hub and the data protection sandbox of the Information Commissioner’s Office (described at question 6) also represent some practical initiatives taken by regulators/public sector bodies that are designed to facilitate innovation in this area in the UK.
- Are there any legal or regulatory issues concerning the transfer of title to or the granting of security over tokens and virtual assets?
The main challenge from an English legal perspective stems from the fact that the common law traditionally recognises property only 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). Accordingly, 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.
Nonetheless, 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.
In its legal statement published in November 2019, the UKJT concluded that cryptoassets 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. Building on this statement the Law Commission’s proposals to create a third category of personal property (introduced at question 7) marks an important development on this question of whether 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.
The current trend towards recognising tokens and virtual assets as property under English law is supported by several recent court decisions. In a landmark ruling in April 2022, the High Court of England and Wales (“EWHC”) in Lavinia Osbourne v (1) Persons Unknown (2) Ozone Networks Inc (trading as Opensea) recognised NFTs as legal property over which a proprietary freezing injunction can be ordered. While it was noted that a cryptoasset does not in itself constitute a chose in action, such assets could hold “a particular, personal and unique value” to a claimant and the NFTs in question clearly met the key characteristics of property at common law identified in National Provincial Bank v Ainsworth. 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. And 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.
The Law Commission’s July 2022 paper on digital assets suggests that existing rules on transfers of title can apply to on-chain transactions, even if that transaction results in the creation of a new, modified or related crypto-token. The legal system is external to crypto-token systems; such systems (such as a distributed ledger or structured record) provide a factual, rather than legal, record, and therefore does not necessarily determine (superior) legal title to a crypto-token. Importantly, the paper further suggests that “possession”, an indication of ownership for more traditional, tangible objects, would not apply to the proposed category of “data objects” (the chosen label for the third category of personal property). Control is determined in many cases by control over cryptographic keys. The suggestion that crypto-tokens are not capable of possession would likely mean that possessory security arrangements—a pledge, for instance—cannot be used in respect of crypto-tokens. Non-possessory security, or a title transfer arrangement, such as mortgages and charges, on the other hand, may be granted by owners of crypto-tokens. The Law Commission continues to consider whether bespoke statutory provisions for collateral arrangements in respect of crypto-tokens may be beneficial.
- 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?
English law is generally recognised as being able to accommodate smart contracts. In November 2021, the Law Commission published a paper containing advice to the UK government confirming that the current legal framework in England and Wales is capable of facilitating and supporting the use of smart legal contacts, without the need for statutory law reform. It noted that, in some contexts, an incremental development of the common law is all that is required to facilitate the use of smart legal contracts within the existing legal framework.
The Law Commission’s findings build on the earlier work of the UKJT, which 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. The UKJT noted in its 2019 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”.
The question of whether cryptocurrencies can be regarded as property, which is considered separately by the Law Commission’s ongoing consultation on digital assets described at question 7, is important because its resolution assists in defining the nature and scope of potential rights, remedies and defences under English law in disputes concerning cryptocurrency and certain other digital assets.
The Law Commission encourages the market to anticipate and cater for potential uncertainties in the legal treatment of smart legal contracts by encouraging parties to include express terms aimed at addressing them. Examples of such provisions include clauses allocating risk if, for example, there are inaccurate data inputs, bugs and coding errors, performance issues caused by external factors such as IT upgrades, or misunderstandings as to how the code will perform.
Other issues that the Law Commission considers may lead to disputes if not properly considered early by parties entering into a smart legal contract include the role of code within the smart legal contract, and in particular, whether the code is intended both to define contractual obligations and perform them, or just perform them. Similarly, the parties may wish to consider the relationship between any natural language and code (and, in particular, where a term is expressed both in natural language and code, which takes precedence in the event of a conflict) as well as the role of non-executable comments in the code and whether these should be considered to have the effect of contractual terms.
Another practical difficulty identified was that, depending on the platform used for the smart contract, it may not be possible to unwind the parties to their pre-contract positions where a contract is voidable. That said, the Law Commission noted that the courts could achieve “practical justice” through other means, such as by ordering the parties to enter into a second transaction on the blockchain, thus reversing the effects of the first transaction, effectively creating the same result.
The pseudonymity and the irrevocable nature of smart contracts give rise to a number of dispute resolution challenges that make it important to include a robust dispute resolution system. The UKJT published the Digital Dispute Resolution Rules in 2021 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 more generally by commentators.
- 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. Several focus on the development of interoperable technical data standards and models, 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 (“CDM”), a machine-readable and machine-executable data model for derivatives products, processes and calculations, is also accelerating. ISDA’s CDM has recently been integrated into ISDA Create, a digital platform for electronic negotiation of derivatives documents.
In March 2020, the British Standards Institute—the UK national standards body—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.
LawtechUK, a government-backed initiative established to support the transformation of the UK legal sector through technology, published its “Smarter Contracts” report in February 2022, highlighting a range of case studies in which smart contracts are being deployed, many of which have been developed through the FCA’s Regulatory Sandbox. A notable example is Nivaura, which has developed a “General-purpose Legal Markup Language” for converting contracts into machine readable and executable formats. Nivaura recently partnered with Santander and Natwest on a pilot to automate the issuance of tokenised securities on a public blockchain using a DLT-enabled payments system. The Lawtech Sandbox has developed the UK Legal Schema, an open source initiative to develop a universal common language for creating digital legal documents.
Other firms that have participated and that continue to participate in the FCA Regulatory Sandbox are using smart contracts for a variety of other purposes, ranging from the transfer of assets to the facilitation of charitable donations. Please refer to question 6 above for further details.
As highlighted at question 5, 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. 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.
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
- 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 10, 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.
More recently (as referenced at question 13) 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. These requirements remain in place and Binance Markets Limited is still unable to conduct regulated business in the UK.
In March 2022, the Advertising Standards Authority issued an enforcement notice to over 50 companies advertising cryptocurrencies and crypto-exchanges, requiring them to review their adverts to ensure compliance with the Committee of Advertising Practice Code. In the same month, the FCA published a notice to FCA-regulated firms with exposure to cryptoassets, reminding them of their existing obligations when interacting with or exposed to cryptoassets and related services. This followed increased interest from regulated firms in entering various crypto markets. As at March 2022, the FCA had opened 300 investigations into unauthorised crypto-businesses over a six-month period, and issued a warning to operators of illegal “crypto-ATMs” to cease operations or face formal enforcement action.
As discussed in questions 4 and 9, the FCA is the AML and CTF supervisor of certain UK cryptoasset businesses under the MLRs, with a range of investigatory and enforcement powers at its disposal.
In Vladimir Consulting Ltd v FCA, the Upper Tribunal rejected a request to suspend the effects of the FCA’s Decision Notice, which refused a company’s application for registration as a cryptoasset exchange provider under the amended MLRs. The Upper Tribunal concluded that the company had consistently failed to comply with the requirements of the Regulations and would, therefore, be unlikely to carry out its business in a compliant manner pending the determination of its appeal against the FCA’s decision.
The proposed expansion of the UK’s legal and regulatory regimes to cover a broader range of blockchain applications (further described at question 7) may result in an increase in enforcement activity.
Please also refer to question 5 above for details of the current attitude of the UK government and regulators to the use of blockchain technology.
- Has there been any judicial consideration of blockchain concepts or smart contracting in your jurisdiction?
The Law Commission and UKJT findings, discussed at questions 15 and 16, are likely to have persuasive authority when courts are considering legal questions relating to blockchain concepts or smart contracting.
There have now been a number of judgments confirming that English law treats cryptocurrency as a form of property, meaning that various forms of interim relief to freeze, preserve or identify such cryptoassets are potentially available to claimants. We discuss a number of these judgments in question 15. One such decision is AA v Persons Unknown , in which the Court granted an interim proprietary injunction over bitcoin. The decision in Danisz v Persons Unknown  followed AA’s analysis of the property status of cryptocurrency; the claimant in question was granted an interim proprietary injunction, a worldwide freezing order and a Banker’s Trust order in a claim relating to the alleged misappropriation of bitcoin.
The judgment in Ion Sciences Ltd v Persons Unknown (unreported, 21 December 2020), a case relating to an alleged ICO fraud, further reinforces the view that cryptoassets can be treated as “property” under English law and are 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.
Ion Sciences was subsequently applied in the March 2022 case of Osbourne v Ozone, in which the EWHC concluded that there was at least a realistically arguable case that NFTs should be treated as property under English law, and that the appropriate lex situs was the place where the owner of the NFTs was domiciled.
In the June 2022 case of D’Aloia v Persons Unknown, an application for interim injunctive relief, the claimant was granted, for the first time, permission by the court to serve proceedings on Persons Unknown by NFT, whereby the documents would be airdropped into the digital wallets of the defendants. In a significant development, the EWHC also found that the cryptocurrency exchange defendants held the claimant’s identifiable cryptoassets as constructive trustees.
In Tulip Trading Ltd v Bitcoin Association for BSV, the EWHC, however, rejected the claim that cryptocurrency software developers owed either fiduciary duties or tortious duties to network participants. It was noted that the owners of cryptoassets “are by definition an anonymous and fluctuating class with whom the Defendants has no direct communication, and certainly no contractual relationship”. The case will be examined by the Court of Appeal, and it remains to be seen how the law in this area will develop. In a related case forming part of the same litigation, the Court also refused a request for security for costs to be paid in bitcoin, citing in particular, the volatility of the cryptocurrency market.
We examine the cases of Tulip and D’Aloia further, and their lessons for the evolving relationship between blockchain, trust and accountability, in our article Leaps of faith: searching for accountability in a trustless environment.
- 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)?
In addition to the law and regulation outlined at question 4, a number of areas of law which are technology neutral may be engaged by a blockchain application including laws pertaining to data protection, competition, property, tax, insolvency, privacy and intellectual property.
A notable issue for all UK or EU blockchain applications is their interaction with data protection legislation. This includes the UK version of the EU General Data Protection Regulation, and 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.
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. To date, English courts have considered that cryptoassets will be located in the same jurisdiction in which the person or company who owns them is domiciled (Fetch.ai Ltd and another v Persons Unknown and others . Other courts may adopt an alternative approach – and stakeholders could therefore seek to commence proceedings elsewhere.
- Are there any other key issues concerning blockchain technology in your jurisdiction that legal practitioners should be aware of?
As suggested in question 1, the blockchain market is likely to evolve now that the UK has left the EU. The package of measures announced by the UK government in April 2022 are designed to make the UK a global technology hub (as discussed more extensively at question 6).
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. In August 2022 a claim was brought in the Competition Appeal Tribunal on behalf of an estimated 240,000 UK investors in Bitcoin Satoshi Vision (“BSV”). The claim alleges that, beginning in April 2019, UK BSV holders suffered estimated losses of up to £9.9 billion as a result of the delisting of BSV by exchanges Binance, Bittylicious, Kraken and Shapeshift. The application states that the four exchanges combined in such a way as to breach the Competition Act 1998 by reducing, preventing or distorting competition. This claim marks the first time that competition law has applied to the digital assets in the UK.