Cryptocurrencies are beginning to emerge into the UK financial market over recent years. Although cryptocurrencies such as Bitcoin open many opportunities, authorities all over the world continue to face challenging questions about the nature and the regulation of cryptocurrencies because certain parts of this system and its related risks are largely unknown. The risks vary from fraud to contractual related issues.
What are the main legal issues?
Cryptocurrencies can enable people in money laundering and tax evasion due to their anonymous nature involved with traders of this service, causing it difficult to identify criminal activities to be tracked if there is a suspicion of fraudulent activity found for the service users. An example of the issue with anonymity was brought to light in May 2017 when a significant portion of the NHS Trusts was hit with ransomware as the offenders of the crime were demanding payments to be made by Bitcoin.
Furthermore, it has been identified that there is an alternate usage of cryptocurrencies known to be “dark-market sites”. This is where offenders can purchase and trade illegal items. Thus, allowing for illegal businesses to market their products online and trade them to customers with minimal possibilities of being tracked down. An additional concern appears from fraudulent traders that merely allege to trade cryptocurrencies but, in fact, defraud the unsuspecting cryptocurrency customers by fraudulently taking their money without any valid cryptocurrency being traded.
What will the UK Government do to combat the legal issues?
The UK Treasury proposes to regulate cryptocurrencies by identifying the financial crime risks that face their projects. Implement appropriate financial crime controls that will mitigate risks and serve as the foundation for building a good compliance culture, therefore, to bring them in line with anti-money laundering and counter-terrorism financial legislation. All cryptocurrency traders will be obliged to disclose their identity, and cryptocurrency platforms will need to carry out due diligence on their customers.
As mentioned above, one of the most controversial and worrying issues is the anonymity of those tradings. Cryptocurrencies may be the default payment method for those with illicit or illegal intent. There are major security flaws within cryptocurrency systems. For example, in 2017, a Cornell researcher believed that millions of dollars were at risk of theft in an Ethereum blockchain.
Here in the UK, a number of companies such as Lush and WeWork have begun taking payments in cryptocurrencies. While some companies have welcomed the shift, experts said it could be an easy way for directors to hide cash from authorities, particularly when companies go bust.
On 18 November 2019, the UK Jurisdiction Taskforce distributed an authoritative declaration on the legal position of crypto assets and smart contracts within English law. This is an important advancement for the legal, business and technological groups, as it creates the UK to be the first jurisdiction to explain that crypto-assets can be considered as property and that smart contracts are competent of being enforced in the UK.
To briefly summarise, the UKJT has established that:
- Cryptoassets (including cryptocurrencies) should in principle be treated as property; and
- Smart contracts (defined primarily by their “automaticity”) should be capable of satisfying the requirements for a binding contract in English law and are thus enforceable by the courts.
The UKJT ascertained that crypto assets have all the legal indicia of property required to establish is “property” within English law. This has further been established by the ruling of the Singapore International Commercial Court in B2C2 v Quoine, one of the first examples where a court utilised contractual rules and trust law in a case concerning cryptocurrency trading.
The classification of crypto assets as property is of significance because proprietary rights, in distinction to personal rights, are accepted against the whole world. These rights are of specific importance in insolvency, where they usually have precedence over claims by creditors and when pursuing to reclaim something that has been in cases of fraud and theft.
However, regardless of being identified as property, the UKJT also established that crypto assets are not “items in possession” because of their intangible nature they are not proficient in being possessed. This implies that crypto assets:
- do not constitute “goods” for the purposes of the Sale of Goods Act 1979;
- cannot be the object of a bailment as this inherently requires the transfer of possession; and
- cannot have certain types of security granted over them (e.g. pledges and liens).
Enforceability of Smart Contracts
Smart contracts are efficient in fulfilling the necessities for a binding contract under English law and are enforceable by the courts. SCs could be sufficiently precise, as they need to be amenable to computational language encoding (computable). Computer language differs from Natural Language – it is rule-based, so requires utmost precision. They are essentially event – consideration – action types of computer programmes, and they need to contain clauses that take into account expected and unexpected outcomes. Operational clauses, conditioned by simple mathematical ‘it – then’ logic, are most suitable.
In its assertion, the UKJT stated that English law does not typically require contracts to be in any form and that contract law is concerned with the implementation of promises. Thus, so long as the essential characteristics appear (offer, acceptance, the intention to be legally bound and consideration), the regulations of contract law should likewise be applicable to smart contracts.
What Can the UK and UK lawyers do to help?
As already outlined, one of the key issues with cryptocurrencies is the lack of transparency and regulation. These challenges will have a huge impact on the legal world. It means continuous education for lawyers and the implementation of new practices for commercial lawyers. In an attempt to remain pro-active and ahead of the curve, legal professionals – and ADR lawyers especially – may want to have the issues outlined above in mind.
As technology advances, the legal world has to keep up and implement regulations to maintain a justified and legal financial sector.
The Digital Asset & Blockchain Lawyers at Philip Jones provide a full suite of commercial, regulatory and taxation legal services to individuals and companies in the crypto and digital asset space.
We act for cryptocurrencies featured in Forbes, Bloomberg, Cointelegraph, Yahoo Finance, CoinMarketCap, Nasdaq, Insider, Investing.com, Benzinga and Gulf News.
Further, we advise and assist individuals who are facing obstacles navigating the crypto legal and tax minefield.
We regularly assist with the following.
Security Token Offerings (STOs) and Initial Coin Offerings (ICOs).
- Drafting, reviewing and advising on whitepapers.
- Advising on and preparing the terms of contribution agreements to issue coins and tokens.
- Advising on and preparing the Terms & Conditions of coin and token platform exchanges.
- Advising on whether tokens constitute securities under the law of the relevant jurisdiction.
Risk & Compliance
- Advising intermediaries such as brokers and exchanges on their compliance obligations.
- Advising on Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance issues.
Advising and assisting private cryptocurrency fund sponsors on all aspects of the fundraising lifecycle, including fund formation, regulatory compliance and market terms; preparing offering documents for new private cryptocurrency funds, including private placement memoranda, limited partnership agreements and subscription agreements; global regulatory advice; tax-efficient investment structuring; and carried interest, management equity arrangements and other incentive structuring.
Venture Capital & Private Equity
Advising and assisting venture capital and private equity firms on transactions involvingdigital assets and blockchain-related companies.
Taxation of Cryptocurrencies
Philip Jones offers sophisticated and knowledgeable legal counsel to clients navigating the legal and taxation minefield of the digital economy.
Our Digital Asset and Blockchain lawyers are actively involved in the cryptocurrency world.
In addition to advising banks and cryptocurrencies, some of our lawyers have been investing in cryptocurrencies themselves for the last decade.
In light of this, Philip Jones Legal use their experience to provide practical taxation advice. In this respect, Philip Jones Legal’s expertise in this field is perhaps unmatched by any other law firm in the City.
Digital Assets In Your Will & Estate Planning
- Advising on complex estates which include digital assets held in physical or online wallets, coin and token platform exchanges, ETFs and more.
- Advising on and preparing your Will to include protection for your digital assets.
- Advising on and preparing your Trust to ensure your descendants and future generations benefit from your digital asset portfolio.
- Estate planning advice to minimise tax liability in relation to your digital assets.
Valuation of Crypto Assets
Our Accountants and Corporate Lawyers can assist in valuation of your crypto assets.
Tracing Crypto Assets
Our technology specialists, Information Technology team and private investigator network assist in tracing crypto assets.
Advising on requirements to register as broker-dealers, commodity pool operators, commodity trading advisers, investment advisers, investment companies, securities exchanges and money service businesses.
Philip Jones assists cryptocurrencies and digital asset companies satisfy the requirements of regulatory bodies such as the FCA to give you the best possible chance of success in regulation applications.
Advising on money service businesses and money transmitters and their registration requirements.
Further, we advise clients during investigations by the FCA, other regulators and law enforcement agencies.
Philip Jones Legal’s Digital Asset & Blockchain Lawyers are proud of their reputation in this specialist area of law. If you have queries or are interested in talking to us about your specific circumstances, please send us an email to email@example.com or book a consultation by calling us on 020 3 573 0860.
Author – Shekhar Bharania at Philip Jones Legal