In our previous blog, we explored the current legislative framework of Non-fungible Tokens (NFTs) and whether it is sufficient to protect digital creators. The blog concluded that the legal institutions have not yet been able to catch up to the speed of development of NFTs; it is the aim of the Law Commission to clarify the law on these digital assets. Linking on from this, this blog will explore the legal status of NFTs and cryptocurrency in the UK and around the world.
Crypto assets have been defined by the UK Government as “a store of value which can be transferred or exchanged digitally.” They were designed to allow individuals to have greater control over their finances. They function as a decentralised form of electronic currency, enabling peer-to-peer transactions without the interferences of a centralised authority like a bank. After the creation of Bitcoin in 2018, the first cryptocurrency, there has been a spike in popularity. In June 2021, the UK Financial Conduct Authority (FCA) published its fourth consumer research paper on crypto assets. It concluded that there is heightened public interest and media coverage of cryptos, with 78% of adults now having at least heard of cryptocurrencies.
There are low barriers to entry as users simply require an internet-connected device to transact with crypto assets. As a result, this technology is often exploited by criminals, hence the need for a clear legislative framework to protect the owners of these digital assets. In 2018, the Cryptoassets Taskforce brought together the Treasury, The FCA, and the Bank of England to coordinate on developing crypto legislation. Over recent years, the FCA has taken steps to protect consumers with new regulatory powers introduced in January 2020, which allowed the FCA to supervise how crypto asset businesses manage the risk of money laundering and counter-terrorist financing. It was decided that crypto asset businesses must comply with Money Laundering Regulations and register with the FCA.
The Cryptocurrency and the Financial Services and Markets Bill was reviewed in October 2022 by the House of Commons. Various amendments were discussed, including the addition of cryptocurrency as regulated financial instruments. The bill was proposed by Andrew Griffith MP, who stated that clause 14 would be added to the Financial Services and Markets Act 2000. The aim of this clause is to clarify that crypto assets can be included under the existing provisions. The Treasury will consult industry and stakeholders before using its powers to ensure that the framework “reflects the unique benefits and risks posed by crypto activities.”
In April 2020, the Government announced a plan to make the UK “a global crypto asset technology hub”. Through this, the Government aims to bring Stablecoins - a type of cryptocurrency - within the regulatory framework of the Financial Services and Markets Bill.
At a Westminster Hall debate on the regulation of cryptocurrencies on Wednesday 25th January 2023, ministers spoke of “the increased interest in the growth of the sector from the media and from colleagues”. This is reflected by the work being done to “bring [them]selves up to speed with the sector”. The lack of regulation in the sector had been identified by ministers in the Commons.
Further in the the report regarding the ‘Cryptocurrency Regulation’, it is highlighted that it had been “almost a year since the Government set out their landmark vision to make the UK a global hub for investment. The debate highlights its support for this aim and argued that: “good actors… and investors need regulatory framework to take forward their work in the sector with confidence”. Unfortunately, there have been several barriers to this regulation, such as reports of “significant delays” by “business operators seeking registration with the FCA” and “a lack of communication”.
The debate outlined the necessity for a proportionate, coordinated approach for the future of Cryptocurrency. There appears to be a reported “disconnect between the Government’s vision” and statements from other relevant industries. Consequently, concerns are being raised about the lack of direction for implementing the vision of a UK cryptocurrency hub set out by the Prime Minister. There needs to be a balance between “risks and ensuring high levels of consumer protection” whilst ensuring it does not “unnecessarily restrict growth or innovation for the future.”
The Governor of the Bank of England said that cryptocurrencies represent the new “frontline in criminal scams”. This presents another reason for “leading banks to limit block cryptocurrency transactions”- included are Nationwide, Santander and Virgin Money.
Government regulators must come together with the industry to implement meaningful change. To get a greater understanding of the ways in which the current UK legislation can be improved further let’s assess the legal status of cryptocurrencies around the world.
Like the UK, the US is currently working towards updating its crypto frameworks amid the surge in crypto popularity. In September 2022, the White House issued a first-of-a-kind Comprehensive Framework for Responsible Development of Digital Assets. Acting on the US Treasury’s advice to urgently implement crypto legislation which could combat criminal activities, the Framework focused on consumer protection, fostering financial stability, and fighting illicit finance. According to the new rulings, crypto asset exchanges will now be obligated to submit Suspicious Activity Reports. Moreover, all crypto wallet owners will be required to identify themselves when sending more than $3,000 in a single transaction.
Since crypto transactions are based on anonymity, it is often the lack of clear accountability which enables financial crimes. The recent US legislative proposal is expected to significantly reduce illicit activity when it comes to crypto asset trading. Considering the UK struggle with regulating financial misconduct when it comes to dealing with digital assets, the US framework could become a noteworthy example.
In an attempt to introduce greater market stability, the Canadian Securities Administrators (CSA) issued a Guidance in 2021 which outlined a new financial framework for crypto asset holders. According to the Guidelines, all issuers are bound to provide disclosures on the methods used to protect their assets against risks of theft or loss. More recently, the CSA issued a requirement for crypto wallet holders to provide records of all electronic fund transfers.
Such regulatory guidelines not only provide protection from fraudulent financial activities but also ensure that a high standard of cyber security is maintained. In light of the recent cyber-attacks on digital asset exchanges in the UK, Canadian regulations can become a useful tool in the hands of British authorities.
The European Union (EU) is currently actively working towards developing a comprehensive framework of crypto regulations which will help address concerns with the security of digital currencies. In 2020 the European Commission issued a Public Consultative Initiative with the aim to gauge public opinion on the EU’s current and potential crypto regulations. Following this, the European Commission released a proposal to introduce new digital asset conduct rules, as well as a licensing system for crypto owners. In 2021, they subsequently introduced guidelines for the first time which specifically focused on crypto issuers. The new regulations have enabled the EU authorities to collect information about senders and recipients of cryptocurrency transfers.
The strategy of collecting and relying on public opinion to draft financial legislation has allowed the EU to gain the goodwill of investors and consumers, on a local and international level. This can become a useful example for the UK regulators as they attempt to balance consumer safety concerns with the issues of overregulation of crypto markets.
To summarise, over the past years, the international community has been actively working towards identifying ideal regulations for crypto markets. The general approach shifted from avoiding crypto altogether (to preserve financial security), to implementing a framework to aid the development of digital assets. As the international community continues to work on legal guidelines, the UK has an opportunity to learn from the examples of the prime crypto markets in the US, Canada, and the EU. Experience can (and should) be drawn from surveying the key stakeholders of national crypto markets (FCA; Crypto Exchanges, customers) and building on this feedback. The success of the implementation of such financial regulations will determine the ability of the UK to establish itself as a global leader on crypto markets.
By Tatiana Sevyan, LLB Student and Charlotte Rosie Cleland, Global Development student at Queen Mary University of London.