UK-WIDE: An Introduction to FinTech Legal: Blockchain & Cryptocurrencies

The UK So Far: A Recap

In seeking to become a crypto hub, the UK is currently walking a tightrope in relation to blockchain and cryptocurrencies, seeking to balance being a place to do business and protecting consumers. In some respects, this can also be seen as a tension between law and compliance.

Law in this context relates to the UK being a jurisdiction that exports its law internationally. In this respect, the work of the UK Law Commission has been exemplary in terms of providing legal clarity in relation to smart contracts; the legal nature of crypto-assets (as a type of property); and decentralised autonomous organisations (DAOs). The result of this has been that English and Welsh law is generally the bedrock of most contractual work done in the sector on an international basis.

Compliance, by contrast, has had a trickier path to navigate. While historically it was common for participants in the ecosystem to state that greater regulation was helpful per se, the movement of the UK to implement one of the first registration regimes for certain crypto-asset activities resulted in many Web3 companies simply relocating offshore and then selling into the UK from abroad. A particular difficulty here has been the fact that compliance, unlike legal, has had to balance two different competing priorities: protection of the consumer (and markets generally) and the promotion of business (and competition generally).

On balance, given the association of Web3 with dishonesty, much of the focus has been on protecting the consumer, on the assumption that well-run Web3 companies would welcome the chance to prove their credentials in protecting consumers. This has not been the case.

Compliance with UK requirements was instead seen as too onerous, and so many firms left the UK, seeking to relocate to regimes where it was perceived as easier to do business. To some extent, indeed, compliance with the UK regime was seen as optional and a high cost that could, and should, simply be avoided as unnecessary.

Currently in the UK

The UK regime is currently in a state of evolution, and to best understand the potential consequences of this evolution it is best considered from both a local UK and a global perspective. The starting point in this respect is that in the last few years there have been a variety of large-scale frauds, of which probably the most famous has been FTX.

This has validated the fact that compliance does, in fact, have an important role, particularly as, generally, the issues that have arisen are not specific to blockchain and crypto-assets but rather of a nature that traditional compliance has been well suited to.

In light of this, as part of protecting UK persons, the UK has responded by expanding its financial promotion rules to certain fungible, transferrable crypto-assets. This regime has its origins in the framework applicable to securities and is designed to ensure that such crypto-assets are invested in by those for whom they are appropriate, regardless of the jurisdiction of the selling entity. Indeed, breach of these rules is a criminal offence punishable by up to two years in jail and an unlimited fine. Furthermore, the criminal nature of the offence means that service providers to entities in breach may themselves be holding the proceeds of crime.

The natural response to such rules may be to simply seek to exclude the UK as a target market for businesses. However, this misunderstands the broader global regulatory landscape. As MiCA comes into effect in the EU and the US struggles to determine the best regulatory course of action, there is a real risk of excluding jurisdictions on the basis of compliance requirements that mean a company will not, in fact, be able to run a viable business.

Indeed, we are now seeing jurisdictions globally take the approach that in order to sell into their populations firms need to comply with their local requirements.

While the UK has, again, therefore taken on the mantle of being one of the first movers, in terms of seeking to regulate communications into the jurisdiction, we can expect to see this become a common approach. Over the next few years, we may therefore see the UK become an increasingly popular destination for crypto-asset and blockchain companies to set up as the perceived advantages of offshore jurisdictions, beyond potentially pure tax advantages, diminish.

The end result is that the UK becomes a crypto hub, more through the use of the stick than the carrot.

UK: Coming Up

The position in the UK, as with jurisdictions generally in relation to crypto-assets and blockchain, is not yet entirely settled. There is a recognition that certain aspects of the UK regime could be improved. In particular, it is now generally recognised that seeking to regulate blockchain and crypto-asset companies through legislation primarily focused on money laundering and terrorist financing may not be as appropriate as bringing such firms into the more general authorisations regime, which has a greater specific focus on what is required to ensure that the UK regulators are satisfied that, for example, consumers and financial markets are properly protected.

Furthermore, it is clear that the UK will seek to continue its role, for better or worse, as one of the first mover jurisdictions. In particular there are likely to be moves to regulate the use of stablecoins used for payment services.

Developments in the legal field are also expected in the future. A particular area of interest here is going to be moves to enshrine the concept of crypto-assets as being a type of “property”, despite being essentially information (ie, code). This still leaves open the question of what kind of property a crypto-asset should be treated as, particularly in the context of insolvency.

What will be the end result of all this for the UK? As is the case for jurisdictions globally, the specific end result is unclear, particularly given the intrinsically international nature of the blockchain and crypto-asset industry, meaning that it may mould itself to best take advantage of the evolving global legal and regulatory landscape unlike any other industry.

However, taking a step back, having been practitioners in Web3 since the first initial coin offering in the UK, what is nice to see is the gradual movement to something that looks like a general certainty. Gone are the days of debating whether or not to ban crypto-assets and blockchain altogether. Their value is recognised, and the question now being debated is how best to utilise that. Let’s face it, that question has still not been settled even in relation to traditional plain vanilla securities.