English law as it relates to cryptocurrencies, decentralised finance ("DeFi") and the wider digital economy is emerging from the fog and becoming clearer and more settled as the market matures. One of the objectives of the recent Financial Services and Markets Act 2023 ("FSMA 2023") was to ensure the integrity of the financial markets for crypto-assets, in recognition of their growing adoption and importance. At the same time, cryptocurrency values continue to fluctuate wildly and to garner interest from institutional and retail investors alike.
We have seen where crypto has come from, and the landscape of where we are now, but what does all this mean for the future? In this article, we take a look at recent and ongoing regulatory changes in the UK and consider how this is likely to be built on by regulators and the Government.
The Past: Changes in Law and Regulation
Regulators have been given more powers to oversee and enforce against firms whose business involves crypto-assets. Since October 2023, firm's targeting UK consumers with financial promotions relating to crypto have had to adhere to the Financial Conduct Authority's financial promotion rules. This means that crypto advertisements now require a risk warning, stating that crypto investments can lose value, and firms must ensure promotions are not deceptive or omit key information. Additionally, crypto promotions must comply with the FCA’s “fair and balanced” principles, offering a realistic picture of potential risks and rewards.
Similarly, firms offering crypto-services are now subject to the FCA's mandatory registration requirements, and the UK's money laundering regulations have been updated to apply to cryptocurrencies, reflecting concerns over their criminal use. As a result, crypto-asset firms operating in the UK must comply with anti-money laundering and counter-terrorist financing requirements, as well as being subject to the underlying money laundering regime under the Proceeds of Crime Act 2002. In the same way as institutions that handle fiat currencies or more traditional financial assets, crypto-asset firms must conduct due diligence on their customers, including by verifying identities and monitoring transactions for suspicious activity. They are also required to report any unusual transactions to the National Crime Agency.
While this may appear to suggest a crypto-sceptical (or at least cautious) approach by the UK authorities, really it reflects a reasonably measured approach to crypto-regulation. It is noteworthy that other, more far reaching proposals have not been implemented, such as the 2023 proposal by the House of Commons Treasury Committee to treat crypto-assets not as a financial product, but as a form of gambling. The proposal contemplated bringing crypto-assets under the purview not of the FCA, but of the Gambling Commission. Having rejected this approach, which would have represented a departure from the approach to regulation taken by many other nations, the UK authorities appear content to bring the regulation of crypto-assets into alignment with other, similar, financial products – especially if they are targeted at consumers.
This perspective is underlined by the direction of travel in the UK when it comes to the treatment of crypto-assets as a species of property. Whether or not crypto is property is deeply important from a legal perspective, primarily because it affects the rights owners have if they are the victims of fraud or theft, and the types of remedies which they might avail themselves to enforce their rights over the assets.
Despite some initial uncertainty, English Courts confirmed that crypto-assets are capable of being property in 2020 in the case of AA v Persons Unknown.[1] Mr Justice Bryan's now well-known judgment in that case was later affirmed by the Court of Appeal in Tulip Trading Ltd.[2] The common law position has been confirmed yet again in the recent decision in D'Aloia.[3]
Indeed, the English Courts are adopting a remarkably innovative and informed approach to dealing with cases of crypto fraud, as shown in recent litigation brought by Tai Mo Shan Limited in response to the theft over $400 million of Ethereum in the notorious "Wormhole Portal" hack. In July 2024, the English High Court granted an injunction over crypto-assets held by a third party DeFi app, Oasis, on the grounds that the assets were either the stolen Ethereum, or were traceable proceeds of the fraud.[4] This is not only an affirmation of the principle that crypto is property (with the consequential rights and remedies that attach to property), but an impressive application of that principle in a major fraud case.
All of which, in our view, reflects a legal and political environment that is increasingly open to accepting crypto-assets as a feature of the modern digital economy, rather than something which government hopes to regulate out of existence.
The Present: Changes happening now
The common law position on crypto-assets being property has yet to be taken all the way up to the UK Supreme Court. There remains an outside possibility (however small) that the common law position of crypto adopted by the High Court and Court of Appeal could be undone by the Supreme Court, given the opportunity.
This seems unlikely but nonetheless, in line with recommendations by the Law Commission, the UK Government will soon put the established common law position on a statutory footing, in the form of the forthcoming Property (Digital Assets) Bill (the "PDAB"). Reflecting its enthusiasm, the Government has said, "digital holdings including cryptocurrency, non-fungible tokens such as digital art, and carbon credits can be considered as personal property under the law", ensuring that "Britain maintains its pole position in the emerging global crypto race".[5]
At the same time, the FCA has just published its new "Crypto Roadmap", setting out the regulator's plans for increased regulation and oversight between now and 2026.[6] Among other things, the Roadmap anticipates that the FCA will soon introduce new rules regulating "stablecoins". The value of stablecoins is pegged to other assets (like fiat currencies or commodities) giving them a degree of stability relative to other crypto-assets, meaning they can be useful for transactions or payments among crypto-entrepreneurs and investors. The FCA – while undertaking to regulate stablecoins – has acknowledged that stablecoins play "an important role in crypto markets to enable smooth trading, lending, and borrowing of crypo-assets".
In November 2023, the FCA published its Discussion Paper on regulating stablecoins. Based on that, it is expected that the regulator will prioritise protecting consumers and promoting stability, while encouraging innovation in digital payments. But following the handover of power in the UK Government earlier this year, the industry is now waiting to see whether (and in what form) the FCA's proposals on stablecoins will be implemented. Wide spread adoption of stablecoins will be a sure sign of crypto becoming embedded in the digital economy. The purposes is to enable faster and cheaper transactions. It is not about speculation or investment. It is about payment.
In response to a recent Law Commission paper, the UK Government has indicated an openness to considering making the legal and regulatory landscape better suited to the core principles of DeFi and the unorthodox way crypto creators and entrepreneurs want to organise their ecosystems. Structures as exotic as Decentralized Autonomous Organisations ("DAOs") are a form of quasi-corporate entity which encourage a "trustless" way of doing business, since their operation is (meant to be) dictated algorithmically via a transparent computer code known as a smart contract. Some in the community consider DAOs to be the future, providing a decentralised vehicle for doing decentralised business. Others are less optimistic, noting the ease with which DAOs can be exploited as vehicles for fraud.
Regardless, other jurisdictions (such as Vermont, Tennessee, and Wyoming in the USA) are beginning to embrace DAOs as a concept. The UK may follow suit by introducing changes to company law and the regulatory system to ensure there is a space for DAOs in the UK's digital economy.
The UK political landscape is clearly keen to be seen as pro-crypto, and, similarly to other cutting edge technologies like artificial intelligence, the Government recognises the benefits of being an early adopter and promoter. But the UK financial economy is too interconnected and sophisticated to be able to accommodate what sceptics, and, indeed, crypto purists, see as an unregulated Wild West. As a result, any new financial technology can be expected to face a material degree of regulatory oversight, particularly if it is marketed to retail investors.
The Future: what to expect?
Despite increasingly pro-crypto regulation, the future remains uncertain, thanks to crypto's notorious tendency to fluctuate unpredictably in value, and as we continue to see major fraudulent activity such as FTX, and the ongoing debate over who is, in fact, Satoshi Nakamoto (right now, all we know is that it is not Craig White!)
That being said, the election of Donald Trump as President of the USA, and his growing bromance with Elon Musk (who is tipped to be made head of a new Department of Government Efficiency in Trump's administration), make it hard to imagine that the landscape for crypto will get less favourable in the world's largest economy. Crypto-markets clearly have faith: since the election, the price of Bitcoin has hit record highs and broken the $100,000 barrier for the first time. Other cryptocurrencies have similarly benefited from this rising tide of confidence.
Examples of the rising sentiment were seen most acutely following the resignation of Gary Gensler, Chair of the US Securities and Exchange Commission. XRP, which has been subject to particular attention from the SEC for the past few years, spiked to record values, from less than $0.50 to over $2. More recently, it was the announcement that Paul Atkins was Trump's pick for new head of the SEC that sent Bitcoin over the $100k barrier for the first time.
In the UK, FSMA 2023 and the PDAB reflect a degree of a unity among UK decision makers to embrace the crypto-economy, while ensuring that there are clear regulatory frameworks in place to promote the stability of the ecosystem and protect consumers. For now, regulators seems to be acting proportionately but it may not take much of a shock to the economy to cause a knee-jerk regulatory reaction.
To the extent that the future is dark for crypto, this is caused, more than anything, by the prevalence of theft and fraud. Malign actors supporting the Russian and North Korean regimes have been central to the use of crypto currency as a means to steal cryptocurrency through major hacks and move the proceeds of crime. The legislative changes being brought into the UK are focussed on addressing this criminality, putting more obligations on institutions to conduct proper due diligence, increase transparency, and help victims. But crypto-assets will remain difficult to trace and retrieve, often by design. Further innovation is needed to give the crypto-asset class the stability and security it requires to become truly ubiquitous.
We see a bright future for crypto, blockchain and the digital economy but it is not without risk. The law will play a big part for crypto developers, entrepreneurs, investors.
Jonathan Brogden (Partner and Head of Crypto Disputes) and Alexander Bradley-Sitch (Associate) are part of the Commercial Disputes team of DAC Beachcroft in London. They regularly advise clients on disputes and investigations relating the cryptocurrencies, DeFi and FinTech.
[1] AA v Persons Unknown [2020] 4 W.L.R. 35.
[2] Tulip Trading Ltd v Bitcoin Association for BSV [2023] 4 W.L.R. 16.
[3] D’Aloia v. Persons Unknown & Others [2024] EWHC 2342 (Ch). The common law approach taken thus far is not without controversy. Since crypto-assets do not conform to previously-established legal formulation of what property is as a matter of law, alternative views hold that crypto should be treated more like confidential information, without being granted true "property" status.
[4] Tai Mo Shan Limited v Oazo Apps Limited [2024] EWHC 2532 (Comm).
[5] Ministry of Justice Press Release, 11 September 2024, available here.
