In an age of rapid digitalization where vast strides in technological development are readily translated into unprecedented and revolutionary alterations to the functioning of society, the emergence of cryptocurrencies represents a potential departure from, or at the least an alternative to, the traditional operation of currency.
Yet perhaps the most remarkable feature of this novel form of digital asset is the number of complex questions that remain unanswered about its legal status, both in the UK and internationally.
The global nature of crypto
Unlike traditional forms of currency, cryptocurrencies function on a world scale; they can be bought and sold at will almost instantly by anyone, anywhere in the world, and their value is uniform across the globe. Where traditional currency – otherwise known as fiat currency – is tied directly to government-issued currency, cryptocurrencies derive value from their native blockchain. No central body dictates the governance of cryptocurrencies in the same way as fiat currency – instead, it is governed principally by the international communities that use it.
As the product of novel technology born out of, or at least inevitably reliant upon the internet, certain questions have emerged regarding the precise legal status of cryptocurrency as a digital asset which is capable of being both bought and sold as a commodity, and used as payment in exchange for goods. Whilst the value of cryptocurrencies is uniform, its legal status is not. The international quality of crypto prevents answers to any such questions from being singular or uniformly applicable. Where governments in certain jurisdictions have embraced the existence and expansion of the crypto market, taking active steps to resolve unanswered questions and assist with the smooth integration of the digital technology, others have erected legislative roadblocks, pursuing policy in staunch opposition to any unknown currency which is not available for careful regulation and control.
This article explores crypto around the world and the way in which different jurisdictions have approached the task of categorising and regulating cryptocurrency, first looking to recent developments within the UK, before comparing English legislation and policy to jurisdictions such as Australia and Singapore, China and Russia.
Cryptocurrency in the UK: A brief update
Since the 2019 case of AA v Persons Unknown [2019] AWHC 3556 (Comm) it has been widely accepted that crypto assets are considered property within the law of the UK. This finding was further confirmed in the case of Wang v Darby [2021] EWHC 3054 (Comm), in which Mr Stephen Houseman QC found that the cryptocurrency in question, Tezos, constituted property which was capable in principle of being the subject of a trust, “notwithstanding its entirely fungible character and non-identifiable status”. This is a significant distinction, as if an asset falls within the legal definition of property it carries with it a long list of implications, for example whether cryptocurrencies may rightly constitute the subject matter of a trust, or of a proprietary or a freezing injunction.
Whilst no explicit crypto legislation has been announced, on the 25 November 2021, the Law Commission published guidance following an extensive consultation and review process into smart contracts in the UK. Smart contracts can perform transactions on decentralised cryptocurrency exchanges and are therefore relevant to digital assets in respect of agreements to transfer of an amount of cryptocurrency to, or out of, an individual’s wallet. The Law Commission concluded that “the current legal framework in England and Wales is clearly able to facilitate and support the use of smart legal contracts, without the need for statutory … reform.”. The Law Commission are also in the process of examining digital assets specifically, with the aim of addressing the need to reform certain aspects of the law in order to “ensure that digital assets are given consistent recognition and protection”. One such area of the law concerns the concept of ownership, and whether or not a digital asset can be possessed, which is currently limited to the realm of physical things. The Law Commission are expected to publish a consultation paper on this at some point in mid-2022, with a full report to follow.
In terms of regulation, as of 10 January 2020, the Financial Conduct Authority is the relevant regulator in the UK and all businesses carrying out crypto-related activity within the scope of the MLRs must register with the FCA prior to conducting business. All businesses must also be fully compliant with the 2017 Regulations, albeit a significantly high number of businesses are failing to meet these requirements.
In all, the UK government, courts and financial institutions have taken notable strides to recognise and regulate crypto and other digital assets. The Law Commission’s appetite for potential reform and evident emphasis on the need for legal certainty in order to ensure that digital assets are protected and clearly demarcated within the law demonstrates a definitive, albeit gradual movement toward acceptance and promotion of cryptocurrencies and their various usages within the UK.
International picture: a look at other jurisdictions
Singapore
In 2019 the Singapore International Commercial Court joined the short list of jurisdictions formally recognising (either by case law or legislation) that cryptocurrencies are capable of being considered property. B2C2 Ltd v Quoine Pte Ltd [2019] SGHC(I) 03 concerned a number of trades performed on currency exchange platform Quoine, registered in Singapore and accessible worldwide. The crux of the case centred on whether the actions taken by Quoine constituted a breach of trust, which in turn required an analysis as to whether the standard criteria for the creation of a trust had been met: namely, certainty of intention, subject matter and object. Such a conclusion could not be drawn without reference to the status of the subject matter in question, specifically whether the cryptocurrencies fell under the category of property. The Court concluded that, despite case law which suggests difficulty in reconciling virtual currencies with the classic definition of property (as per the House of Lords in National Provincial Bank v Ainsworth [1965] 1 AC 1175), cryptocurrency does have the fundamental characteristics of intangible property, being an identifiable thing of value, despite not being considered legal tender in the sense of being a regulated currency issued by a government.
From a regulatory standpoint, Singapore have also made marked progress. In January 2020, The Payment Services Act (“PSA”) came into effect, regulating the operations of cryptocurrency firms in Singapore and introducing a regulatory framework for cryptocurrency payments. The PSA regulates seven types of payment services, including money transfer services, both domestic and cross border, e-money issuance services and digital payment token services. Any business offering any of the seven services must apply for a licence, unless otherwise exempt. For two out of the three categories of licence, namely the standard payment institution licence and the major payment institution licence, the successful applicant must be a company incorporated in Singapore or overseas, with a permanent place of business or registered office in Singapore, and at least one executive director who is a citizen, permanent resident of Singapore, or belonging to a class of persons prescribed by the Monetary Authority of Singapore (“MAS”). The MAS has stated that it expects the framework to strengthen consumer protection and promote confidence in e-payments, a fundamental ingredient in the successful integration and promotion of digital currencies.
Australia
Heading “Down Under”, in Australia, all cryptocurrencies are considered property in the eyes of the law. This is in line with the approach taken in the UK and Singapore, albeit perhaps a correctly cautious step behind El Salvador. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF 2006) treats cryptocurrency as a digital representation of value that may function as a unit of exchange, be used as consideration for the supply or goods and services and which is interchangeable with other forms of money. However, cryptocurrencies being categorised as property also translates into subsequent tax implications. If cryptocurrency is not held in the course of a business (excluding as a personal use asset of $10,000 or less), a profit on its sale will be subject to capital gains tax.
Australia is regarded as a reasonably stable jurisdiction for cryptocurrency agencies and, in keeping with the government’s non-interventionist and relatively passive approach, cryptocurrency regulation is largely entangled with existent domestic law (such as the AML/CTF 2006). As such, the classification of cryptocurrencies in Australia falls largely into existent categories of financial assets. The AML/CTF 2006 provides a fairly substantial regulatory framework for cryptocurrencies, stipulating that all entities exchanging digital currency must register as exchanges; identify and verify users; maintain accurate financial records and comply with specified reporting obligations. Any non-compliance with the above mentioned requirements can lead to criminal sanctions. Furthermore, updated guidance published by Australian regulator ASIC makes clear that cryptocurrency exchanges must now be legitimised by acquiring an Australian Financial Services Licence, alongside other financial service providers defined under Part 7.6 of Chapter 7 of the Australian Corporations Act. In all, the Australian government has fairly consistently demonstrated a liberal and welcoming attitude towards crypto assets, and whilst it has no immediate plans to do so in the near future, the Reserve Bank of Australia has been involved in exploring the potential use of a central bank digital currency.
China
Pivoting to the East, an altogether different attitude to digital assets can be observed. In 2013, relatively early in the lifespan of cryptocurrencies, China announced that it does not recognise cryptocurrencies as legal tender and that its banking system does not accept cryptocurrencies or provide relevant services. Whilst this approach was not unusual at the time, four years later in September 2017, Chinese regulators went on to ban Initial Coin Offerings (ICOs) – the industry’s equivalent to an initial public offering (IPOs) – stating that the use of cryptocurrencies such as Bitcoin and Ether to conduct ICOs was an unauthorised and illegal form of public financing. The ICO rules also banned cryptocurrency trading platforms from converting legal tender into cryptocurrencies and vice versa. China proceeded with demonstrating firm opposition to the rise of digital currency, pursuing crypto exchanges and prohibiting them from allowing traders to convert their cash to crypto (and vice versa), as well as from offering any other crypto-related services. By July 2018, 88 virtual currency trading platforms had withdrawn from the market.
This staunch attitude has remained firmly unchanged in spite of progressive developments in the West, and on the 18 May 2021, three leading bodies in China (the National Internet Finance Association of China, the China Banking Association and the Payment and Clearing Association of China) issued a report re-emphasising the existing cryptocurrency ban in the country. The report makes clear that institutions must not accept virtual currencies or use them as a means of payment and settlement.
Russia
Cryptocurrency holds a rather undecided position within Russian law and policy. In July 2020, the Russian government granted legal status to cryptocurrencies following a protracted period of mixed messaging regarding the promotion and proliferation of the digital currency in the country. In the same fell swoop, however, crypto payments for goods and services became the subject of a blanket ban. Half a year later in January 2022, the Central Bank of Russia called for a total ban on cryptocurrencies within the country, citing the risks posed by the volatility of digital currencies on the country’s broader economy. In February 2022, new draft regulations governing cryptocurrencies in Russia were submitted by the Russian Finance Ministry, upholding an existing ban on the use of crypto payments for goods and services and setting a cap on the amount of rubles any individual can invest in crypto. However, Russia is home to the world’s third-largest cryptocurrency mining industry behind the United States and Kazakhstan, a puzzling contradiction which suggests that the country’s general disdain for crypto-related risks is not shared by all. In any event, the effort to achieve a legislative consensus has yet to be achieved in Russia, though the country’s focus may well now be diverted elsewhere.
El Salvador
In September 2021, El Salvador made the digital currency Bitcoin official legal tender. Bitcoin is now recognised as currency equal to the US Dollar and may be utilised without limitation to discharge debts and pay for goods and services. Many are optimistic that the adoption of Bitcoin will increase financial access and prosperity for lower-income citizens of the country, a majority of whom do not have a bank account. Not all reactions to this significant step were positive and approving, however. The International Monetary Fund (IMF) has repeatedly voiced its disapproval, expressing the view that the potential economic and legal risks of the unprecedented use of Bitcoin to the Salvadorian economy are outweighed by the benefits. Furthermore, in the context of ever-increasing concern for environmental and broader ESG factors, the highly energy-intensive process by which Bitcoin is ‘mined’ (a process by which computing systems solve complex mathematical problems) is a major source of concern, particularly when assessing the long term viability of cryptocurrency as a legal tender.
From a regulatory standpoint, there is scope for improvement; in a relatively brief period of time, the Salvadorian government has had to establish a framework as well as payment platforms to allow for the conversion from US Dollar to Bitcoin. Some deficiency in the system is therefore inevitable, particularly as El Salvador does not follow IFRS accounting standards. This perhaps makes it difficult to situate the development as being easily comparable to jurisdictions where existing standards of financial regulation are higher. Nonetheless, El Salvador’s adoption of Bitcoin is a significant development when assessing the international approach to and integration of cryptocurrencies and, given more time, may be all the more representative of the potential for future developments.
Concluding remarks: the significance of diverging approaches
In all, the international picture is painted in many different colours. From one jurisdiction to the next, the way in which individuals may access, buy, sell and utilise their cryptocurrencies, and the legal status and protection given to such assets, is evidently vastly different. Inevitably, this signifies that international uniformity remains a distant goal and that pertinent investors and traders ought to take measured strides to educate themselves on the legal and regulatory status of crypto in any and all relevant jurisdictions – which, when one considers the vast nature of the internet, could be a considerable undertaking. Nonetheless, it is clear from the considerable and expeditious progress made toward integrating cryptocurrencies within large sections of the world that cryptocurrency and digital assets are here to stay, holding a certain place within the economic and legal future of any jurisdiction willing to accept them.
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