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Tag: cryptocurrency regulation

  • Crypto Claims: How Do They Work?

    Crypto Claims: How Do They Work?

    Cryptocurrency Regulation Overview

    The volume of crypto transactions grew by 550% in 2021, which is indicative of the rapid expansion of the market. However, alongside this, the level of crypto crime hit $14 billion according to a report by Chainanalysis. It is, therefore, unsurprising that the Financial Conduct Authority has labelled cryptoassets as ‘very high risk, speculative investments’. This is undoubtedly due to the fact that regulation in this area is still in its infancy.

    However, the need for robust protection by law is paramount and the recent proactivity of the courts is evidence of this. Indeed, more recent developments underscore that important progress is being made for victims of crypto crime.

    Crypto assets as a form of property in the UK

    In 2018, Mr Justice Birss granted the world’s first freezing order on cryptoassets.[1] Yet, two more recent cases evidence the courts’ likely line of attack and highlight other remedies available to victims of cryptocurrency fraud: Fetch.ai Ltd and another v Persons Unknown and others [2021] EWHC 2254 (Comm) and Ion Science Limited and another v (1) Persons Unknown, (2) Binance Holdings Limited and (3) Payment Ventures Inc (unreported) 21 December 2020 (Commercial Court).

    Their judgments boast three key takeaways. Firstly, the courts’ recognition of cryptoassets as a form of property under English law, following the decision in AA v Persons Unknown [2019] EWHC 3556. Secondly, the courts’ demonstrable willingness to grant remedies against ‘persons unknown’. Thirdly, the willingness of the courts to grant information orders against cryptocurrency exchanges, even when they are located outside of the jurisdiction. This means that a cryptocurrency exchange would be required to disclose certain confidential information relating to the cryptoassets in question.

    The practical implications on Crypto Claims

    The use of injunctive orders against ‘persons unknown’ has allowed for relief for victims who are chasing a defendant whose anonymity remains intact; this is a common problem with stolen cryptoassets and, therefore, a huge development.

    In Fetch.ai Ltd, the court’s narrow definition of ‘persons unknown’ highlighted its cautious and scrupulous approach.

    The definition was split into three categories:

    • Persons directly involved in the fraud;
    • Persons who were in receipt of assets but who had not paid their full market value; and
    • Innocent receivers.

    The third and final category serves to limit the scope and protect those receivers who did not know or could not reasonably have known that the assets belonged to the claimants.

    In Ion Science, a proprietary injunction was sought to stop fraudsters dealing with the assets until resolution at trial. Additionally, a worldwide freezing order was granted in light of the significant risk of dissipation.

    However, the court also granted a Bankers Trust order against the crypto exchanges; this disclosure order compelled the exchanges to disclose confidential information to help with the identification of the alleged fraudsters.

    It is, therefore, clear that the English courts are becoming well versed in crypto claims and are effective in their application of current legal frameworks in order to assist victims in their recovery of cryptoassets.

    [1] Elena Vorotyntseva v Money-4 Limited t/a Nebeus.Com [2018] EWHC 2596 (Ch)

  • Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Disclosure Of Cryptocurrency Assets In Divorce Financial Settlement Proceedings

    Cryptocurrency assets may be in trouble in terms of increasing fraudulent activity and volatile market values but experts are firm – digital assets are not a fad and the market is continuing to grow. It is approaching a total capitalisation of $1 trillion and the number of people trading in cryptocurrencies is increasing year on year. For divorcing couples, especially those who are high-net-worth (HNW) disclosure of cryptocurrency assets is becoming increasingly commonplace. Therefore, when negotiating a financial settlement, you need to ensure your Divorce Solicitor is experienced in cryptocurrency assets.

    Cryptocurrency remains a mystery to many of our family law clients, therefore, in this article we deep dive into the various legal matters crypto assets can raise in divorce financial settlement proceedings.

    What is cryptocurrency?

    Cryptocurrency is a digital currency that can be used to purchase goods and services (the UK beauty retailer Lush takes crypto as a form of payment on its website). When Argentinian football superstar, Lionel Messi transferred to French club Paris Saint-Germain, he received part of his $30 million package in cryptocurrency. You can also invest in cryptocurrency assets in the form of purchasing the currency directly or investing in crypto funds and companies. Crypto assets can take different forms, for instance non-fungible tokens (NFTs) which can represent different property for instance digital art.

    Where is cryptocurrency kept?

    Cryptocurrencies are managed using blockchain technology which means they are outside of the central banking and financial system, albeit subject to anti money laundering laws. Therefore, no ‘currency’ actually exists. Instead, cryptographic keys are stored in ‘wallets’ which are managed by a centralised crypto exchange (CEX).

    This may sound confusing, however, it is no different than notes and coins which are worthless in themselves (as paper and metal) but have a value attached which can be used to purchase goods and services.

    Do cryptocurrency assets have to be disclosed in family law proceedings?

    Cryptocurrency is considered an asset in family law proceedings and therefore must be disclosed. The Courts have considerable powers at their disposal to seek disclosure and value cryptocurrency assets, although their volatile exchange rate can make this a challenging exercise.

    One of the attractions of dealing with cryptocurrency assets is that transactions can be made anonymously, or in the case of Bitcoin, the most well-known cryptocurrency, pseudonymously. This can lead to disputes where one spouse believes the other is hiding cryptocurrency assets in order to keep them out of the divorce financial settlement.

    Can cryptocurrency assets be traced?

    As there is no centralised ownership register for cryptocurrency assets a specialist forensic expert may need to be instructed to establish where such assets are held and their approximate value. In theory crypto assets are represented by an immutable record on blockchain, but given the number of cryptocurrencies that have been lost by hacking or just not been accounted for there is an argument to say not all blockchain systems are failsafe.

    If there is evidence that your spouse is engaging in cryptocurrency transactions in order to hide or dispose of the assets so they do not become part of the financial settlement, your Divorce Solicitor may be able to obtain a freezing order. Case law in recent years supports the principle that cryptocurrency is a form of property. This will prevent them from dealing with or disposing of their cryptocurrency assets for as long as the injunction is in place. The order can be extended to cover not only your spouse but also any CEX that may facilitate potential transactions.

    What if cryptocurrency assets cannot be traced?

    If it becomes clear that the assets cannot be found despite the best efforts of forensic experts, your Family Law Solicitor may be able to persuade the Court that the assets do in fact exist by providing evidence such as bank statements or tracked wallet transactions showing dealings in cryptocurrency. If your Solicitor’s argument is successful, the Family Court Judge, after considering all the factors under section 25 of the Matrimonial Causes Act 1973, may award you a larger share of the overall matrimonial assets ‘pot’ after taking into account the approximate value of the undisclosed cryptocurrency assets. Additionally, persuade the court that any financial settlement is not on a ‘clean break’ basis allowing the opportunity to recover further income or assets as evidence of crypto assets materialise.

    Concluding comments

    Although cryptocurrencies have technically been around since the 1980s (with Bitcoin coming into play in 2008) they are unregulated in most economies. This, along with the speed of crypto transactions, and the ability to trade anonymously with some currencies means that when it comes to tracing undisclosed cryptocurrency assets in family law proceedings, it is vital to instruct a Solicitor who has not only experience in dealing with this type of asset, but the necessary expert forensic contacts who can conduct effective traces.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2023. This article does not constitute legal advice. For further information, please contact our London office.

  • Financial services and markets bill: How the UK might become a new Hub for crypto

    Financial services and markets bill: How the UK might become a new Hub for crypto

    Does The Financial Services and Markets Bill have the Crypto Factor?

    Regulation or innovation? One question on everyone’s lips is whether these terms are mutually exclusive in the world of cryptocurrency. At present, there is a backdrop of considerable uncertainty: war impacting the distribution of key commodities such as grain; UK recession; UK currency falling in value against the dollar; and a deteriorating standard of living. This pattern is reflected globally, with 45 countries facing inflation rates of over 15%.

    The crypto horizon looks particularly gloomy when one also considers the sudden and catastrophic crash of FTX last November. With an estimated $8 billion in losses, this episode undoubtedly gives crypto skeptics renewed ammunition for criticism. 

    Yet, the UK government is set on transforming Britain into ‘a global hub’ for crypto. Indeed, last July the Financial Services and Markets Act (FSMA) was introduced to Parliament. 

    The original Bill and its subsequent amendments are indicative of government attempts to chase the tails of this rapidly changing technology. It also largely mirrors progress taken on the continent, demonstrated by the EU’s Markets in Crypto Asset regulation.

    Financial Services and Markets Act: The Initial Changes

    The original version of the FSMA set out plans to recognise stablecoins as a valid form of payment, giving the Financial Conduct Authority (FCA) the power to regulate them. Those stablecoins capable of effecting payments, namely ‘digital settlement assets’, are to be brought within the Bank of England’s regularity perimeter. 

    The FSMA also clearly defines ‘digital settlement assets’ and gives HMT the power to amend this definition. This is of particular importance, as it ensures the legislation will keep pace with rapidly developing technology. 

    Further Developments

    Further amendments to the FSMA, made in November, will broaden the remit of the FCA’s powers if passed into law. Andrew Griffith explained that the changes ‘amends the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate crypto assets and activities relating to crypto assets.’ 

    At present, the FCA’s power extends to ensuring that cryptoasset firms are employing effective anti-money laundering (AML) and financial crime procedures. However, these changes mean that cryptoassets will be treated, and thus regulated, in a similar way to shares and other more traditional securities. 

    What does this mean for cryptoasset firms?

    This regulation would essentially lead to a ‘levelling-up’ for cryptoasset firms when it comes to their compliance obligations.

    As a result, firms that are offering services relating to cryptoassets will likely require FCA authorisation. This means that any firm operating crypto exchanges, supplying investment advice or custody services in relation to cryptoassets will need to be fully registered with the financial services regulator in order to operate legally in the UK. 

    Those firms who are already registered and subject to the FCA’s AML regime must go through a separate registration process. This is because full authorisation under the FSMA will potentially mean that firms will be subject to all rules laid out within the FCA Handbook, not just those under the AML regime. Notably, this could include the Financial Ombudsman Service rules on complaints. 

    The FCA’s new powers will enable a much broader regulation of cryptoasset firms, including restrictions on advertising and selling in the UK market. This is due to a move to append ‘including where an asset, right or interest is, or comprises or represents, a crypto asset’ to Section 21 of the Act.   This represents an extension to the financial promotions regime, as Section 21 prevents the advertisement and promotion of investment activities by unregulated firms. 

    Any firms violating these rules and engaging in fraudulent activities involving cryptoassets will be at risk of fines and/or other penalties at the behest of the FCA. 

    What does this mean for consumers?

    One of the FSMA’s overall objectives is to ensure greater protection for those engaging in crypto-related services and investments. Indeed, it will undoubtedly consign more power into the hands of the consumer.

    In order for crypto to flourish meaningfully, this legislative certainty is indisputably necessary. In 2022, the Financial Lives Survey indicated that around 3 million UK consumers have already invested in cryptoassets. The FSMA will ensure greater business certainty, attracting even more investment and creating more jobs in the sector. The Act has had its second reading in the House of Lords on 10th January, and is currently going through the Upper House’s committee stage, after which there will be the report stage and third reading before the Bill reverts to the Commons for further debate. Royal Assent is expected in spring/summer this year.

  • Crypto – the Prodigal Asset?

    Crypto – the Prodigal Asset?

    As Heraclitus said: “There is nothing permanent except change.”

    Every innovation is met with suspicion if not derision. Planes and trains were seen as the work of the Devil, whilst some wanted the car outlawed- ironically the very early vehicles were battery not gasoline powered.

    There was marked antipathy to UK commercial TV when launched in the 1955. Some thought it would not last and that all we needed was the BBC. Wind the clock forward and it’s the BBC having to find its niche in a world of multi-providers and new technologies providing novel ways to view programmes and pay for them. Content has changed exponentially courting questions as to what are the boundaries of free speech?

    The internet and social media have yet to be tamed and regulated. The UK’s Online Safety Bill 2022 shows the tension between free speech and protecting the vulnerable.

    Crypto and its supporting technologies are the latest to be under the gaze. Admittedly crypto has scored some own goals thanks to the gung-ho anti-regulatory mentality of FTX (and fall out consequences like Block Fi). Whilst ‘the fake it until you make it’ maxim now looks like a route map to prison food given the conviction of Elizabeth Holmes, founder of Theranos.

    Whilst we can be scathing of crypto let’s not forget it is only about 14 years that established ‘analogue’ banking was under scrutiny and pushed capitalism to the brink. The effects are still being felt economically, socially and legally.

    Crypto has the potential to be the fundamental catalyst in changing capitalism, and in the right hands (human and AI) the capacity to further democratise society.

    However, to do so it needs several important elements.

    The first important aspect is to ensure trust and transparency. Crypto using more acronyms than a tin of alphabet soup only antagonises matters and shrouds matters in mysticism when the sector should be earning trust as well as broad acceptance. Even Tesla’s Elon Musk resisted calling tyres ‘rotating mobility aids.’

    Make sure the adults are in the room. And by that I do not mean tropes of yesteryear but like-minded people from all backgrounds, ages and nationalities who are willing to embrace change but not change for changes sake. Also, don’t regard regulation and accountability as a death knell to creativity and innovation.

    The courts and lawyers accept that there is risk to everything. What you regulate is ensuring people know what they are letting themselves in for and that there is proper transparency and accountability. We should not protect people from failing but we should protect them from people who make failing inevitable whether because their approach to crypto business is fraudulent or just damn feckless.

    Legislators need to understand blockchain and crypto. Also, regulation should be agile and responsive. Also, keep it simple. The more complex and unfathomable the laws the more chances of creating uncertainty and loopholes that undermine the purpose of the legislation. If existing legislation works then just adapt to crypto.

    As with climate change and the Internet, crypto is a borderless market yet most legislation is derived from jurisdictions. There is already divergence on definitions of crypto assets, for instance between the proposed EU Markets in Crypto-Assets (MiCA), and the UK’s proposed amendments to the Financial Services and Markets Bill (FSMB).

    The FSMB defines a crypto asset as: 

    “Crypto asset’ means any cryptographically secured digital representation of value or contractual rights that:

    • Can be transferred, stored or traded electronically, and
    • That uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

    Whilst MiCA adopts a more forensic analysis and definitions will cover certain types of NFTs (non-fungible tokens).

    Seemingly, the FSMB will not cover NFTs whilst the UK’s Digital, Culture, Media and Sport Committee launching an enquiry how best to regulate NFTs. 

    The US securities law such as the Securities and Exchange Commission (SEC) may treat certain types of NFT as securities. 

    NFTs play an increasing role in the creative industries but their application exceeds these valuable sectors.

    Ideally, crypto needs international courts and universal standards- but given the NFTs examples above it is not likely to happen any time soon. 

    Common Law should provide consistency but variation occurs, for instance compare Australia and UK court decisions as to whether crypto assets are a form of property. 

    Ensure that blockchain and also crypto are green using renewable energy. 

    The biggest goal for crypto is to re-define the application of business and also give choice as to the type of money or unit of value we use.

    We would be aghast if there was only one type of fashion, car, phone or cheese; we have choice and so it should be with money and its utility.

    Central governments and banks fear that they will lose control over collecting taxes, monetary policy and so forth; an immutable blockchain should make tax collection easier! 

    The right utility weighting can ensure crypto money has real value and not something built on quicksand. The current mantra of we value it because we do can only be taken so far.

    Currently, the wealth of a country or person is based on fairly crude profit and loss principles. 

    Smart blockchain technology can trace and account for specified qualities and once verified a value can be attributed, for instance, if a company has an excellent employment record then a value is attributed. 

    Likewise, if you can show that production does not include use of carbon or a supply chain does not exploit children then a value can be given. As such, profitability is measured in terms of additional identifiable qualities rather than just what is produced or services provided.

    Such an approach helps productivity, help stem inflation as each crypto assets would be linked and valued against identifiable parameters not just on market whim. 

    The legal groundwork exists. For instance, S414 C (7) Companies Act 2006 says companies need to take account of factors such as such as environmental matters, including the impact of the company’s business on the environment. Also, requires consideration of social, community and human rights issues. 

    Whilst the Directive on Corporate Sustainability Due Diligence and Amending Directive (EU) 2019/1937 will apply to EU and non-EU companies generating a net turnover of more than €150m in the EU in the financial year preceding the last financial year. The Directive is likely to be adopted by 2023 and take effect during the next three to five years.

    Blockchain will be a significant driver in the application of these laws and influence how companies are perceived and valued.

    This does not prevent central governments imposing rules of engagement.

    It is easy to look backwards through rose tinted glasses and resist change.  As Leo Tolstoy said: ‘Everyone thinks of changing the world, but no one thinks of changing himself” 

    One way we could change ourselves is to embrace blockchain and crypto and, like a child, nurture them so they become inspirational and constructive adults.

    Julian Wilkins of Eldwick Law

    Consultant Solicitor and Notary Public

    Member of the Chartered Institute of Arbitrators

    CEDR Accredited Mediator