2021 saw a huge spike in interest in cryptocurrency and cryptoassets, among both private investors and businesses. Sam Healey, partner in business crime and regulation at JMW Solicitors explains more about the reasons why crypto is attractive to businesses.
Firstly, it offers a potential framework for the ownership of digital assets, and can be a cost-effective way to transfer money internationally – but crypto markets have a reputation for a lack of regulation or oversight that can make them extremely high-risk.
As is often the case with technological innovations, the law takes some time to catch up. While Bitcoin and other cryptocurrencies have been available since 2008, it was only their explosive popularity over the last couple of years that forced global authorities to take note and begin to strengthen their efforts at regulation.
Thankfully, there is now much more clarity about the legal status and regulations that apply to cryptoassets, although these are always subject to change as this market evolves.
Here, the crypto legal experts at JMW Solicitors explain how crypto assets and currencies are regulated, what their legal status means for businesses, and how you can avoid the highest-risk propositions.
What are the regulations that currently apply to crypto coins?
Responsibility for overseeing crypto falls to the Financial Conduct Authority (FCA), the UK’s chief financial regulator. At the time of writing, the FCA does not consider cryptocurrencies legal tender; rather, it classifies them as exchange tokens. These fall outside traditional financial frameworks and, as such, the coins themselves are unregulated. On the other hand, some cryptoassets may be classified as security tokens, and these are regulated by the FCA in much the same way as traditional securities.
More regulations apply to crypto markets and exchanges, where coins are bought and sold. Cryptoasset firms must register with the FCA, and ensure that they implement effective anti-money laundering and anti-terrorist financing measures. The FCA has powers to oversee these businesses and ensure compliance.
The regulatory landscape around cryptocurrencies and assets in the UK became the subject of scrutiny in 2021 as a result of their rapid growth in popularity. Several legal precedents were set at that time which indicate that, in the view of English courts, cryptoassets are considered property. This means that there are legal routes businesses can take to recover stolen cryptoassets in the UK, as under English law, assets that are owned by someone in the UK fall under British jurisdiction, wherever they are in the world.
As well as the FCA, the Advertising Standards Agency (ASA) has involved itself in the regulation of cryptocurrency, by maintaining standards for the ways in which these assets can be sold in the UK. As such, businesses should ensure they provide comprehensive risk disclosures to customers about the volatility and potential loss of buying, selling or holding cryptoassets. If you are concerned about your legal position, it is often best to speak to an expert crypto solicitor about your circumstances and receive tailored advice.
What are the biggest risks and how can businesses respond?
There are a number of significant risks in crypto markets, from the fact that assets are often vulnerable to hacking, to the proliferation of money laundering and terrorist financing activities, to the number of scams designed to steal assets from businesses. Even without any illegal activity, the crypto market can be extremely volatile, with coins and assets rapidly rising and falling in value.
It is important to note that some currencies (particularly the more high-profile and notable coins) are much more stable than others, and businesses can keep their investments as safe as possible by avoiding the promises of quick profits. No investment is ever without risk, but by carefully researching a particular coin or asset before you invest, you can fully understand the degree of risk you are facing. Beware of ‘pump-and-dump’ scams, where the value of a coin is artificially inflated very quickly, and then assets are sold off by the perpetrators of the scam at this high price, before the value suddenly drops back to zero.
Phishing scams are a common way that hackers will attempt to steal cryptoassets. Most people are aware of the risk of phishing, and this leads many businesses to assume that they are not at high risk, but this fails to account for the sophistication of these attacks. These days, criminals can easily learn personal information about the directors of a company through social media platforms and use this to imitate them. They can also disguise an email address to appear genuine, and thereby authorise a payment or encourage a member of staff to click on a malicious link.
Once criminals have stolen cryptoassets, they quickly move their money. The speed of crypto transactions means that assets can be split up and transferred rapidly back and forth between wallets, creating a trail that is very difficult to trace. However, while this can be confusing for authorities, it fails to overcome the primary advantage of blockchain technology, which is that the blockchain itself contains a record of every transaction.
As such, while it is certainly more difficult to track stolen assets, it is not impossible – it simply requires a careful process of digital forensics. As we have mentioned, cryptoassets are considered property under UK law, and this means that there are legal actions that victims of fraud can take to recover their assets. Courts in England have granted international freezing orders to prevent criminals from accessing, liquidating, withdrawing or otherwise disposing of cryptoassets. This can enable victims to later recover their funds – although, given how volatile many cryptocurrencies are, they may not recover the full value of these assets.
It is unclear at this stage how regulation of crypto markets will change, but we expect that stronger restrictions will come into force as this area of finance continues to develop. With additional regulation, including efforts to hold exchanges and platform operators more responsible for illicit use of their services, markets could begin to stabilise and build much greater trust in crypto markets. As cryptocurrency becomes more popular and is more widely used, its relationship to existing currencies is also likely to stabilise. However, the current volatility of the market means that it is hard to predict what will happen next, and around the world, the legal status of these assets remains ambiguous. If you have legal questions, speak to an expert solicitor to ensure you remain up-to-date on crypto regulations and can stay ahead of any expected changes.
