Jurisdictions around the world are looking at how to regulate digital assets. The UK has set out proposals, and the authors of this article think the country may gain an edge over the competition.
In April 2022, the Chancellor of the Exchequer at that time, Rishi Sunak, signalled the UK government’s ambitions to make the UK a “global hub” for crypto asset technology. Part of the plan was “to ensure the UK financial services industry is always at the forefront of technology and innovation.” In tandem, the government committed to introducing a new regulatory regime for crypto assets, to reflect the risks and opportunities they present.
The wheels of regulatory change have been slowly turning since then and there is increasing pressure for action to consider the evolving technical landscape and need for consumer protection, (particularly following the collapse of FTX), with some complaining that the UK may be falling behind the European Union (which has already adopted its MICA regulations).
However, whilst the regulators may be behind, the wider lawmakers are not. The UK has remained at the forefront of the digital assets ecosystem due to its adaptive and flexible common law system. The English and Welsh courts have made several groundbreaking decisions over the past three years, securing personal property rights to digital assets and adapting existing legal tools to assist with tracing and recovering stolen cryptoassets.
Against that backdrop, in June 2023 the Law Commission published its Digital Assets report which considered the array of challenges faced in relation to digital assets and set out recommendations for future reform.
The report acknowledges the vast progress that has been made in recent years by virtue of common law which has resulted in the law covering this area being “relatively certain.” In that context, the Law Commission has made few suggestions for law reform. Instead, it has based its recommendations on three core principles:
- Prioritising the ongoing common law development on the law of proprietary rights in digital assets by the judiciary;
- Adopting a targeted approach to any law reform, where required (particularly focusing on codifying the present common law position that digital assets attract personal property rights with the creation of a separate, third category of “things” in order to accommodate the nuances and technicalities of different digital assets, and the property rights capable of being attributed to them); and
- Seeking guidance from industry experts to support the development of common law and statute (by way of the appointment of a formal government panel of industry-specific experts who will support the judiciary).
The tripartite proposals are welcome:
- The English judiciary’s propensity to create new law for novel digital assets, whose numbers and types are ever increasing, is unmatched as is the speed at which the judiciary is capable of changing law, in contrast with the slower pace at which legislatures are known for moving at. It therefore makes sense to acknowledge the role that the judiciary can and should play as the digital asset ecosystem continues to evolve;
- Clarification and codification of the already-developed common law position will provide further certainty for participants in the digital asset sphere; and
- The formation of an expert panel is a groundbreaking and unique proposal – if the appointment and constitution of the panel is well-considered, the panel will aid the judiciary to keep abreast of a fast-moving technical landscape.
The tripartite approach will ensure that the UK remains a centre of excellence for digital assets. Whilst the courts continue to lead the charge in the short term, regulatory change is also bound to come, which can only cement the UK’s position.
Meanwhile, other jurisdictions continue to compete to attract investors and businesses seeking to enter the digital assets space, with Singapore and the United Arab Emirates particularly leading the charge, aiming to perfect their own regulations and laws.
So how do they compare?
The Money Authority of Singapore sees the greatest potential in stablecoins – its October 22 Consultation Paper on Regulatory Approach for Stablecoin-Related Activities viewed stablecoins as a potentially credible digital medium of exchange – subject to ample regulation and financial arrangements, such as sufficient reserve assets. Subsequently, this month it has just confirmed that Singaporean-based crypto service providers will be required to deposit customer assets under a statutory trust before the end of the year for safekeeping. This is a positive step for consumers. However, on the legal status of digital assets, Singapore’s High Court has only confirmed this week that the holder of a crypto asset has in principle an “incorporeal right of property recognisable by the common law as a thing in action and so enforceable in court.”
This ruling indicates that, at long last, Singapore has caught up with the English common law position as at 2019, which marked the point at which the English Court first held that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction. It will be interesting to see how the law continues to develop there.
Meanwhile, the UAE has taken greater strides to implement “virtual asset” regulations. In 2022 Dubai established the Virtual Assets Regulatory Authority (“VARA”) which describes itself as “the world’s first independent regulator for virtual assets.” It assists with managing regulations for advisory, exchange, and financing activities. Additionally, the UAE has established the Securities and Commodities Authority, its federal securities regulator which has overall responsibility for supervising and regulating the virtual assets sector. The establishment of these entities is reflective of the Emirates’ government-centric approach to the development of digital asset regulation.
On the other hand, the legal position on the treatment of digital assets as property is less clear. In a recent decision from the Ras Al-Khaimah Primary Court, bitcoin was described as “a digital currency that does not meet the legal and Sharia criteria that make it a currency subject to the rulings of dealing with official legal currencies recognised internationally.” The regulatory and legal positions may therefore be at odds, and it will be interesting to see whether there is future convergence.
Striking a balance
The Law Commission has signalled that the recipe for success in the UK lies in cooperation between the judiciary and its government and industry counterparts.
Other jurisdictions appear to be prioritising regulatory developments but are lagging on the legal classification of digital assets as ‘property,’ potentially restricting the redress available to domestic and foreign investors seeking to enforce their personal property rights in the event of a dispute. For now, maybe the UK has the edge and, if the government seeks to adopt some of the Law Commission’s proposals, it will arguably be further out in front – watch this space.
This article was previously featured in Wealth Briefing: Digital Assets Legal Reform – Is It Really Necessary?
For all questions regarding the topics raised in this article, please contact Amy Harvey or a member of our team.