Regulation: International

On 24 November 2023, the Investment Association published a report on behalf of the wider Technology Working Group to the UK Government’s Asset Management Taskforce (the “Working Group”) on a “Blueprint” for the implementation of a fund tokenisation regime in the UK (the “Tokenisation Report”).

The Financial Conduct Authority (“FCA”) which, along with HM Treasury is an observer to the Technology Working Group, also provided input on the Tokenisation Report and launched a new fund tokenisation page on its website.

The industry focus on fund tokenisation is mainly aimed at authorised funds in the UK, rather than the unauthorised funds that are typically used within the traditional institutional-investor-focussed private equity space, but the information contained herein will nonetheless be of interest to the wider market and it will be interesting to see how things develop for the industry as a whole.

On 7 September 2023, the United Kingdom’s Financial Conduct Authority (“FCA”) set expectations ahead of its new financial promotion rules for cryptoassets (which we wrote about here).

From 8 October 2023, new rules for the marketing of cryptoassets come into force. The new requirements include the need for marketing

On 8 June 2023, the UK Financial Conduct Authority (“FCA”) published a policy statement (PS23/6) on the financial promotion rules for cryptoassets (the “Policy Statement”). This is accompanied by a guidance consultation (GC23/1), where the FCA is seeking feedback on proposed guidance to the Policy Statement.

In the first two instalments of our series we examined the progress of English law to provide a secure and certain legal infrastructure for cryptoasset investment and management. In particular, we looked at how recent English case law has addressed the following questions:

(1) Are cryptoassets property and (2) Can cryptoassets be held on trust? (see Part 1 here)  (3) Where are cryptoassets located for the purposes of securing jurisdiction over claims and remedies? (see Part 2 here).

To recap, a line of recent cases has now made clear that English law recognises cryptocurrencies as property. Although there is no direct English decision on this point yet, there appears to be no reason why cryptocurrencies could not be held on trust. In terms of the location of cryptocurrencies, and therefore securing jurisdiction of the English courts, whether that is the place where the person or company who owns them is domiciled, or where they are resident probably remains open for debate.

In this third (and final) part of the series, we preview potential legal initiatives which are designed to continue building the legal infrastructure for digital assets in the UK, including initiatives such as the UK Law Commission’s Digital Assets Project and the UK Jurisdictional Taskforce’s (UKJT) Digital Dispute Resolution Rules.

In the first part of this series of articles, we examined the progress of English law to shape and build an infrastructure to support the development of a secure and certain environment for investment in digital assets. We considered how recent English case law has addressed the questions of whether cryptoassets are property, and whether they can be held on trust.

In this second instalment, we review jurisdictional issues relating to digital assets.

Where are cryptoassets located?

Where assets are located in the eyes of the law is relevant to questions of what governing law applies to them, the Court’s determination of its own jurisdiction (including the appropriate forum for a claim to be resolved) and questions of service of court documents outside the jurisdiction. Crypto-disputes raise questions of where cryptocurrency exchanges are located, the identification and location of defendants, and where cryptoassets (which have no traditional physical form) are situated.

The law of the jurisdiction in which property which is subject to litigation is located is referred to as the lex situs of the property. In general terms, Courts determine the lex situs of land and chattels based on their (physical) location, and in respect of enforceable personal rights over property (known as choses in action) where they are recoverable or can be enforced. Given their intangible nature, determining the lex situs of cryptoassets is a question the English Courts have needed to grapple with sooner or later.

The Ion Science Ltd v Persons Unknown (unreported, 21 December 2020) case presented an opportunity to do so. It suggested that for the purposes of English law the lex situs of cryptocurrency is the place where the person or company who owns it is domiciled.[1] This approach was followed in Fetch.ai Ltd and another v Persons Unknown Category A and others[2] as part of the Court’s consideration of whether to grant permission for the claimants to serve proceedings outside the jurisdiction. (In that case, the claimants were then able to obtain a worldwide freezing order and proprietary injunctive relief against unknown fraudsters, among other orders.)

Sir Geoffrey Vos, the Master of the Rolls, wants English law to be at the forefront of developments relating to cryptoassets and smart contracts. In his thought-provoking foreword to the government-backed UK Jurisdictional Taskforce’s (UKJT) Legal Statement on Cryptoassets and Smart Contracts, he explained that English law should aim to provide “much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial services industry” as well as to “demonstrate the ability of the common law in general, and English law in particular, to respond consistently and flexibly to new commercial mechanisms.” He returned to the same theme in a speech on 24 February 2022 at the launch of the Smarter Contracts report by the UKJT in which he said “[m]y hope is that English law will prove to be the law of choice for borderless blockchain technology as its take up grows exponentially in the months and years to come”.

The law defines whether and how an owner can find and recover a stolen asset, whether a contract about an asset can be enforced and whether rights are owed between parties in relation to an asset.  English law has traditionally been very flexible in fashioning remedies to uphold contracts and to allow parties to preserve and follow (trace) assets – by interim protective relief in the form of injunctions, disclosure orders against third parties (Banker’s Trust orders), by recognising trusts over assets and by the English Courts accepting jurisdiction over claims in the first place.  If English law allows owners of cryptoassets to access these remedies, it should provide the “market confidence, legal certainty and predictability” described by Sir Geoffrey Vos. In this article, we explore the extent to which recent developments in English law have furthered these objectives and address in turn:

  • Are cryptoassets property?
  • Can cryptoassets be held on trust?

In the second part of this series, we will review recent developments concerning jurisdictional issues relating to digital assets and in the third part we will preview key legal and policy developments which are in the pipeline.

On 19 January 2022, the UK Financial Conduct Authority (“FCA”) published a consultation paper (CP22/2) (the “Consultation”) setting out its proposals to strengthen its financial promotion rules for high-risk investments (including cryptoassets), as well as for authorised firms which approve and communicate such financial promotions. The Consultation builds on feedback received to its discussion paper (DP21/1) on how the FCA could strengthen financial promotion rules and also forms part of its ongoing work on addressing harm in the consumer investment sector, to pursue its Consumer Investments Strategy as published in September 2021.

The proposals set out in the Consultation relate to financial promotions for “high-risk investments,” being those which are subject to marketing restrictions under the FCA rules. This includes investment based-crowdfunding, peer-to-peer agreements, other non-readily realisable securities, non-mainstream pooled investments and speculative illiquid securities. The FCA has also confirmed that these will also include cryptoassets once they are brought into scope of the FCA’s financial promotions regime. Some of the key changes the FCA is seeking to implement, as set out in the Consultation, are as follows:

One driver for the first widely adopted cryptocurrency Bitcoin was to create a store of value that existed outside of government control. It is therefore no surprise that attempts to regulate the rapidly developing crypto asset market have required great efforts from regulators and legislators around the world to keep apace.

In this blog, we compare key drivers and results of the regulatory approach being taken in the US and UK. While the U.S. is leading the way on the enforcement of crypto regulations, the UK has taken greater steps in relation to banking approvals. With regard to tax treatment, the position is becoming much clearer in both jurisdictions.

First though, is there even “an” approach within each country?