The recently published report entitled "The Legal Status of Cryptoassets & Smart Contracts" defines the legal status of cryptocurrencies, specifying an asset class they belong to & clarifying the laws applicable to them. It will be particularly interesting to all those who are contemplating launching a cryptocurrency business in Great Britain or already have one.
Analysis of this voluminous document leads one to the following conclusions:
- crypto assets should be treated as property;
- cryptoassets can be considered securities;
- crypto assets fall under the definition of property.
Can crypto assets be treated as property?
It says in the report that the current definition of property is broader than the one found in Common Law. Therefore, cryptoassets can & should be treated as property while conducting cryptocurrency transactions in the UK.
The report is not legally binding; however, in the recent case of AA v Persons, the court ruled that Bitcoin is property and as such can be subject to an injunction against ownership.
It should be remembered, though, that it is the private key that provides access to a cryptoasset. Hence, private keys should be treated as information as well.
Registration of a cryptocurrency company in the UK: Using cryptocurrencies as property
The authors of the report ask themselves the question: “Under what circumstances, if any, will cryptoassets be considered property?” Their answer is that cryptoassets are best classified as property and, accordingly, cryptoassets fall under the definition of “property”.
It should be noted that the report does not acknowledge the fact that cryptoassets are "information". However, its authors do note that the "private key" (i.e. the password used to access a cryptoasset) can be considered information.
Regulation of cryptoassets in the UK: Transferring of cryptoassets
An "on-chain" transaction means that cryptoassets are transferred using distributed ledger technology. The data contained in a cryptoasset is encrypted & requires a key to be decrypted. Thus, each new crypto asset has a new set of data and a new private key.
Considering all of the above, starting a cryptocurrency company in England requires one to have a good understanding of how exactly each transaction takes place.
By conducting an off-chain transaction, the parties agree to transfer the cryptoasset; however, the transaction isn’t recorded in the distributed ledger. The recipient is informed about the private key & given control over the cryptoasset.
Since no new key is generated, the person who transfers the virtual currency also retains control of the cryptoasset.
The report introduces some clarity into how UK courts can determine the legal status of cryptocurrencies. Cryptocurrency holders are, therefore, advised to use it as a guidance in all their subsequent activities; however, they should also be closely watching the developments in the cryptocurrency sector which is continuing to evolve at a rapid pace.
Considering launching a cryptocurrency project in the UK? Need legal advice on cryptocurrency regulation in Great Britain? IQ Decision UK is at your service.