It has been a busy week for UK law, with the Law Commission of England and Wales revealing its recommendations for reforms of digital asset laws – shortly prior to the Financial Services and Markets Bill officially coming into play. But what could these developments mean for the future of digital assets in the UK?
Throughout the last decade, existing UK laws have been flexible enough to accommodate the digital asset and crypto market. However, as the space evolves and becomes more complex, legal uncertainty has continued to grow.
To tackle this issue, the UK government commissioned the Law Commission of England and Wales to analyse common law to discover how applicable laws can change to keep up with ever-changing technologies. In its final report, the Commission revealed that the UK is ‘well-placed’ to provide a globally relevant set of laws that maximise the potential of existing and future technologies in the region.
Shortly after, the Financial Services and Markets Bill officially became an Act of Parliament (law), after receiving royal assent. By passing the Bill, the government is looking to ultimately strengthen the UK’s position as a financial services hub.
How are developments making the UK more attractive to foreign firms?
Kate Gee, counsel at specialist commercial litigation law firm Signature Litigation, explains the significance of the Law Commission’s recommendations: “The report is a clear endorsement of the work done to date in the digital asset space by legal professionals and the courts of England and Wales to adapt and innovate as has been required.
“The report ‘champions’ the common law system, and draws directly from its successes to form the foundation on which further common law development and statutory reform (albeit limited) can be based. There is unwavering support for the ongoing dynamism of the private law of England and Wales, with a view to this jurisdiction remaining a ‘globally competitive and flexible tool for market participants in the digital asset space’.”
Khalid Talukder, co-founder of FX management consultancy DKK Partners, also explained the potential benefits of the Financial Services and Markets Bill: “This Act will play an important role in allowing British businesses to thrive and operate, especially with the removal of unnecessary restrictions on wholesale markets. The testing out of new tech and innovative solutions will also strengthen the UK’s efforts to become the next Silicon Valley, and project its position as a leading hub.
“We have recently seen how inward investment is key to unlocking the potential the UK hosts, with tens of thousands of new jobs being created from foreign investment. These efforts should allow Britain to continue to be recognised as a great place to invest and start a business.”
Could the heavy hand of US regulators benefit the UK?
Combined, the crypto and digital asset law recommendations and the Financial Services Bill make the reform of existing UK laws and the introduction of new laws pertaining to the financial sector much easier. These moves also ensure more legal clarity when it comes to the quickly evolving space of blockchain and digital assets, ensuring the UK can remain a global leader in this sector.
It is also important to pay attention to the differences in the regulatory landscape in other leading regions, such as the US and the EU.
In the US, the Securities and Exchange Commission (SEC) is pursuing legal action against the likes of Ripple, Binance and Coinbase, prompting strong suggestions of ‘overregulation’ by the US Commission.
Brandon Zemp, CEO of consulting and education company BlockHash, explains the potential repercussions of the strong actions by the regulator: “One possibility is a mass exodus of investment and innovation from the United States to more favourable countries and territories (including Europe, Singapore and Hong Kong).”
With this in mind, the UK may well try to position itself as ‘the’ place to house crypto organisations and operations. By clearly outlining its definitions of digital assets, and creating a flexible and fast-moving hub for financial services and crypto assets, the government may hope to capitalise on mistakes in the US and strengthen its own position.
Remaining competitive in a global landscape
As the UK aims to capitalise on its unique regulatory opportunities post-Brexit, the government will also be keeping a close eye on the evolution of regulation in the European Union (EU). The EU’s Markets in Cryptoassets (MiCA) regulation is set to come into play sometime in either 2024 or 2025, with an expectation that the new rules will position Europe as a more attractive space for innovators in the crypto world.
MiCA draws a distinction between cryptocurrencies and tokens, rather than relying on past laws that were made without crypto in mind.
The recent advances in the UK are making laws and regulations more accommodating for digital asset and crypto firms. Andrew Whitworth, policy director for EMEA at Ripple, discussed how positive the UK’s current steps are for the future of the region as a leading crypto hub.
Whitworth said: “The UK is making good on its promises to position the country as a leading crypto hub. The Financial Services and Markets Bill is a crucial step in this journey, providing certainty and clarity for the crypto industry.
“The process to get to this law has been well run and establishes the UK as a frontrunner when it comes to attracting crypto and blockchain businesses from around the world. The last pieces of the puzzle will be for HM Treasury to create secondary legislation and for UK regulators to establish the rulebooks the industry needs, a process Ripple is actively supporting.”
As the UK quickly evolves its rules, the government may look to capitalise on potential regulatory shortcomings in the US as well as position itself ahead of other countries across Europe.
The Law Commission’s “much-needed initiative”
Matt Green, co-head of the blockchain digital assets group at UK law firm Shoosmiths, discussed the importance of the flexibility of the recommended crypto laws by the UK Law Commission.
“The Commission’s approach offers the courts flexibility in determining what might fall into this third category by providing general guidance that there may be instances where personal property rights can exist, from digital assets, to quotas or carbon emission allowances.
“We note that so long as Recommendation 2 is clear, uniform and regularly revised, then common law is a favourable, flexible and future-proofing method for determining what may or may not be property,” Green explained.
He also praises the decision to implement more guidance around definitions and concepts for lawmakers: “This is a much-needed initiative. A clear, regularly revised document to assist the courts will prove extremely useful in assisting the judiciary and industry as a whole, particularly in ensuring that the parties are familiar with complex concepts and that those concepts are uniformly presented and applied.
“Although judges have sought to apply the law consistently in a fast-paced environment, key concepts which can influence a judge’s decision have been presented (or at least appear to be understood) as different from the facts in certain instances. For example, judges have remarked that Bitcoin is not traceable by its nature (the opposite is true) or have stated that certain cryptocurrency exchanges are banks, likely because these are concepts familiar to the judiciary.
“In our view, the panel must have a clear mandate and provide non-prejudicial and self-serving information to uphold the integrity of the industry and ensure matters relating to digital assets can be dealt with properly.”