Cryptoassets and Smart Contracts in English Law

Submitted by Rocco Limongelli on Tue, 02/23/2021 - 07:19
Cryptoassets and Smart Contracts

The Crypto world has gained enourmous interest in recent years, and particularly in the past 12 months, where we saw an increase in retail investors but most importantly in institutional investors.

 

Recently Tesla’s CEO and Founder Elon Musk, has announced that Tesla added $1.5billion worth of Bitcoin to its balance sheet. MicroStrategy’s Michael Saylor has acquired in excess of $1 billion worth of Bitcoin through his company, even by taking out debt. JP Morgan is now seriously considering Cryptos as a product to offer to their investors and client, while many central banks are now offering Cryptoassets custodial services.

 

With the increased interest in this kind of assets, it is imperative for the jurisprudence to evolve and classify this assets, not only for the protection of the investors but also to preserve the entire Crypto ecosystem.

The regulators are growing extremely concerned of the lack of guidance. While in the US, legal proceedings have been initiated by the NY State Attorney against Theter and the U.S. Securities and Exchange Commission (SEC) against Ripple (XRP), in the UK the Financial Conduct Authority (FCA) has warned consumers of the risks of investments advertising high returns based on cryptoassets. They went on to state that: “As with all high-risk, speculative investments, consumers should make sure they understand what they’re investing in, the risks associated with investing, and any regulatory protections that apply.

For cryptoasset-related investments, consumers are unlikely to have access to the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS) if something goes wrong. Consumers can find out more about which cryptoasset activities the FCA regulates in PS19/22: Guidance on Cryptoassets.

Consumers should be wary if they’re contacted out of the blue, pressured to invest quickly or promised returns that sound too good to be true. Visit the FCA’s ScamSmart pages for more information on how consumers should protect themselves from fraud.

Cryptocurrency law

 

Firms offering these products should make sure they comply with all relevant regulatory requirements and are authorised by the FCA where this is required. Since 10 January 2021, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering. Operating without a registration is a criminal offence.”

Firms offering these products should make sure they comply with all relevant regulatory requirements and are authorised by the FCA where this is required. Since 10 January 2021, all UK cryptoasset firms must be registered with the FCA under regulations to tackle money laundering. Operating without a registration is a criminal offence.” The FCA then went on to identify several risk factors:

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
  • Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.

( the original press release can be found here: https://www.fca.org.uk/news/news-stories/fca-warns-consumers-risks-investments-advertising-high-returns-based-cryptoassets )

Nonetheless, some clarity was achieved thanks to the UK Jurisdiction Taskforce (UKJT) which launched a public consultation on the principal issues of legal uncertainty regarding the status of cryptoassets and smart contracts under English law.

The consultation was launched in response to growing interest in cryptoassets and wider use of the blockchain technology across a wide range of industries.

The consultation concerned itself with two main legal issues:

  • Cryptoassets. Under what circumstances, if any, would a cryptoasset and a private key be characterised as personal property?
  • Smart contracts. In what circumstances is a smart contract capable of giving rise to binding legal obligations, enforceable in accordance with its terms?

The UKJT headed by Sir Geoffrey Vos, has produced a Legal Statement following the consultation process and has established that:

  • Cryptoassets are to be treated as property under English Law, as they possess all the characteristics to be treated as such. However, as cryptoassets exist only virtually, they will fall outside the definition of goods or the purposes of the Sale of Goods Act 1979 (SGA 1979). This means that the SGA 1979 and all the protection that the act provides will not apply to cryptoassets. Cryptoassets are, however, "property" for the purposes of the Insolvency Act 1986.
  • Smart Contracts are capable of satisfying the well-established principles of an English Law legal contracts (namely certainty of terms, intention to be legally bound and consideration). As such, they are capable of being enforced or challenged in a court of law. Some would argue that the anonymity of the party entering in the Smart Contract could pose an issue for the contract to be a valid one. However, it has been established that English Law does not require the parties to know each other identity. /li>

We are able to advice on the treatment of cryptoassets and all issues surrounding this ever evolving technology.

Author

Rocco Limongelli
Rocco Limongelli
Corporate and Commercial Solicitor at Optimal Solicitors Rocco joined Optimal Solicitors in April 2020, setting up the Corporate and Commercial department. He practices in both corporate and commercial law, and has particular experience in the fintech, technology and fashion sectors. Rocco has also particular expertise in dealing with cross-border matters, having assisted clients from all over Europe. He has a commercially aware approach when advising clients. He understands how to work with highly driven and business minded clients, and getting deals done. He also advises on corporate transactions, including mergers and acquisitions, joint ventures, corporate re-organisations and shareholders disputes. Rocco also advises on a wide range of commercial and contractual arrangements, including drafting of terms and conditions, GDPR compliance, outsourcing agreements and SaaS agreements. Rocco has the skills to help you set up, run and expand your business worldwide.
 
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