Crypto catch-up

In 2023, the UK has seen various legal developments relating to crypto-assets. These include the work undertaken by the Law Commission of England and Wales (the Commission) on property law, potential modifications to the tax treatment of certain decentralised finance (DeFi) transactions and additional regulation of the industry.

Law of property

On 28 June 2023, the Commission published the final report of its digital assets project (the Report),[1] following its 2022 consultation paper. This project focused on the place of crypto-assets within the law of property.

The Commission’s conclusion was that certain digital assets can be subject to property rights. It suggests that they would form part of a third category of personal property, apart from things in possession and things in action. It recommends legislation to confirm that things outside these two existing categories can be recognised as subject to property rights. However, the boundaries of this third category should be left to be developed by the common law. It further recommends legislation to set out a legal regime for collateral arrangements involving crypto-assets.

The Report also contains useful legal analysis of various issues relating to crypto-assets, including control, transfers, intermediated holding arrangements and collateral arrangements.

Taxation

The UK does not have a specific tax regime for crypto-assets. Therefore, their taxation will be governed for the most part by the existing rules and general principles applicable to other assets. Guidance on how to apply these rules to crypto-assets can be found in His Majesty’s Revenue and Customs’ (HMRC’s) Cryptoassets Manual,[2] as well as in specialist works on the subject.[3]

By contrast, other jurisdictions, like Austria, have a specific tax regime for crypto-assets. There have been calls for the UK to adopt its own crypto-asset tax regime, such as in the response of an industry representative association, Crypto UK, to the House of Commons Treasury Committee inquiry into the crypto-asset industry.

It is unclear whether this is going to happen in the UK but we can expect to see specific legislative tweaks. HMRC ran a consultation earlier in 2023 on lending and staking crypto-assets in DeFi transactions,[4] to which STEP responded. Lending a token to another person, or staking it to a liquidity pool, will often involve a transfer of beneficial ownership. At present, this is a disposal that would be subject to capital gains tax (CGT), even though the effective economic ownership of the token is retained.

The consultation proposed that, in this situation, there would be no CGT payable on the original transaction. CGT may be payable later if the borrower becomes unable to return the borrowed tokens or if the lender disposes of the right to recover the lent/staked tokens (e.g., by selling a liquidity token).

The consultation closed on 22 June 2023 and we are currently awaiting a response from the government.

Regulation

The UK government is increasingly moving to regulate crypto-assets. One example is His Majesty’s Treasury’s 2023 consultation on the financial services regulatory regime for crypto-assets.[5] It is proposed to bring crypto-assets within the regulatory framework of the Financial Services and Markets Act 2000. This would involve specifying certain activities involving crypto-assets that are to become regulated, meaning that those carrying them out would need to be authorised and that the Financial Conduct Authority (FCA) would be able to impose rules regulating those activities.

STEP has responded to this consultation, flagging the fact that, as proposed, the rules would apply to trustees and personal representatives who sell or purchase crypto-assets or hold private keys on behalf of a trust or estate. STEP proposed that exemptions should be provided for these circumstances on similar lines to the pre-existing exemptions for personal representatives and trustees. The consultation closed on 30 April 2023 and we are awaiting the government’s response.

We have also recently seen developments in crypto-asset regulation from the FCA. One of these is the ‘travel rule’, introduced from 1 September 2023, which requires crypto-asset businesses in the UK to collect, verify and share information about crypto-asset transfers. Another is the introduction on 8 October 2023 of crypto-asset marketing rules. These require marketing to be clear, fair and honest, with prominent risk warnings, and to prohibit inappropriate incentives such as ‘refer a friend’ bonuses.