Counsel Kate Gee and director at LondonLink (GI) Limited Simon Everington explore the regulatory and legal landscape of crypto assets in the United Kingdom and Gibraltar and provide insight on litigation in the crypto space, in Compliance Monitor.
This article was originally published in Compliance Monitor, on 6 April 2022, and can be found here.
Cryptocurrencies, digital assets and the distributed ledger technology (DLT) underpinning them are transforming the investment landscape. Despite warnings by global regulators of inherent risks, the cryptocurrency market seems set to become a permanent feature. Having twice breached the $2trn threshold last year, the aggregate value of all traded cryptocurrencies has since settled well above the $1trn mark.
Despite the volatility of crypto values, total transaction volume grew to $15.8trn in 2021, up 567% from 2020. Tesla recently revealed that the value of its Bitcoin holdings stood at $1.99bn (£1.5bn) at the end of last year. Crucially, it’s not just Bitcoin. In total, more than 80 different cryptocurrencies each have a market cap exceeding $1bn at the time of writing.
Although the future direction and value of individual cryptocurrencies is impossible to predict, the parallel growth of litigation involving crypto seems inevitable. Last year, cryptocurrency-based crime reached an all-time high of $14bn, according to a report from data provider Chainalysis, up from $7.8bn in 2020. Meanwhile a raft of recent decisions of the English Commercial Court show that judges have been open to dealing with disputes involving cryptocurrencies and, in doing so, have been both proactive and innovative in their approach.
Anticipating the UK’s need to stay ahead in a competitive international legal landscape, Professor Richard Susskind, technology adviser to the Lord Chief Justice, has proposed creating a new Institute of Legal Innovation that would identify gaps in the law created by advancements in technology, like crypto assets and AI, and promote the use of English law in global business contracts. One further benefit would be to safeguard the position of England and Wales as a global hub for litigation and arbitration, in particular for disputes involving advanced technology.
At present, in terms of large-scale crypto disputes, the US is leading the way. The US courts are being asked to consider all manner of issues: enforcement actions from the SEC in relation to crypto-exchanges; civil disputes about whether cryptocurrencies are securities; claims of crypto-market manipulation; share and token valuation disputes; and claims involving breach of contract, fraud, hacking, negligence, as well as breaches of fiduciary duty. Just this week, the US Department for Justice arrested two people and confiscated more than USD3.6bn worth of cryptocurrency alleged to have been stolen during the 2016 hack of Bitfinex. This exercise was significantly aided by the fact that the assets could be followed through the blockchain. It represents not only the government agency’s largest financial seizure but also is a stark warning to bad actors in this space.
In examining the likely trajectory of future disputes in English courts, these are the types of claims that we anticipate seeing more of. In addition, as government authorities start to build out their regulatory framework in the crypto space, we expect an increase in investigations concerning, and claims based on, non-compliance.
Crypto market maturity and regulatory developments
Steps being taken by different countries to regulate the marketing of crypto assets, and how providers of cryptocurrencies and crypto assets are registered, reflect the market’s evolving maturity. Evidence that 2021 became the year of mass adoption for cryptocurrencies can be found across the globe. Last September, El Salvador made history by becoming the first country to allow consumers to use Bitcoin in all financial transactions, alongside the US dollar.
A critical factor in this trend is the greater ease of purchase. In the UK, it is estimated by the Financial Conduct Authority (FCA) that more than 2.3m people (4.4% of UK adults) currently own cryptocurrency – up from around 1.9m in 2020. Investors can now buy certain crypto currencies via PayPal, for example, making them more accessible to the average person. Advertisements for crypto also routinely appear on London Underground, on buses, and promotion of crypto exchanges and tokens in sport and on social media has been an increasing concern for market regulators, given their wide reach and appeal, and the fact that the target audience is usually young and often inexperienced in making investments and/or with the investment product. Spain now requires influencers to disclose if they are being paid (in money or by way of some other benefit) to promote crypto, and if so to include “clear, balanced, impartial and non-misleading” content about the risks involved, including a statement that the crypto industry is unregulated, and the investment could lead to a loss.
Here in the UK, the FCA has launched InvestSmart, which targets a young audience who may be inexperienced at investing. It aims to reach these investors online and through social media, and to educate potential investors about the products and related risks. At the same time, the UK Treasury and the FCA are considering tightening the rules on crypto promotion. The FCA has expressed concern about the “rapid growth” in risk-taking during the Covid-19 pandemic; Sarah Pritchard of the FCA said, “too many people are being led to invest in products they don’t understand and which are too risky for them”. The draft proposals include tightening the rules around promoting crypto assets, introducing strict risk warnings and banning “refer a friend” incentive schemes. Fines for serious regulatory breaches will likely follow.
As the UK and Europe take steps towards regulation of the crypto market and the promotion of investment in digital and crypto assets, we can expect to see an increase of investigations in this space and potential claims being brought in the event products have been misdescribed, incorrectly promoted or mis-sold.
As crypto becomes more mainstream, the English court will continue to grapple with crypto-related disputes.
To date, the English courts have demonstrated their willingness to engage meaningfully with disputes involving crypto assets, using the tools in their toolbox, such as freezing orders, disclosure orders and other interim measures, to help claimants who have been defrauded out of cryptocurrency or crypto assets.
- AA v Persons Unknown  EWHC 3556 (Comm) – the court endorsed the analysis in the Legal Statement on Cryptoassets and Smart Contracts (published by the UK Jurisdiction Task Force in November 2019) concluding that cryptocurrencies are a form of property capable of being the subject of a proprietary injunction.
- Robertson v Persons Unknown (unreported, October 2019) – the Commercial Court granted the claimant an asset preservation order over 100 Bitcoin (then valued at £1m+) that had been targeted in an email phishing attack.
- Ion Science Limited & Ors v Persons Unknown & Ors (unreported, December 2020) – the court provided guidance as to the determination of governing law and jurisdiction in disputes relating to crypto, concluding that the lex situsof a cryptoasset was where the person or company who owns the asset is located. The Court went on to grant a proprietary injunction and worldwide freezing order against persons unknown to preserve the assets or their traceable proceeds, and ancillary disclosure order to identify the alleged wrongdoers. It also granted Bankers Trust Orders permitting the claimant to seek disclosure from two cryptocurrency exchanges located out of the jurisdiction.
- Ai v Persons Unknown  EWHC 2254 (Comm) – here, the Court granted a proprietary injunction and worldwide freezing order against various categories of persons unknown who had misappropriated cryptoassets from a cryptocurrency trading account. In reaching the decision that the relevant crypto-assets were “property”, the Court agreed with the finding in AA v Persons Unknown, albeit on a different basis, holding that the crypto-assets in question were “choses in action”.
- Wang v Derby  EWHC 3054 – following a contested hearing about whether or not cryptocurrency was held on trust, the Commercial Court held that – although no trust arose on the facts of the case – there is no impediment to crypto being held on trust. This case also paved the way for two matters to be addressed in future judgments: (i) the jurisprudential use of the terms “cryptocurrency” and “cryptoasset” (which are not interchangeable, and are treated differently by regulators and other practitioners), and (ii) through an analogy offered by Stephen Housman QC in the judgment, whether non-fungible tokens (NFTs) could also be recognised as “property”.
- Mr Dollar Bill Limited v Persons Unknown  EWHC 2718 – the claimant sought and obtained (i) a proprietary injunction to restrain further dissipation of the Bitcoins; and (ii) Norwich Pharmacal and Bankers Trust Orders against the two cryptocurrency exchanges (both outside the jurisdiction) for disclosure of information to assist with the asset tracing exercise.
Despite the absence of crypto-specific regulation, these cases show that the English courts have been willing to use existing legal principles and relief to deal with this energy asset class.
Approach in Gibraltar
Beyond the UK, it is also worth examining Gibraltar – the first jurisdiction in which DLT providers were regulated. Under its licensing scheme, the Gibraltar Financial Services Commission (GFSC) has already approved 15 cryptocurrency and blockchain firms as “DLT Providers” and has also approved a small number of Virtual Asset Arrangement Providers (“VAAPs”). More might follow, not least because a large (and growing) number of cryptoasset firms, that benefitted from temporary registration under the UK’s money laundering regulations, but have recently had their applications rejected by the Financial Conduct Authority (FCA). Gibraltar’s DLT Regulatory Framework also helps to provide crypto businesses with the much-needed certainty they need to grow and develop their products and services and should provide some reassurance to their customers that those products and services must meet a high bar of security and customer protection. Indeed, to date, no crypto disputes have reached Gibraltar’s courts.
The flip side, of course, is that as crypto activities increase in Gibraltar, more crypto disputes are also likely to surface. In fact, Gibraltar can reasonably be expected to become a preferred venue for legal disputes in the crypto space given its robust regulatory regime, the relative speed with which cases come before Gibraltar’s Supreme Court, the deep experience that some of its leading lawyers possess in growing the sector and, of course, the more affordable, VAT-free fees that those lawyers and other professionals on the Rock charge for their services. Its similarities with the jurisdiction of England and Wales will also be a compelling factor in its favour.
There have been some apocalyptic warnings about crypto in recent months. Bank of England Governor, Andrew Bailey, has drawn parallels between a potential crypto market crash and the collapse of Lehman Brothers, which precipitated the global financial crisis and the resultant litigation. Last year, he said: “I’m sceptical about crypto-assets, frankly, because they’re dangerous and there’s a huge enthusiasm out there.” He added: “I’m going to say this very bluntly again: buy them only if you’re prepared to lose all your money.” Nevertheless, appetite for investments in digital assets remains high.
As more and more people hold cryptocurrency and other crypto assets, and digital currencies and assets become increasingly accessible and traded/exchanged, a rise in disputes involving these types of assets will follow. Importantly, investors would be wise to remember – at the point of investing – that some jurisdictions will be more favourable than others in the event of a dispute. Practitioners and investors (i.e. potential future claimants) in England and Wales should rightly feel encouraged by the English court’s approach, which has been shown to be innovative, flexible and open to new ideas; the same will almost certainly apply to investments made or held in Gibraltar, once the courts there are asked to consider claims in the crypto space.
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