3 January 2009 – a day that will be immortalised in history as the day the Bitcoin Genesis Block was mined. Back in the late noughties, Bitcoin burst onto the scene as a reactionary antidote to the pitfalls of the financial crash. The once impenetrable trust placed in TradFi institutions now irrevocably shaken. The stage was set for a new fiscal regime. Enter cryptocurrency. A shiny new product that did away with the need for third-party intermediaries to validate transactional interactions. Banking for the ‘unbanked’ in the post-Lehman Brothers world.
In the beginning, cryptocurrency’s decentralised and unregulated nature, was seen as a unique selling point and a welcome change. Down with oversight, up with financial freedom! However, as became quickly evident, a lack of overarching regulation allowed cryptoassets to become exploited by nefarious actors.
For example, Chainalysis’ annual Crypto Crime Report (2023) indicates that $3.7 billion was stolen by crypto thieves in 2022 alone. It is, therefore, understandable why regulators, legislators, and key stakeholders alike, have sprung into action in an attempt to provide workable regulatory solutions to this wide-scale problem. While this may be to the dismay of many a die-hard cypherpunk, regulation is the only way to provide greater market and consumer confidence, which will ensure the longevity of digital assets for years to come.
Courting ‘coin’troversy
Crypto scandals regularly grace the headlines. For example, global victims of the FTX debacle are still reeling from the exchange’s collapse in November 2022. In March, the former CEO, Sam Bankman-Fried (SBF), was sentenced to 25 years in prison for his role in the fraud. However, SBF’s replacement, John Ray III, has since intimated that once the exchange has liquidated its remaining assets, it will be able to repay creditors the $11 billion owed, with a likely surplus of approximately $5 billion left over. The saga continues.
In the UK, the news cycle has been dominated by the story of ex-takeaway worker, Jian Wen, who was convicted of one count of money laundering, after 61,000 bitcoins were seized in the largest seizure of its kind in the UK. The 61,000 bitcoins seized represent just under a 0.3% market share of all bitcoins that will ever be in existence. Wen is due to be sentenced at the end of the month.
With countless similar cases, the scale of the problem is abundantly clear, and crypto criminality cannot be left unchecked. It is, therefore, unsurprising that over the past 18 months we have been treated to an array of regulatory and legislative advancements that aim to curtail the rampant misuse of cryptoassets.
The UK has been especially active in the space with the introduction of various legislative measures. Take for example, the enactment of the Financial Services and Markets Act 2023, which received Royal Assent in June 2023. The Act has, among other things, brought cryptoassets under the scope of the definition of ‘investment’ for UK Regulated Activities. A few months later, the Economic Crime and Corporate Transparency Act 2023 (which received Royal Assent in October 2023) came into force, augmenting the powers available to law enforcement in the search and seizure of cryptoassets, specifically through the amendment of criminal confiscation powers under Parts 2 to 4 of the Proceeds of Crime Act 2002, and civil recovery powers in Part 5.
The regulation of new crypto-centric products should also be noted. The Financial Conduct Authority (FCA) announced in March that it would not object to requests from Recognised Investment Exchanges to create a UK-listed market segment for cryptoasset-backed Exchange Traded Notes (crypto-ETNs), available to professional investors only. While crypto enthusiasts may have been hoping that the FCA’s hardline regulatory stance against other exchange-traded products (such as ETFs) may have thawed (especially in the wake of the US introduction of 11 spot bitcoin ETFs in January, which have since generated over $12 billion in net inflows), the UK regulator is sending a clear message that there is a fine line to tread between bolstering the market, and consumer safety.
Peering into the future
Since their introduction in 2009, cryptocurrencies have permanently altered the way in which we transact. What the future will bring for the crypto space is anyone’s guess. However, if the recent slew of regulatory advancements is anything to go by, it is likely that practitioners and market participants in the space will have to become au fait with these new regulatory parameters and be live to further developments on the horizon.
Take for instance, the Law Commission’s recent Call for Evidence on proposed legislation confirming digital assets as capable of being the object of a third category of personal property rights under English Law, even though they are neither a thing in possession, nor a thing in action.
Interestingly, this approach does not deviate from that which has already been established under the common law. However, the proposed legislation is in a bid to foster legal security once and for all. The Commission explains that “the flexibility of common law allows for the recognition of a distinct category of personal property that can better recognise, accommodate and protect the unique features of certain digital assets (including crypto-tokens and cryptoassets). We recommend legislation to confirm the existence of this category and remove any uncertainty.”
‘Uncertainty’ is the key word here. Uncertainty has previously led to gaps in the legislative and regulatory landscape, that bad actors have successfully sought to exploit. While it can be argued that third-party oversight was not what was originally intended when Satoshi Nakamoto first introduced the world to Bitcoin as a peer-to-peer electronic cash system in the Bitcoin White Paper, it is evident that widespread market legitimacy will be achieved only with a practicable regulatory framework. Whether the Law Commission’s draft legislation becomes law is now a waiting game. However, the flurry of recent regulatory action is an indication that digital assets will be subject to greater regulatory underpinning, both now and in the future.
Written by:
Charlotte Tregunna, Partner
Amalia Neenan FitzGerald, Associate