In this article, our director Louise Abbott considers the future of crypto regulation in England and Wales and discusses how other jurisdictions are regulating this sector with leading experts from across the globe.
Crypto assets have been the subject of increased scrutiny during the last couple of years, with both the government and the FCA having expressed concerned over ‘the wild west’ of finance.
Following the introduction of the Crypto Asset Financial Promotion Amendments Order 2023, and the Financial Services and Markets Act 2000, together with the Economic Crime and Transparency Bill, the sector is now looking ahead at what the impact of this regime has had, and what is planned for the future. Phase 1 of the current regulation seems to have had little effect (perhaps even a negative effect), with some exchanges moving out of the English promotion markets completely. The sector needs further regulation, but the introduction of phase 2 is not yet fixed.
On 11 September 2024, the new UK Labour Government introduced the Property (Digital Assets etc) Bill, which provides that digital assets may be considered to be personal property under the laws of England and Wales, and so may be afforded the same legal protections as traditional categories of personal property. In practical terms, this legislative confirmation is likely to reduce the scope for residual arguments as to whether cryptoassets are capable of attracting traditional property rights and may add to the growing attraction of London’s business and commercial courts as a crypto dispute resolution centre.
It was thought that Phase 2 would be introduced in the latter stages of 2024; heralding a wholescale regulation and establish a more comprehensive set of rules for most cryptoassets; beyond fiat-backed stablecoins. The proposed new rules will cover a wide range of activities, including issuance, exchange, investment, risk management, lending, custody, borrowing, leverage, safeguarding, and administration.. However, the recent election and subsequent new Labour Government’s manifesto priorities have caused these proposed developments to be held in the proposed legislative queue. Notwithstanding, it is widely anticipated that the extensive and impressive work undertaken by HM Treasury, the FCA and the Bank of England will influence the proposed changes; which would see the FCA’s workload significantly increase in its regulation of cryptoassets.
Regarding AI in finance, the new Labour Government has pledged to adopt an “agile” approach to regulation; one that promotes the use of technology to foster growth and inward investment, whilst ensuring consumer protection, as recently reported in the Financial Times.
How are other jurisdictions regulating crypto?
The Cayman Islands/BVI/Bermuda
The Cayman Islands, BVI and Bermuda are all overseas territories of the UK. They are not part of the UK or the EU. Except in relation to matters of foreign policy, sanctions, and defence (for which the UK is responsible), each is self-governing and has its own legislature and parliament.
They have all adopted legislation to implement the Financial Action Task Force’s guidance on virtual assets, which requires “virtual asset service providers” to have appropriate anti-money laundering (AML) and know your customer systems in place and to register with (or be licensed by) the regulator.
Bermuda has had a digital assets licensing regime for over eight years and offers different kinds of licences depending on whether the business is a startup, scale up or a fully operational business. As many digital asset-related activities are in the scope of Bermuda regulation, it tends to attract crypto businesses who are seeking to be regulated and obtain a licence.
The Cayman Islands is popular with community-governed crypto projects which operate a layer 1 blockchain and also conduct grant making and marketing through unregulated director-led foundation companies. These foundation companies do not need to have any shareholders and so are well-suited for a decentralised autonomous organisation.
The Cayman Islands also has a significant number of regulated crypto hedge funds domiciled there (recently estimated at over 60% of all digital asset funds globally). There are a small number of regulated virtual asset service providers (VASPs) operating from Cayman.
The BVI has historically attracted DeFi and unregulated crypto businesses (such as proprietary trading) due to its very modern and flexible companies law. It has only recently brought its VASP Act into force and the number of authorised VASPs is in the single figures (but expected to increase significantly in the next six months).
The issuance and sale of utility tokens is typically outside the scope of the VASP Act and is unregulated in the BVI (by contrast with Cayman and Bermuda which both regulate token sales). The BVI is therefore a very popular jurisdiction to set up single purpose token issuer vehicles.
Often clients will use a combination of the jurisdictions to achieve their business goals: for example, they will set up a BVI token issuer to raise funds and a Cayman foundation to operate and promote a layer 1 blockchain. The funds will be deployed in developing the protocol and promoting its adoption.
Many global digital asset businesses will include a Cayman, BVI and/or a Bermuda business as part of their overall structure to take advantage of the regulatory certainty each jurisdiction provides.
Portugal
Portugal is in a leading position in Europe regarding web3 ecosystems, with reports stating that “the founders of protocols and companies with a deep European footprint regard Lisbon as the world’s most important crypto hub”.
From a policy side, the Portuguese government has implemented a National Strategy for Blockchain to take advantage of investment opportunities (especially within the EU framework), the digital skills and abilities of professionals living in Portugal, the capacity for entrepreneurship and the will to place Portugal at the forefront of innovation in this field.
Cryptocurrencies (or crypto assets) currently have no bespoke regulation in the Portuguese legal framework and, therefore, are subject to the general provisions that regulate similar activities. This is except for specific activities related to the provision of crypto-assets services that are established in Law No. 83/2017, as amended by Law No. 99-A/2021, of December 31 (Portuguese AML Law) which transposed the AML Fifth Directive into national law.
Notwithstanding, Initial Coin Offerings (ICOs) that make crypto assets available which may qualify as financial instruments or securities will fall within the scope of the Portuguese Securities Code, being required to comply with established provisions related to Public Offerings. ICOs that issue crypto assets that are qualified as utility tokens are forbidden to use expressions related to financial markets.
Noteworthy is the Markets in Crypto Assets (MiCA) Regulation, applicable from January 1 2025, which has established a new legal framework for the European Union for the cryptoassets industry, and which will have a ripple effect throughout the world. It is anticipated that Portugal, and other Member-States, will enact national legislation to address specific aspects related to the practical implementation of MiCA. This legislation will primarily focus on defining the relevant national competent authorities responsible for ensuring compliance with MiCA and the specific sanctions regime.
MiCA operates within the European legislative framework, employing a phased approach for implementation. This deferment aims to facilitate the establishment of technical regulatory standards and delegated acts required for further clarity on specific aspects of the regulation.
Under Article 143 of MiCA, entities engaged in offering services with crypto assets under pre-existing legislation before December 30 2024 can operate based on previous standards until July 1 2026. This allowance extends until the authorities grant or refuse the new authorisation under the MiCA Regulation, depending on whichever occurs first.
In alignment with this transitional framework, VASPs registered under Portuguese AML Law can continue rendering services within this transitional period. They may operate until the occurrence of specific conditions:
a) On or before July 1 2026;
b) Obtaining authorisation as per MiCA Regulation; or
c) Refusal of such authorisation.
Member states retain the discretion to opt out or shorten the duration of the transitional regime if they consider their pre-existing national regulatory framework before December 30 2024 to be less rigorous.
Since January 1 2023, Portugal has also specific provisions regarding the taxation of crypto assets activities. Business income is taxed at progressive marginal tax rate up to 48% plus additional solidarity surtax of 2.5% on income between €80,000 and €250,000 and 5% on income exceeding €250,000. Income is either taxable within the so-called “simplified regime” or under the “organised accounts” regime.
Gibraltar
Gibraltar is a market leader in the regulation of cryptocurrency and blockchain technology, becoming one of the first jurisdictions to introduce comprehensive legal frameworks tailored to digital assets. With its pioneering Distributed Ledger Technology (DLT) regulations, Gibraltar has attracted numerous crypto funds and blockchain companies, establishing itself as a hub for innovation in the digital economy.
With the commencement of the DLT Regulations in 2018, Gibraltar became the first jurisdiction in the world to create a regulatory framework for crypto businesses. The DLT Regulations provide a clear, principles based regulatory framework for businesses using DLT for the storage or transmission of value belonging to others.
The primary objective of the Regulations was to ensure the Gibraltar Financial Services Commission (GFSC) could achieve its objectives by regulating the industry in a safe and secure manner and thereby protecting the reputation of Gibraltar and consumers. The DLT Regulations cemented Gibraltar’s position as a crypto-friendly jurisdiction and consequently, Gibraltar experienced significant growth within this industry as businesses started to make Gibraltar their home.
Cryptocurrencies themselves are not regulated. Instead, the DLT Regulations regulate the access points (onramp/offramps) to the markets as opposed to regulating cryptocurrencies specifically.
Firms operating within this space are also required to comply with Gibraltar’s AML, counter-terrorist financing and counter-proliferation financing rules and regulations contained within the Proceeds of Crime Act 2015 (POCA) and its subsidiary legislation.
Gibraltar also regulates the selling of digital assets, whether that be initial token offerings or over-the-counter offerings. Under the Proceeds of Crime Act 2015 (Relevant Financial Business) (Registration) Regulations 2021, a person engaging in that activity is required to register with the GFSC before selling digital assets. This is commonly referred to as a VASP registration.
Gibraltar does not levy capital gains tax, value-added tax, or withholding tax. Furthermore, there are certain personal tax statuses that can apply to individuals whereby one’s individual income tax position is capped. It operates a territorial corporation tax model. Consequently, companies pay 15% corporation tax on all profits that are accrued in or derived from Gibraltar.
Legal Expenses Insurance
It is clear that the regulatory gap in England and Wales plays a significant part in the number of problems we see in this sector. Crypto lawyers are seeing success for victims of fraud through the English Courts, for litigation, and arbitration, primarily via the London Court of International Arbitration, and this is seeping into crypto contracts, with England and Wales being selected as the choice of law and jurisdiction. English courts have been quick and decisive in the ability to plug the gaps in the regulatory shortfall. Louise Abbott of M2 Recovery, and Andrew Maguire of Littleton Chambers have secured many successes for victims of crypto scams through English litigation and arbitral proceedings in the LCIA .
This adds to the growing attraction of London via it’s business and commercial courts and the LICA, as a crypto dispute resolution centre. M2 Recovery Limited offer a legal expenses insurance policy to those wishing to pursue crypto cases. If you have questions or concerns about crypto regulation or insurance, please contact Louise Abbott.
Authored By
Louise Abbott, M2 Recovery Limited (London)
Andrew Maguire, Littleton Chambers (London)
Jay Gomez, Triay Law (Gibraltar)
Sara Hall Walkers Global (London)
Nuno Lima da Luz, Cuatrecasas Law Firm (Portugal)