It comes as no surprise to many that laws regarding cryptocurrencies can vary widely by national jurisdiction. Government officials the world over are having difficulty classifying the new digital asset age according to existing statutes. On top of that issue, each country may have several agencies with overlapping responsibilities that can confuse the situation even more. What might work for the SEC and the CFTC in the United States may not work in Europe or the UK. Clarification is sorely needed, but awareness of the current status and potential future directions will always help in any crypto matter.
Stephen Palley, a corporate lawyer at Royds Withy King based in Bath in the UK, specializing in M&A and contractual matters in the technology and financial services sectors, recently sat down with Ed Chapman, an M&A and transactional lawyer from the English firm of Royds Withy King, to discuss pertinent crypto issues of today and beyond. Mr. Palley focuses his practice on cryptocurrencies and blockchain technology.
The Financial Conduct Authority (FCA) and HM Treasury (HMT) will have the most impact on all things crypto in the UK at the moment. Here is a brief recap of a few key positions that are pertinent today:
- “The FCA subsequently issued draft guidance on cryptoassets in January 2019, and their final policy statement should be released in the summer. Based on the draft the FCA is not proposing to regulate what it calls ‘exchange tokens’, which include Bitcoin or Litecoin, or utility tokens in the majority of cases.”
- “However it does expect to regulate ‘security tokens’, by reference to existing capital markets legislation in England and Wales (in particular the Regulated Activities Order (contained in the Financial Services and Markets Act 2000). In short, if a token looks like a security (e.g. it has share or debt like characteristics) it is likely to be caught and will be characterized as a ‘regulated activity’.”
- “HM Revenue & Customs (akin to the Internal Revenue Service in the US) have also stated that cryptoassets are liable to capital gains tax on disposal if a profit is made, and individuals will also be liable to pay income tax and national insurance on cryptoassets received from an employer as a non-cash payment or via mining.”
- “The UK may end up enacting more stringent AML laws than the rest of Europe, which may drive firms to other jurisdictions with more light touch compliance regimes. Another possibility is that a more robust regulatory regime may engender confidence in the UK as a place to deal with cryptoassets (as is the case with existing public offerings). Time will tell.”
Mr. Palley also shared a few thoughts on where legislative and regulatory themes might head in the longer termed future:
- “Where there is regulation enforcement action, sanctions and litigation will follow. I expect the FCA to take the lead here and establishing its regulatory perimeter.”
- “While the upcoming FCA guidance will help provide much needed clarity, I expect litigation to follow around the classification of tokens as the market develops.”
- “I see security token offerings (STOs) becoming part of the investment landscape and, in certain circumstances, they offer an innovative method of fundraising.”
- “The FCA has also strongly hinted that it will ban the sale of crypto derivatives such as contracts for difference and futures to retail investors later this year, on the basis they carry a high risk of loss.”