What is cryptocurrency?
In short, cryptocurrency is a virtual currency which is recorded on a digital ‘ledger’. Cryptocurrency relies on distributed ledger technology to function, usually in the form of blockchain. In essence, a digital ledger is distributed to all users on the network which shows all successfully completed transactions (similar to entries of credits and debits in an accounts ledger).
Copies of the same ledger are distributed to everyone, essentially acting as a public database, and all copies are automatically updated with entries as and when there is a transaction. This acts as a real-time record of ownership, thus adding to its security, and it also cuts out the middleman as there is no bank or trusted entity maintaining a single central ledger or required to process a transaction.
A key feature of cryptocurrency therefore is that it is ‘decentralised’ meaning that it is not created or controlled by a central government or any single entity. The value of cryptocurrency is dictated by demand. Bitcoin is probably the best-known form of cryptocurrency, but there are now well over 4,000 cryptocurrencies.
What’s the legal status of cryptocurrency in the UK?
The UK has no specific legislation governing cryptocurrency but has slowly developed its approach through case law. Cryptocurrency is not recognised as ‘currency’ or a form of legal tender, however it is now considered ‘property’.
English Law identifies two forms of property:
- things in possession (physical items),
- things in action (a right capable of being enforced).
Technically, cryptocurrency does not fall into either category, however, a legal statement published in 2019 by the UK Jurisdictional Taskforce (“UKJT”) on cryptoassets and smart contracts held that a strict interpretation would be unsuitable and that there were strong grounds on which cryptocurrencies should be recognised as property.
The recognition of cryptocurrency as property has essentially introduced a new asset class to be considered by professional advisors and litigators as forming part of a person’s ultimate wealth and asset portfolio, including taking measures to protect and seize such assets.
Whilst it is early days, we are seeing that cryptocurrency is capable of being subject to the same treatment and rights of enforcement as property. This is supported by several recent cases where freezing orders and interim injunctions have been granted by the courts to preserve cryptocurrency assets prior to judgement, including in AA v Persons Unknown ( EWHC 3556) where the court specifically endorsed the UKJT legal statement, upholding cryptocurrency’s status as property.
What could the future hold?
With other jurisdictions already implementing legislation governing blockchain and cryptocurrency technology, along with a rise in well-known businesses such as AXA, Microsoft, Starbucks and Coca Cola confirming they will accept payment in cryptocurrency, UK legislation is somewhat behind the times.
Whilst there does appear to be some interest, with the Bank of England and HM Treasury currently considering the possibility of creating a digital currency of the United Kingdom (unofficially referred to as “Britcoin”), given that this would be centralised, with the digital currency being issued by the Bank of England, it is arguably more akin to fiat currency (traditional currency) rather than cryptocurrency.
The UK clearly has some way to go, and this is likely to prove an exciting area with potentially fast-moving developments in the legal status of cryptocurrency.
Feb 22 Update: The Government announced in January that it plans to tighten up the rules on cryptoasset advertising with the aim to protect consumers from harm. Cryptoasset advertising rules to be tightened.