The evolution of technology in a lightly regulated environment has driven the expansion of the cryptoasset market in recent years. This growth, in tandem with an exponential increase in the potential applications of blockchain, has resulted in a whole new digital economy bringing with it complex and novel legal issues for regulators as well as those operating in this space.
What Are CryptoAssets?
Cryptoassets are essentially electronic currencies which are offered as an alternative to centralised national currencies, the first and arguably most famous of which is Bitcoin.
The term cryptoasset also tends to be used as a catch-all for any form of digital asset that exists solely within the internet. A cryptoasset uses cryptography, peer to peer networking and distributed ledger technology (DLT) that regulates the creation of any new units. DLT also helps verify transactions and secures them without the need of any involvement from a third party.
How can I tell if a crypto investment is a scam?
There’s no simple answer to this question, but there are a few red flags which you could look out for:
- Any guarantee of profits, particularly large profits;
- Websites without clear information about who they are operated by and where the company operating the site is located;
- Websites without terms and conditions of use;
- Poorly written sites (typographical errors or poor use of language);
- Any hard-sell in terms of increasing the amount being invested or request for funds to cover the cost of withdrawing profits; and,
- Terms and conditions which have choice of law and jurisdiction clauses for unusual jurisdictions, different from where you think the investment is based, and where you are sending the money.
That doesn’t mean that a site which doesn’t exhibit these features is genuine. As with any financial investment, you should proceed with caution and only after you’ve properly checked out the place and people you’re thinking of sending your money to.
I think I have been the victim of a crypto-fraud and my crypto assets have been stolen, what can I do?
On the assumption that there are links to England and Wales, you have a number of options in order to investigate and try to recover your money or crypto assets:
- Instruct a firm such as Kingsley Napley to investigate a civil claim for recovery of money or crypto assets. This might involve applying for proprietary or freezing injunctions, seeking disclosure of information from third parties such as banks or crypto exchanges and issuing a claim in the High Court of England and Wales against the fraudsters. These steps can be very effective, but are also expensive. We charge on an hourly rate basis and for emergency actions such as injunctions you might expect to pay £50-100,000 in legal costs just for the initial applications. If the case is complicated it might cost more than that. As such the amount you have lost will dictate whether this route is available to you.
- If there is a regulated entity involved, then you could make a report to the regulator.
- You could report the matter to ActionFraud.
- You could report the matter to the police.
- You could engage a blockchain analyst to help to trace your crypto-assets and see where they have been transferred.
I am in the Middle East and have a dispute with a crypto-company based in Cyprus, can you represent me?
Claims involving crypto assets can involve complicated arguments relating to what country’s law might apply and in which country’s courts could a claim be brought. The solicitors at Kingsley Napley are qualified to advise on the laws of England and Wales. Whilst we often work with lawyers in other countries, unless there is a link to England or Wales, getting an English firm involved may be unnecessary and may just increase costs.
My wallet has been frozen by the exchange and in the meantime the value of the crypto assets have dropped, can I sue the exchange?
We can advise you on claims against various parties including exchanges. We will need to see the terms and conditions which govern your use of the exchange which may dictate where a claim can be brought and which country’s laws will apply to any claim and which may include limitations or exclusions of liability on behalf of the exchange.
My wallet has been frozen can you help me get it released?
There are numerous reasons why an exchange or wallet provider might freeze a wallet. You might need to update your ID documents, or there may be a misunderstanding about a transaction, or the exchange or wallet provider might have cause to suspect money laundering or the receipt of proceeds of crime. However, there might also be technical reasons why a wallet could be frozen. Likewise the inability to access a wallet or the assets in that wallet could be the first sign that something is wrong with the provider.
Whilst we can assist with some of those reasons, we cannot necessarily speed up the release of a wallet if there are suspicions of money laundering or receipt of the proceeds of crime, particularly if a Suspicious Activity Report has been made to the NCA. We will not be able to help if a technical glitch has caused the freeze of your wallet.
My crypto account has been closed without notice. What can I do?
Many exchanges and wallet providers reserve the right to close accounts in certain circumstances. If this has caused you to suffer a loss you might want to instruct us to look at the terms and conditions for use of the account to see whether the exchange/wallet provider had the right to close your account or whether they have breached their own terms in doing so.
Can I sell crypto-derivatives?
Not to retail customers. Since 6 January 2021, a ban has been in force prohibiting the sale, marketing and distribution of derivative products (including CFDs, futures and options) as well as exchange traded notes (ETNs) which reference what are referred to as unregulated transferable cryptoassets. The ban only applies to retail clients and not to professional clients or eligible counterparties. Breaching the ban is a criminal offence and great care should therefore be taken if engaging in activities which could be considered to fall within the remit of new restriction.
Do I have to register my crypto asset business with the FCA?
All crypto firms operating by way of business in the UK are now required to register with the FCA under the Money Laundering Regulations before engaging in crypto asset activities. This covers three principal categories of activity:
- Exchanging, or arranging to exchange, crypto assets for money or one type of crypto asset for another;
- Operating a machine, such as a crypto ATM, which uses automated processes to exchange money into crypto assets or vice versa; and
- Provision of custodian services for customer’s crypto assets or private cryptographic keys.
Operating without the required registration may constitute a criminal offence or render the firm liable to a civil penalty.
How do I register my crypto asset business with the FCA?
Applications for registration are made via the FCA’s online system, Connect.
You will need to pay a fee of £2,000 if your business has UK crypto asset income of up to £250,000 and £10,000 if you have income of more than £250,000.
Businesses are required to provide:
- A business plan setting out the business objectives, customers, employees, governance, plans and projections. This needs to provide enough detail to show that the proposal has been carefully thought through and that the adequacy of financial and non-financial resources has been considered. It must also include details of the volume and value of transactions, number and type of clients, pricing and the main lines of income and expenses;
- A programme of operations setting out the specific crypto asset activities of the business;
- A marketing plan including a description of customers and distribution channels;
- An explanation how the business is structured and organised, which includes a description of any relevant outsourcing arrangements, if any, and a corporate structure chart;
- Details of the key IT systems which will be used to run the business, including details of IT security policies and procedures;
- Evidence that directors and any other persons who are or will be responsible for the management of the business have a good reputation, and have the appropriate knowledge and experience to act in this capacity;
- Details of governance arrangements, the internal control mechanisms in place to identify and assess risks and a description of money laundering and counter terrorist financing control measures in place;
- Anti-Money Laundering/Counter Terrorist Finance framework and risk assessment: this should highlight the risks specific to the business model activities and provide details on how these risks will be mitigated. Anti-Money Laundering/Counter Terrorist Finance staff training material should also be included;
- A business-wide risk assessment including monitoring and mitigation policy;
- All crypto asset public keys/wallet addresses: this should include all of the crypto asset addresses controlled by the business and used in the activity of the business for each crypto asset that the business deals with;
- An explanation of customer on-boarding agreements and process;
- Details of transaction monitoring, record-keeping and recording procedures;
- Business continuity plan, outsourcing arrangements policy and service license agreements;
- Budget forecasts and financials for the first three financial years; and,
- Money Laundering Reporting Individual forms for all directors, executives and officers.
You must also disclose to the FCA any issues as to why your business may not be fit and proper to be regulated by the FCA for these purposes. This is something that the FCA takes very seriously, and giving them false or misleading information may be a criminal offence.
The FCA has three months to determine an application but this time period only starts to run when the FCA is satisfied that it has received all the information it requires: where further information has to be requested, this can significantly extend this three month period.
The registration process is a rigorous one and many firms are finding that their applications have been unsuccessful. There is a process by which a decision to refuse an application to register may be challenged. However, it may be more practical simply to withdraw the application, consider whether there are steps which may be taken to address the concerns raised by the FCA and, if so, submit a new registration application in due course.
What should I do if I receive a letter from the FCA regarding my crypto business?
The FCA may make contact with firms and individuals who are not currently registered under the Money Laundering Regulations and / or authorised under the Financial Services and Markets Act 2000 where the FCA considers that they should be. Registration and authorisation are two separate regimes but operating without required registration or authorisation are both criminal offences. It is therefore critical that you seek legal advice and engage proactively with the regulator to address their concerns.
Do I have to pay tax on money made trading crypto assets?
No one factor determines how money made on trading crypto assets will be taxed and the circumstances must be looked at carefully as whole. In the UK, money made by an individual is likely to be taxed as capital (on the basis that the crypto assets are held as investments) and so capital gains tax will be payable. However, income tax will apply if a trade is carried on. This is a question of fact that will be determined by, for example, the frequency of trades and how organised the activities are. Advice should always be taken on this, together with the inheritance tax implications of owning crypto assets and whether any overseas tax implications are relevant.
Different considerations will apply to companies which own crypto assets.
Specialist crypto asset legal expertise
Our team of specialist crypto asset lawyers bring together legal expertise from multiple disciplines across the firm, including our corporate and commercial, regulatory, dispute resolution, criminal, family, real estate & construction and employment practices. Our integrated team are able to advise on:
- Control and ownership of crypto assets
- Tracing crypto assets
- Fraud relating to crypto assets
- Valuation of crypto assets
- Using proceeds from crypto asset investments for the purchase of property
- Crypto assets and the regulatory perimeter
- Investigations by the FCA and other regulators and law enforcement agencies
- Security Token Offerings (STOs) and Initial Coin Offerings (ICOs) including:
- Reviewing and advising on the contents of whitepapers
- Drafting and advising on the terms of contribution agreements to issue coins and tokens
- Reviewing and advising on the terms and conditions of coin and token platform exchanges
- Security Token Offerings (STOs) and Initial Coin Offerings (ICOs) including:
- Anti-money laundering (AML) and Know Your Customer (KYC) compliance advice
- Wills and Trust advice in relation to crypto assets
Further information and to contact the team
Our recent crypto asset experience includes:
- Advising on contractual disputes in relation to crypto wallets and trading accounts
- Advising an investor on the terms of a Contribution Agreement relating to the issue of security tokens linked to financial derivatives.
- Acting on a multi-jurisdictional fraud claim involving the purchase of crypto assets
- Acting for numerous clients on their property acquisitions making use of the proceeds from their crypto investments
Financial Regulatory Litigation
Corporate and Commercial
Partner and Head of Department
Corporate and Commercial
Corporate and Commercial
Criminal Defence and Police Investigations
Family and Divorce
Real Estate & Construction
Latest blogs & news
With the price of crypto assets generally making a good recovery from the Covid-19 related decline of 2019 contrasted with the very recent volatility following issues with the adoption of the cryptocurrency as legal tender in El Salvador, investors in cryptocurrencies might be considering realising some of their gains to try to help minimise any further instability.
The Financial Conduct Authority (FCA), in its annual business plan published today, sets out its areas of focus for the year ahead. It is, as ever, essential reading for all those in the regulated sector.
Keeping the crypto market on its toes? The FCA publishes latest cryptoasset consumer research and takes regulatory action against Binance Markets Limited
For the fourth year the FCA has published research on the changing relationship between consumers and cryptoassets. In spite of the pandemic, the strong upward trend in public engagement and media coverage has continued, with the FCA estimating 2.3 million adults now hold cryptoassets.
A Director at the National Crime Agency recently voiced concern about crypto assets being used to fund property purchases in the UK. The NCA’s Nigel Leary was quoted by The Times as saying: “Anything purchased with crypto assets I’d be slightly sceptical about. I’d like to see why they’re being done in that way and what the requirement is for that anonymity, and why it needed to be done in a crypto transaction.”
Despite the Covid-19 pandemic, 2020 was an incredible year for crypto assets. Largely driven by the increased demand from institutional investors, Bitcoin shattered its previous price records. However, its pseudonymous nature and the ease with which it allows users to instantly send funds anywhere in the world makes crypto assets appealing to criminals.
Hot on the heels of its consultation on bringing cryptoasset inside the scope of the financial promotions regime at the tail end of last year, the FCA has launched a further consultation on the UK’s regulatory approach to cryptoassets and stablecoins.
As of 10 January 2021, all cryptoasset firms are required to be registered with the Financial Conduct Authority (FCA) under the Money Laundering Regulations.
Research recently undertaken by the FCA has found that 5.35% of the UK population hold (or have previously held) cryptoassets where in 2019 this figure was 3%. For several years now the Government, the Bank of England and the FCA have been consulting on and considering how best to regulate this burgeoning market.
The year 2019 started with plenty of optimism regarding the growth of Security Token Offerings (STOs). Many articles at the start of the year suggested, like one on TokenMarket, that “it’s looking very likely that 2019 will be the year of the security token offering”. In this blog we look back on some of the key moments of 2019 with regard to STOs and consider whether 2019 really was the dawning of a new era worthy of the revolutionary hype back at the start of the year. However, if you would first like to take a step back and digest a user-friendly introduction to the concept of security tokens, please listen to our podcast or read our earlier crypto assets blog.
In just ten years, cryptoassets have become a £100 billion industry. We now face the alarming prospect that millions of pounds can be hidden behind a few lines of computer code without ever touching a bank account. If your soon-to-be ex-partner has made a fortune with Bitcoin, how do you get a share?
The tenth anniversary of the first ever BitCoin transaction will fall in April 2020. Not many people are using cryptoassets for everyday transactions, such as a takeaway pizza order and as such Satoshi Nakamoto’s vision of a stateless peer to peer electronic currency is yet to be realised, but in the last few years cryptoassets have certainly entered the public consciousness, even if that does mostly relate to the huge spike in the value of BitCoin in December 2017.
Security tokens are a digital representation of ownership rights in real world assets (such as property or shares) and have captured the curiosity of entrepreneurs, startups and investors. This blog summarises the potential benefits and pitfalls of security tokens and is part of our wider crypto assets blog.
The Singapore International Commercial Court (SICC) case of B2C2 Ltd v Quoine Pte Ltd  SGHC(I) 03 considers how the law relating to mistake could apply to contracts formed on an automated basis by computers using algorithmic software.
Whether you are in the market for short-term profit or making long-term investments, adequate planning is certainly a worthwhile (and small) investment of your time and money. If you’ve been savyy enough to successfully invest in crypto-assets, make sure you are smart enough to ensure your loved ones can benefit, should the worst happen.
“Cryptoassets have attracted significant and growing attention from consumers, markets, governments and regulators globally”, stated the FCA earlier this year in launching its consultation on its Guidance on Cryptoassests. Jill Lorimer has previously commented on the Cryptoassests guidance.
The aim of the Guidance is to “provide regulatory clarity for market participants carrying on activities in this space” and it appears to do just that.
The recent confirmation by the UK Financial Conduct Authority (FCA) that it is investigating 18 firms involved in the sale of crypto assets, such as Bitcoin, indicates a ramping up of regulatory focus on the controversial sector.
The Treasury Committee’s inquiry into economic crime is one of the most wide-ranging of the committee’s current workstreams, and its conclusions are keenly awaited.
As well as assessing the effectiveness of the anti-money laundering regime in the UK, MPs have been examining the impact of economic crime on consumers.
Earlier this month, the Lord Chancellor David Gauke confirmed that a new 18 courtroom legal centre is to be built on the site of Fleetbank House in London which will focus on issues such as economic crime (including fraud) and cyber crime. Due to be established in 2025, this “state-of-the-art court” is to give the message to the world that Britain “stands ready to deal with the changing nature of 21st century crime”.
On 11 June, the UK Financial Conduct Authority (FCA) issued a “Dear CEO” letter on how banks should deal with the financial crime risks associated with “cryptoassets”. The FCA defines cryptoassets as publicly available mediums of exchange that feature a distributed ledger and decentralised system for exchanging value, such as Bitcoin and Ether. These assets are more commonly known as cryptocurrencies.
Regulators around the world are calling for cryptocurrencies to be brought within the remit of financial regulation. To date, the focus has largely been on Bitcoin, which was the predominant cryptocurrency traded on some of the largest dark web markets. However, in light of the call for better oversight, the value of Bitcoin plummeted and evidence suggests that users are moving towards alternatives that afford greater anonymity.