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Courting Crypto: Recent Developments in the Digital Assets Arena

The 19^th century American novelist and pal of Mark Twain, Charles Dudley Warner, famously quipped: “politics makes strange bedfellows”. An interesting sentiment in a year that has been dominated by major elections with citizens in the UK and the US flocking to the polls to do their civic duty. In the UK, the 4 July general election saw Sir Keir Starmer take up residence in No. 10 with a majority reminiscent of Blair’s ascent to power in ‘97. The US, however, is (at the time of writing) just over a month away from deciding on the White House’s new occupants in a race that is still too close to call. Perhaps Warner’s words now take on new meaning in an election year that has seen a strange interlinking between the political and the digital – chiefly through the influence of the crypto-sector.

Friends in High Places

Born as a reactionary and alternative financial system in the wake of the ‘08 crash, the digital assets movement has long been spearheaded by players who have wished to circumvent the strictures of TradFi and the like, essentially forging a new way of transacting for the future. It is therefore no wonder that cryptocurrency has played an interesting role in both the UK and US political scenes this year.

Stateside, nonprofit consumer advocacy organisation Public Citizen reported in August that crypto-corporations have donated over $119 million in a bid to get crypto-positive candidates elected, with 48% of all corporate donations made during this year’s election cycle coming from crypto-centric benefactors. Across the Pond, the annual Labour Party conference, which ran in the last week of September, saw key crypto-industry actors issue the new government with a cri de coeur, asking for the provision of regulatory clarity for the sector as a matter of urgency.

Intriguingly, Labour’s manifesto was silent on its stance towards cryptocurrency during the summer election. However, their sentiment towards the industry may be discerned from the party’s January 2024 publication Financing Growth, Labour’s Plan for Financial Services. In that publication, Labour promised a vision for the financial sector that embraced ‘innovation and fintech as the future of financial services by becoming a global standard-setter for the use of AI in financial services, delivering the next phase of Open Banking, defining a roadmap for Open Finance, embracing securities tokenisation and a central bank digital currency, and establishing a regulatory sandbox for financial products to reach underserved communities’. A further pledge was made, indicating that ‘a future Labour government will therefore look to make the UK a global leader in tokenisation by advancing work to clarify the law around tokenisation, and working with regulators to establish a proportionate, outcomes-based regulatory regime to oversee the technology.’

Regulation Nation

Whether these promises turn into tangible results is now a waiting game. However, there is movement on the horizon. On 11 September, the Property (Digital Assets etc) Bill was introduced into Parliament with its first reading in the House of Lords. The Bill aims to provide important elucidation on the legal treatment of digital assets in the UK, by confirming the existence of a third category of personal property, clarifying that a thing is not prevented from being the object of personal property rights merely because it is neither a thing in action nor a thing in possession. In a press release announcing the Bill, the Ministry of Justice stated that the Bill ‘will mean that for the first time in British history, digital holdings including cryptocurrency, non-fungible tokens such as digital art, and carbon credits can be considered as personal property under the law […] The Bill will also ensure Britain maintains its pole position in the emerging global crypto race by being one of the first countries to recognise these assets in law.’

Interestingly, the recent judgment in D’Aloia v Persons Unknown, Bitkub & Ors [2024] EWHC 2342 (Ch) (which was handed down a day later) made note of this Bill’s importance on the national crypto-stage. The landmark ruling deliberates, for the first time in the aftermath of a contested trial, the legal status of the cryptocurrency USD Tether (USDT), with the High Court definitively finding that USDT is property under English law, on the grounds that ‘USDT, while neither a chose in possession nor a chose in action, is capable of attracting property rights for the purposes of English law.’

The judgment focused attention on the Bill when stating that ‘the Law Commission’s draft Property (Digital Assets etc) Bill does not seek to say whether crypto-assets, or certain classes of them, are property. It simply clarifies that something can be property that is neither a chose in action nor a chose in possession.’ It is therefore arguable that both the judiciary and the legislature are working towards offering greater clarity in a sector that is constantly and rapidly evolving.

The Bill and the D’Aloia judgment come in the wake of a series of concerted regulatory and legislative efforts that have sought to distil the somewhat murky waters surrounding the crypto-industry. For instance, the enactment of the Financial Services and Markets Act 2023 (which received Royal Assent on 29 June 2023) has, amongst other things, brought cryptoassets under the purview of the definition of ‘investment’ for UK regulated activities. Further still, the Economic Crime and Corporate Transparency Act 2023 (which received Royal Assent on 26 October 2023) has augmented 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.

Future Focussed

These important manoeuvres seem to signal a targeted proactivity in the UK regulatory scene, in a bid to provide much needed illumination for crypto-users in the UK. A cohesive regulatory underpinning is essential to the establishment of market stability and greater mainstream consumer confidence. But this cannot take place in a vacuum. Whether the regulatory momentum keeps pace with the rapidity of technological developments in the sector will be influenced by a variety of factors – key among them is governmental treatment of digital assets. Cryptocurrencies are not restricted by physical borders and so the success or failure of these products is inextricably linked to broader geo-political events. Labour’s plans for the treatment of cryptoassets in the UK are yet to unfold. The US position is similarly as uncertain – but perhaps greater clarity will be provided post 5 November. In the meantime, it might be prudent to take comfort in French playwright Marcel Achard’s reworking of Warner’s earlier sentiment: “The bedfellows politics made are never strange. It only seems that way to those who have not watched the courtship.” Only time will tell if the crypto/political relationship will go the distance, or instead start to sour.

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Amalia Neenan FitzGerald (Associate) - Peters & Peters Solicitors LLP

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Courting Crypto: Recent Developments in the Digital Assets Arena

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