The improving prospects of cryptoassets

The driving force behind this increased scrutiny is no secret. There have been a large number of reported scams in this sector, many of them high profile and often targeting retail investors with non-standard marketing practices such as celebrity endorsements on social media. By some reports, US$4.26bn of cryptocurrency was stolen worldwide in the first two quarters of 2019. The upshot is that the sector has attracted a notorious reputation for fraud. To take two high-profile recent examples, in December 2018 the founder of QuadrigaCX, Canada’s largest cryptocurrency exchange, died unexpectedly without leaving any record of the password to the offline device in which approximately US$190mn of customer money was allegedly held. A similar disappearing act was performed by the founder of OneCoin, Ruja Ignatova, in 2017, in a Ponzi scheme fraud publicised in a popular BBC podcast series ‘The Missing Crypto Queen’. In addition to such headline-grabbing rackets, in the past year approximately 1,800 scams in the sector were reported to the FCA, who were separately moved in July 2019 to propose a ban on cryptoasset derivatives, due to concerns that financial products of undiscernible value were being marketed to unsophisticated investors. It is telling that the recent proposal for FCA regulation of cryptoasset businesses was prompted by a UK government paper which highlighted evidence of “increased risks from the use of cryptoassets for illicit activity, as well as risks to consumers and markets”. 

The upshot of all of these scandals is that, in the eyes of many, the cryptoasset sector has become associated with, at best, sharp business practice and, at worst, organised crime. This is a lamentably long way from cryptoasset sector founder Satoshi Nakamoto’s vision of a currency system that replaced the need for trust in financial institutions with an immutable ledger protecting parties from fraud. The danger is that cryptocurrency, founded on a desire to avoid the oversight of allegedly self-dealing institutions and governments and with a bracing disregard for national legal systems, may have become a victim of the freedoms that it offered. Despite this, however, the sector may have found help from the unlikely sources of regulation and law.  

On 18 November 2019, the UK Jurisdiction Taskforce (a government commissioned analysis by leading members of the legal profession) published their ‘Legal statement on cryptoassets and smart contracts”. This concluded that cryptoassets have all of the indicia of legal property. Assuming the courts agree with this analysis (which remains to be seen), it may have a number of potentially important consequences for the UK cryptoasset industry. These include clarifying that cryptoassets are not pure information (which the English courts are typically reluctant to treat as property) and, crucially, can be sued for and transferred in the same way as more conventional property. In the foreword, the Chancellor of the High Court expressed his hope that the Statement would “go a long way towards providing much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial services industry”. It is also reasonable to think that a requirement for cryptoasset businesses to be FCA regulated has potential to curb the most damaging excesses in the sector and, over time, lead to a normalisation of cryptoassets as an accepted class of financial asset.