The question of the legal status of cryptocurrencies in the UK is often raised. The Working Group has recently published its response and clarified the legal status of cryptocurrencies, which asset class cryptocurrencies belong to in the UK, and which laws apply to them. This material will be especially useful for those who intend to register a cryptocurrency company in the UK. 

Summarizing the broad provision entitled "The Legal Status of Crypto Assets and Smart Contracts" (the "Legal Provision"), the following conclusions can be drawn:

  • Cryptoassets should be treated as property in principle;
  • Cryptoassets may be treated as securities; 
  • Crypto assets fall within the definition of property for the purposes of section 436(1) of the Insolvency Act 1986 (the "Act").

Are crypto assets treated as property

The Statement makes useful references to crypto assets in the insolvency context and notes that the definition of property contained in section 436(1) of the Act is broader than the typical common law definition of property and concludes that crypto assets should be treated as property for the purposes of the Act.

The statement is not legally binding, but recently, in AA v Persons unknown (2019) EWHC 3556, the Court considered whether Bitcoin is a form of property and can be subject to the prohibition on possession of property. 

The judgment emphasizes that the Court may be guided by the Statement and the Task Force's findings, with the judge considering the Statement as "an accurate statement of the position under English law" and concluding that Bitcoin is property and can be subject to an injunction against possession.

However, it should be remembered that it is the private key that provides access to the crypto asset. The Task Force concludes in the Statement that private keys should be treated as information. 

Registering a cryptocurrency company in the UK: cryptocurrencies as property

The Task Force was asked "under what circumstances, if any, would crypto assets be considered property" and concluded that crypto assets are best classified as property. Accordingly, the Task Force concluded that cryptoassets fall within the scope of "property".

It should be noted that although the task force was not ready to recognize that cryptoassets are "information", it was found that the "private key" (the password used to access cryptoassets) is information.

Regulation of cryptoassets in the UK: transfer of cryptoassets

The Task Force also considered how and who can demonstrate and transfer ownership of crypto assets. The transfer of virtual currency can be disrupted by "on-chain" or "off-chain" transactions.

As a result of an "off-chain" transaction, a valuable asset may be transferred to a third party without the consent of an official. 

An "on-chain" transaction means that a crypto asset is transferred to another user based on distributed ledger technology.  The data cannot be accessed through the private key, as the new crypto asset has a new set of data and a new private key. When launching a cryptocurrency company in England, it is necessary to understand how the transaction will take place.

When conducting an off-chain transaction, the parties agree to transfer the crypto asset, but the transaction is not recorded in the distributed ledger. The recipient accepts knowledge of the private key and gains control of the crypto asset. Since no new key is created, the person who transferred the virtual currency also retains control of the crypto asset. 

For this reason, the officer will need to take appropriate steps to ensure that the transaction is conducted "out of the chain" to prevent the director who retains knowledge of the private key from going bankrupt and therefore taking care of control of the crypto asset.

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