A UK and European perspective on the regulation of cryptoassets

In this report, we collaborate with our international Preferred Firm Network to provide an overview of how cryptoassets are regulated in the UK and EU

17 March 2020

Last year saw cryptoassets brought under the commercial and regulatory spotlight in the UK and EU. In the UK, the Financial Conduct Authority (FCA), took steps to impose direct regulations for these relatively novel instruments, following on from the final report of the FCA’s Cryptoasset Taskforce released in late 2018. The report explored in detail the elements that make up what cryptoassets are and looked more generally at their underlying technology, Distributed Ledger Technology (DLT).

2019 began with the launch of an FCA consultation on how, and if, certain types of cryptoassets interact with the current regulatory regime. The consultation closed on 5 April 2019 and the FCA published its final findings in a policy statement on 31 July 2019. Most recently, the UK Jurisdictional Taskforce issued a statement on cryptoassets and blockchain whereby it concluded that cryptoassets could be treated as property under UK law, while smart contracts can be treated as legally enforceable contracts where they satisfy the general principles of contract law.

In parallel, in mainland Europe both the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued advice to the European Commission on how to best deal with cryptoassets. While the EBA’s advice focuses on anti-money laundering practices and looks at cryptoassets with a focus on monetary regulations, ESMA looks at cryptoassets through the lens of regulations governing financial instruments.

The UK has always been at the heart of both financial and technological innovation, but traction has also been seen in some EU member states, such as France and Malta, which have implemented specific legislations dealing with cryptoasset activities. Luxembourg has also implemented rules that permit the storage of securities on a blockchain and it is considering introducing the concept of a ‘token’ into the legal system as a next step. In a similar vein, Poland has deployed regulation which allows for joint-stock companies to have their shares stored on DLT software. Lastly, some jurisdictions, such as Finland and Croatia, have gone further in their implementation of the Fifth Anti-Money Laundering Directive (AMLD5) by taking it as an opportunity to expand financial regulation of cryptoasset in one consolidated act.

In the private sector, Facebook’s unveiling of ‘Libra’ in collaboration with major technology, payment, and financial entities has shown the potential application of cryptoassets in real-world scenarios, and has mobilised regulators across the globe to consider how such monumental moves can interact with the current regime. Other major projects involving DLT that do not necessarily hinge on underlying cryptoassets, such as R3’s Corda, the UK Land Registry’s Project ‘Maison’ or JPMorgan’s Interbank Information Network, have shown that one way or another DLT is here to stay. The question is whether cryptoassets are here to stay too.

While a technologically agnostic approach towards filtering cryptoassets through the financial regulatory fabric at this stage could provide a solution, an issue arises as a result of the differing stance member states across the EU have taken in implementing the notion of ‘investment activities’ in their domestic rules as well as the fact that prior regulations were not drafted with technological innovations, such as cryptoassets, in mind. This can present complications for multijurisdictional projects involving cryptoassets.

Against this backdrop, we have undertaken an exercise to consolidate information from our network of Preferred Firms across the EU, presenting a snapshot of how cryptoassets are regulated in their respective jurisdictions. In this interactive report, written by Sarah Kenshall, director, Gareth Malna, senior associate and Paschalis Lois, trainee solicitor, we present a high-level overview of the financial regulatory framework in the UK and EU as of the date of publication of this report.

Please read the report using the link below.

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Sarah Kenshall 1

Sarah Kenshall Director

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