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What are cryptoassets and how are they regulated?

Posted on: September 14th, 2023 by AlexT

In the age of the Digital Revolution, terms such as ‘cryptoassets’, ‘cryptocurrency’, ‘tokens’, and ‘blockchain’ have become increasingly common in everyday conversations, as well as in financial, technological, and legal discourse. Despite their growing presence, adoption and relevance, misconceptions and ambiguity continue to surround this novel asset class.

Perhaps these misconceptions and ambiguity can be explained by the nuances in the terminology, which often amalgamate traditional financial and technological terms.

The terms ‘cryptoassets’, ‘cryptocurrency’, and ‘cryptotokens’ are often used interchangeably, yet each has its own specific implications and considerations.

Whilst ‘cryptocurrency’ is perhaps the most commonly recognised catch-all term for this group of assets, it is somewhat of a misnomer as they do not possess all of the properties of a traditional currency (also called ‘fiat currency).

Fiat currencies are typically used as a medium of exchange for goods and services. They can also be used as a store of value and as a unit of account. They are most often issued by central banks or monetary authorities.

In contrast, cryptocurrencies are not yet widely accepted as a medium of exchange, and their inherent volatility makes them unsuitable as a unit of account. Cryptocurrencies are said to be ‘decentralised’ as they are not issued by or subject to governments, central banks or monetary authorities. However, a point should be made to contrast this with Central Bank Digital Currencies (CBDC’s), which are digital forms of fiat currency issued by central banks, and are often mentioned in the same discourse as cryptocurrencies.

For these reasons, the term ‘cryptoassets’ is a more accurate catch-all term that we choose to adopt.

What are Cryptoassets?

Essentially, they are digital assets that use cryptography for security, and utilise a form of distributed ledger technology, such as a blockchain, to record and store transactions. The wide definition of ‘cryptoasset’ adopted in the UK also encompasses cryptoassets such as NFT’s.

Blockchain is the underlying technology that enables the secure and decentralised functioning of cryptoassets. A blockchain is a type of digital ledger that is distributed across a network of computers known as nodes, where no one single entity has control of the data.

Each block contains a list of transactions which are cryptographically linked to the previous block, which functions to create a secure and immutable record of transactions.

The decentralisation aspect of cryptoassets is one of their most appealing design features. It means that they are not subject to governmental or monetary policy interference, nor are they susceptible to any single point of failure, and it also enables a number of use cases for cryptoassets.

Popular and well-known cryptoassets include Bitcoin, Litecoin, Ether, and Cardano, although there are now tens of thousands of cryptoassets in existence.

Treatment of Cryptoassets in the UK

As the adoption of cryptoassets continues to grow, they have presented novel and unique challenges to governments, monetary bodies, and international regulators. One of the main challenges in regulating cryptoassets is that they are global in nature and exist without borders. As such, different national regulators have taken inconsistent approaches towards their treatment of cryptoassets, and it is very much a sector that is in a near-constant state of regulatory and legislative flux.

Cryptoassets are not subject to any blanket prohibition or ban in the UK, in contrast to what has been seen in other parts of the world such as China. Rather, the UK government and regulators have openly recognised the substantial benefit and use cases of cryptoassets and blockchain technology, which has made the UK a ‘friendly’ jurisdiction for start-ups and established companies alike, looking to develop, create, implement, and explore this space.

Aside from an outright ban on the marketing, distribution or sale of crypto-derivative products to retain consumers, there are no specific prohibitions on the use, purchase or trading of cryptoassets in the UK.

The legal status of cryptoassets in the UK is that they are treated and viewed as property. While there is continuing academic and legal discussion on this classification, which does not neatly fit with cryptoassets, the view that cryptoassets constitute property has been accepted several times by the High Court. This has provided much-needed legal clarity as to the status of cryptoassets, and how they are to be treated under existing laws and frameworks. This approach by the High Court has meant that England and Wales have emerged as a favourable forum for resolving cryptoassets disputes, as the legal clarity provided allows for the application for well-established laws to this emerging asset class.

Are Cryptoassets Regulated in the UK?

The UK has positioned itself as a key participant in shaping the regulatory landscape for cryptoassets, with bodies such as the Financial Conduct Authority (FCA) taking steps to define and further classify cryptoassets.

Broadly speaking, the current FCA regulatory regime refers to cryptoassets by way of a token taxonomy, which then dictate whether a cryptoasset is regulated or unregulated.

Security tokens and e-money tokens are regulated by the FCA, whereas exchange tokens and utility tokens are considered unregulated tokens.

  • Security Tokens: These are cryptoassets with characteristics causing them to meet the definition of a Specified Investment as set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. An example of a security token is a cryptoasset that represents shares in a company or functions as a debt instrument.

A security token essentially grants the holder financial rights, akin to a share or a bond, and cryptoassets which exhibit characteristics and functions of a security token would be regulated.

  • E-money tokens: These are cryptoassets which meet the definition of e-money and are subject to the Electronic Money Regulations 2011, and fall within the scope of regulation.
  • Utility Tokens: These are cryptoassets which essentially act as digital coupons for the service, application or ecosystem they are associated with. They do not confer ownership rights (unlike security tokens) and nor do they represent an investment in the issuer. They are often used as a means of exchange for goods or services, or to acquire access to a particular service or application. Utility tokens are unregulated – examples include Basic Attention Token (BAT), Filecoin (FIL), and Axie Infinity (AXS).
  • Exchange Tokens: These include cryptoassets that are used in a similar way to traditional fiat currency as a means of exchange, although they do not meet the criteria to be considered a currency. Similar to Utility tokens, they do not grant the holder any ownership rights or rights associated with specified investments. They are often held as speculative investments, as well as a means of exchange. Exchange tokens are unregulated, and examples include Bitcoin (BTC) and Ether (ETH).

The FCA takes a substance over form view in relation to cryptoassets. In other words, if a cryptoasset has the substance of a traditional financial instrument, regardless of whether it is in digital form, it will fall under the FCA’s regulatory ambit.

Cryptoassets lacking the characteristics of a traditional financial instrument, including those like Bitcoin, Ether, and other various utility and exchange tokens, are not currently regulated. It is also prudent to note that even if a cryptoasset is unregulated by the FCA, certain activities relating to or involving those cryptoassets may trigger other regulatory regimes.

The prevailing sentiment appears to be indicating increasing regulation and oversight into the crypto sector, driven by concerns in relation to consumer protection, stability of the financial markets, and various financial scandals that have happened within the crypto sector in recent years. There is an ongoing consultation which proposes to bring cryptoassets within the scope of existing legislation by considering them as a specified investment under the Financial Services and Markets Act (Regulated Activities) Order 2001. The consultation process remains underway, and its outcomes will significantly influence the future regulatory framework for cryptoassets.

Conclusion

The landscape of cryptoassets and their regulation is complex, rapidly evolving, and varies across jurisdictions. The implications for individual investors and cryptoasset enterprises are substantial. The complexities of cryptoassets covered in this article only scratch the surface, and it is essential to seek out expert advice in order to ensure that guidance is tailored to one’s situation.

Andrew Conway explores eviction statistics in Property Industry Eye and Property Investor News

Posted on: May 19th, 2023 by AlexT

Senior Director Andrew Conway discusses how recent eviction and repossession figures do not tell the full story, and explores the impact of the pandemic on landlord-tenant disputes.

Andrew’s article was published in Property Investor News, 1 March 2023, and Property Industry Eye, 19 May 2023.

Earlier this month, the government released statistics for mortgage and landlord repossessions from October to December 2022. The Guardian chose to sum up that announcement with the headline ‘Rental evictions in England and Wales surge by 98% in a year’, implying that England and Wales are in the midst of a rocketing homelessness crisis.

Of course, these figures must be viewed in the context of long-term trends rather than selectively compared to anomalous, post-pandemic data. Readers will recall the temporary restrictions which the government imposed on evictions (and commercial forfeiture) during the pandemic. Repossessions were always going to surge once those restrictions came to an end. Interestingly, however, they still have not reached pre-pandemic levels.

So, while it is true that the final quarter of 2022 did show a near doubling of evictions compared to the same period of 2021, with 5,409 reported repossessions, the figure was still fifty percent lower than the peak in 2014/2015, when there were between 10,000 and 11,000 every quarter.

In the decade before the pandemic moratorium on evictions, there was never a quarter in which fewer than 6,000 evictions were recorded. This suggests that the situation for private renters is, in fact, improving in terms of protections offered to tenants. That only 5,409 evictions were reported is even more remarkable when set against the backdrop of a cost-of-living crisis and surging inflation. Landlords, whose mortgage repayments have in many cases soared in tandem with rising interest rates, have seemingly not been forced to sell their properties in droves; had they been, evictions would have been expected to be far higher than their present rate.

At the same time, tenants – who have been faced with massive price rises in energy bills, food and other basic needs – appear to have defaulted on their rent at a lower rate than many had predicted, resulting in the relatively low number of evictions reported. Without seeking to trivialise the gravity of any forced eviction, that the figures have remained below pre-pandemic levels should be seen in a far more positive light than portrayed in many sections of the press and political arenas. Similarly, the fact that the figures have not climbed above pre-Covid rates, despite the significant backlog in the Courts caused by the nine-month moratorium, offers even more hope that the private rental sector is improving for renters and landlords alike.

The same is true when analysing the MoJ’s mortgage repossession figures, which – despite also climbing year-on-year in the last quarter of 2022 – remain comfortably below pre-pandemic rates. Again, rising interest rates have had a serious impact on borrowers’ abilities to repay their mortgages, at the same time as they already feel the squeeze from the ever-rising cost of living. However, the relatively low number of mortgage repossessions implies that borrowers have been able to weather the storm better than expected throughout the inflationary crisis and suggests that lenders are taking a more responsible and empathetic attitude towards enforcement.

And do spare a thought for commercial landlords, not all of whom are the ‘fat cats’ that certain sectors of the press would have readers believe. They too have had a rough ride over the past few years, particularly as a result of the pandemic. The enforced move to working from home saw a collapse in footfall in city centres, impacting all businesses reliant on the physical presence of consumers, and consequently affecting their landlords, who faced a wave of rental defaults as a result. Landlords were also bound by onerous government restrictions on commercial evictions (forfeiture) and, as a result, had no choice but to allow tenants to carry on renting premises that they weren’t paying for, despite their contractual obligations.

Of course, while some tenants did not pay rent for wholly understandable and unavoidable reasons, forced into default through no fault of their own in the wake of the economic collapse sweeping the country, others such as large retailers with significant online presences and whose turnovers were largely unaffected by the pandemic, took advantage of the restrictions and simply chose not to pay their rent, even though they could afford to.

While many businesses were able to take advantage of emergency measures introduced by the government, including the Coronavirus Job Retention Scheme (furlough) and Coronavirus Business Interruption Loan Scheme, landlords were left largely to fend for themselves.

Whatever your viewpoint, it’s clear that landlords and tenants across the property spectrum have both suffered as a consequence of the pandemic and this has impacted families and businesses alike. While it may be fashionable in certain quarters to apply a reductive ‘landlords bad, tenants good’ stance towards any property-related story, often it pays to delve beneath the headlines, and take a more nuanced view of the situation. Landlords and tenants are both deserving of protection from the current socio-economic situation and focusing on one at the expense of the other does no good for either in the long run.

Abtin Yeganeh comments on the Renters’ Reform Bill in IFA Magazine and Housing Today

Posted on: May 17th, 2023 by AlexT

Senior Associate Abtin Yeganeh discusses the impact of the Renters’ Reform Bill on no-fault evictions, in IFA Magazine and Housing Today.

Abtin’s comments were published in IFA Magazine and Housing Today, 17 May 2023.

“The Renters’ Reform Bill will be welcomed by the majority of UK tenants who, at times, feel there is a degree of uncertainty surrounding their occupation due to ‘no-fault evictions’.

“Currently, landlords can evict their tenants without cause at the end of the fixed term of the tenancy. The Renters’ Reform Bill proposes to abolish this.

“No-fault evictions can be particularly concerning for families with young children in school due to the disruption it causes when an eviction occurs during term time.

“To date, no-fault evictions have provided landlords with security, as they know they can obtain possession at the end of the tenancy without cause. The abolishment of no-fault evictions may, therefore, be a cause for concern for landlords. However, the Bill will reform the grounds of possession under Ground 8 of the Housing Act 1988. New grounds will be introduced to address repeated serious arrears, and situations where possession is required to allow the landlord to sell a property or for the landlord and/or family members to occupy the property.

“In addition, the Bill will require landlords to meet the Decent Homes Standard, ensuring that homes are well maintained and do not pose a danger to tenants, which currently only applies to the Social Housing sector.

“The Renters’ Reform Bill should strike a balance between the rights of tenants and security for landlords.”

Andrew Conway comments on Twitter’s rent dispute at their London HQ in The Next Web

Posted on: January 27th, 2023 by Natasha Cox

Asked about the possible motivations behind Twitter’s non-payment of rent with reference to a recent article reporting on it, Andrew comments: “Twitter is clearly looking to cut costs, so this must be the primary motivation. The article says that Twitter has abandoned its offices near Piccadilly Circus so, presumably, there’s no intention to re-occupy (or negotiate better terms).

“However, unless the landlord forfeits the lease (that is, taking back the premises, so it can be re-let to other tenants) or agrees to accept a formal surrender of the lease, Twitter will remain liable to pay the rent for the remainder of the term of the lease. Surrender/forfeiture act so as to bring the lease to an end. A tenant will be liable to pay rent (and other sums due under the lease) up the date of surrender/forfeiture but not beyond.”

Commenting on the increase in unpaid rent more broadly, Andrew explains: “during the pandemic, lots of tenants will have withheld payment of rent, primarily for cashflow purposes. The government introduced temporary measures which prevented landlords from forfeiting leases. Those restrictions came to an end on 25 March 2022.

“It also introduced measures which provided for certain rent payable by certain tenants (primarily in the leisure/hospitality sector) over a specified period to be ‘ringfenced’. Landlords and tenants were encouraged to try to agree how much of that rent would be paid (and on what terms). Absent any agreement, the matter could be referred to arbitration. However, those measure have also now come to an end.”

Regarding the potential legal ramifications of Twitter’s non-payment of rent, Andrew states: “non-payment of rent can give rise to forfeiture or Court proceedings for recovery of the arrears (as in this case). However, unless a landlord thinks that it can re-let the premises fairly easily, there would seem little point in forfeiture. A landlord will be left with empty premises on which it will have to pay business rates after three months.

“Moreover, empty premises are more susceptible to occupation by squatters. Many landlords are taking County Court to recover arrears, so that they can obtain a money judgment which they can look to enforce. Ordinarily, a landlord will have 6 years in which to enforce a money judgment.

“A landlord might seek to wind-up a tenant company that fails to pay a judgment debt.  I don’t imagine that Elon Musk will allow Twitter to be wound up for failing to pay rent. However, I suspect that the tenant company in this case is a group company and liquidation won’t impact on the main trading company.

“So, save for reputational damage, there may be no risks here.”

Asked about the course of actions courts will be forced to take in these proceedings, Andrew explains: “the Court won’t take action as such. It will be for the landlord to commence proceedings and Twitter may or may not defend the claim.

“If the claim is undefended, the landlord will obtain a default judgment which it can subsequently look to enforce. If the claim is defended, it probably won’t be heard for at least 18 months, unless the landlord makes a successful application for summary judgment on the grounds that Twitter has no real prospect of successfully defending the claim at trial.”

Finally, commenting on what this case means in the broader landscape of property law, Andrew concludes: “it’s virtually impossible to comment on this without knowing the basis of the claim and, more importantly, the grounds on which Twitter defends the claim.

“That said, I can’t think of any basis on which Twitter might successfully defend any claim for payment of rent arrears, so I don’t imagine this case will be ground-breaking. It’s newsworthy simply because of who the tenant is.”

Andrew’s comments were published in The Next Web, 27 January 2023.