For UK traders, investors and businesses dealing with cryptoassets, it is important to understand the complex tax implications for this rapidly evolving sector. For many industry participants, the line between fact and fiction regarding the taxation of cryptoassets is blurred, often leading to confusion.

Having clarity and understanding on the UK’s approach to the taxation of cryptoassets is therefore vital for individuals and businesses to better plan their transactions and strategy, thereby optimising their tax burden.

The Tax Treatment of Cryptoassets in the UK

The UK’s tax authority, HMRC, recognises that there are a number of different types of cryptoassets, and have adopted a taxonomy that aligns closely with the FCA’s regulatory position. However, the tax treatment of cryptoassets is dependent on the nature and use of the assets in question, as opposed to their classification.

To put to rest a common misconception, HMRC does not consider the buying and selling of cryptoassets to be comparable to gambling. Whether a transaction can be properly characterised as gambling will be a question of fact and will instead be considered on a case-by-case basis.

Importantly, HMRC does not consider cryptoassets to be currency, and therefore treats them as a traditional asset for tax purposes. Consequentially, profits made from cryptoasset activities are taxable.

What taxes are applicable?

For individuals dealing with cryptoassets, the two main types of tax applicable would be Capital Gains Tax (CGT) and Income Tax.

Capital Gains Tax

Capital Gains Tax is essentially a tax on the profit made when an asset that has increased in value has been sold or disposed. It is the gain that is made which tax is applied against, rather than the whole amount that it has been sold for. For example, if you bought Bitcoin at £16,000, and later sold for £25,000, the gain on which tax would be applied would be £9,000.

Disposal of cryptoassets does not just include selling the cryptoasset for fiat, but also trading it for another cryptoasset, spending it on goods or services, or gifting it.

There is also an annual tax-free allowance, for such instances. For the 22/23 tax year, this allowance is £12,300, and for 23/24 it is £6,000. This means that gains up to the amount of the annual allowance are not subject to any CGT.

If the profits exceed this amount, then CGT will be payable on the amount above the tax-free allowance, with the rate payable depending on your taxable income.

Income Tax

In some instances, cryptoassets, and activities relating to them, can be treated as income in nature; for example, payment for services with cryptoassets, receiving cryptoassets as employee remuneration, or earning cryptoassets from mining or staking activities.

In other circumstances, trading cryptoassets may also be subject to income tax, especially if the trading activity is particularly frequent and regular. Again, whether an individual’s trading activity would constitute treatment as income for taxation purposes will be highly fact dependent and assessed on a case-by-case basis.

Cryptoassets received by an airdrop might also be liable for income tax if the individual has taken an action in exchange for the airdrop, for example promoting or moderating the socials for a particular project.

In relation to mining or staking taxes, if the activity is professional in nature profits may be subject to income tax under trading income rules. If the activity is more casual, it would likely be subject to income tax as miscellaneous income.

If cryptoassets are mined, then the amount of tax will be based on the value of the cryptoasset at the time it was mined. If the mined cryptoasset is later sold and its value has increased, there may also be CGT applicable on the profit made from the increase in value.

The rate of income tax payable would be dependent on the individual’s income for the particular tax year.

It is therefore important to keep detailed records of cryptoasset transactions, as it is possible to reduce the gain, and therefore the tax burden, by deducting allowable costs such as transaction fees.

Cryptoasset Tax Treatment and Businesses

For businesses engaged in cryptoasset activity, the tax treatment would depend on the nature of activities and transactions. A business involved in cryptoasset activity may be liable to pay a number of different taxes such as CGT, Corporation Tax, Income Tax, VAT, and Digital Services Tax. For example, if a business’s primary function is the trading of cryptoassets, then profit and losses will be subject to corporation tax at the applicable rate.

The tax treatment of businesses will depend on the particular facts of its activities, and will take into account a range of factors.

Lost Cryptoassets

If the private key to a cryptoasset wallet is lost, HMRC does not view this as a disposal of the asset. Whilst you may have lost access to the cryptoassets within the wallet, you still technically own the assets.

However, in situations where there’s no realistic chance of recovering the cryptoassets, it may be possible to file a negligible value claim and seek relief for a capital loss.

Gifts

Gifting cryptoassets is viewed by HMRC as a disposal, and therefore will attract a tax liability in the form of CGT. In other words, you would be subject to CGT on the difference between what you originally paid for the cryptoasset and its market value at the time it was gifted.

However, there are advantageous carve-outs when it comes to gifting cryptoassets to your spouse or civil partner, as transfers between spouses/civil partners are not usually subject to CGT at the time of the gift.

Rather, the recipient takes on the original cost basis and will then be liable for any CGT if they later sell or dispose of the cryptoassets.

Conclusion

Taxation and cryptoassets can be a complex and nuanced area, with many considerations, and failure to report crypto gains or losses could lead to penalties and interest charges on unpaid tax liabilities.

It is therefore important to note that, although the nature of cryptoassets and the decentralised framework in which they operate allows for pseudonymity, HMRC has invested significant time and effort to ensure cryptoasset tax compliance.

HMRC has been known to request customer information from centralised exchanges, and also utilises technology and analytics to analyse data and transactions which can establish connections between cryptoasset wallets and transactions and the individuals behind them. 

With this in mind, it is imperative that individuals engaged in the crypto sector seek professional advice to ensure that tax liability is calculated correctly and is optimised in line with their strategy and objectives.

With many crypto firms suspending their services in the UK, Senior Associate Asim Arshad comments on the FCA regime concerning the investment of cryptoassets.

Asim’s comments were published in CoinDesk, 4 October 2023, and can be found here.

“Essentially, all communications to U.K. consumers in relation to crypto assets which could be seen as an invitation or inducement to invest, must comply with the rules.”

With the increasing adoption of cryptoassets, it is inevitable that we will see a rise in interactions between this sector and more traditional asset markets, such as real estate.

An increased awareness of cryptoassets, and their growing availability over the past decade have presented both individuals and enterprises with access to a risk-on environment, characterised by high risk and reward profiles. Consequently, numerous investors have experienced significant returns on their initial, sometimes modest, investments. One notable trend we have observed is the convergence of crypto wealth with the traditional real estate market, particularly in the form of crypto gains being utilised towards real estate acquisitions.

There are primarily two methods by which individuals and businesses are using crypto wealth to enter the real estate market.

The first and most common approach involves utilising the fiat proceeds from crypto gains to cover part or the whole cost of a property purchase. This approach aligns closely with established conveyancing practices.

The second approach entails the direct use of the cryptoassets themselves to facilitate the property purchase. The property’s purchase price, whilst still being pegged to a fiat value, is not settled in fiat currency but rather in an agreed-upon amount of specified cryptoassets.

Both approaches have their own complexities and advantages, including risk tolerance, market conditions and legal considerations.

Using fiat proceeds of cryptoassets

The approach of using fiat proceed of crypto gains in property purchases is a method which strongly resembles established conveyance process, albeit with some nuances in the process brought on by additional financial planning and legal considerations. This is by far the most common method by which parties are utilising cryptoassets in order to purchase property.

Generally, the process will involve several key considerations.

Conversion to fiat

The first step of this process is to convert cryptoassets comprising part or the entirety of a cryptoassets portfolio into a fiat currency, as the British Pound Sterling.

This will usually occur through a centralised exchange and, given the volatility of the crypto markets, timing may be an important consideration.

Parties will often aim to convert their cryptoassets at a peak value, so as to maximise the return into fiat. If substantial sums are being converted and off-ramped, then it is likely that it will be done in tranches and using multiple centralised exchanges to get the best rates and mitigate slippage.

It is also possible to convert cryptocurrencies into fiat currencies using OTC trades, facilitated by a specialised broker.

Banking considerations

Whilst banks and other financial institutions are undoubtedly more familiar with cryptoassets than they were several years ago, it is still important to note that not all financial institutions are crypto friendly.

As such, when off-ramping substantial sums from an exchange to a bank account, it is vital to consider whether the bank in question is willing to accept the funds into the account, and buyers must be prepared for the bank to make enquiries about the source of funds in line with standard anti-money laundering and know-your-customer requirements.

Legal and tax implications

A conversion between cryptoassets (e.g. Bitcoin to USDC) or a conversion from cryptoassets into fiat is also likely trigger a tax liability, and crypto investors may be subject to capital gains tax or income tax, depending on the nature of the activity.

Solicitors assisting with the purchase of  property in such cases will be aware that they will be taking these fiat funds into their account in furtherance of the purchase. As such, they will have a responsibility to determine that these fiat proceeds of cryptoassets activity is genuine and not illicit funds or an attempt to launder money.

In other words, the solicitor must be able to verify the source of funds – a key consideration  due to the sector specific knowledge that this requires. Before instructing solicitors with the conveyance of the intended property, potential buyers should ensure they are comfortable and able to verify source of funds coming by way of cryptoassets.

At Lawrence Stephens, our dedicated cryptoasset and blockchain team within the firm works closely with our conveyancing department to be able to review and verify source of funds deriving from cryptoassets activity seamlessly.

Application of the funds

Depending on how fiat funds are intended to be applied, if a cash amount is being used to cover the entire cost of the property, then standard conveyancing procedures will apply to the rest of this process.

However, if funds are intended to be used as a partial deposit, with the rest of the purchase price to be financed through a mortgage, lenders will likely require an overview of your finances including cryptoassets gains.

Completion

Once the parties arrive at the completion stage, the buyer will transfer the fiat funds to their solicitors, as will the mortgage provider if applicable. The solicitors on either side will then ensure the timely transfer of funds and completion of formalities to record the transaction and change of ownership of the property.

Using cryptoassets to purchase property

Whilst certainly a less common route to purchase property, it is also possible to utilise cryptoassets themselves for a property purchase. Whilst this route to acquire property comes with additional considerations, complexities and advantages, it can often be a desirable option particularly for those with large crypto portfolios.

Agreement with seller

One of the main considerations and challenges with such an approach is finding a seller who not only has a property to sell that fits the requirements of the buyer, but is also willing to accept cryptoassets as a form of payment.

Much like any other property purchase, parties will need to arrive at an agreed figure for the purchase price of the property and, even though cryptoassets will be used in the transaction, the purchase price agreed must be agreed in fiat currency. This is not just crucial for contractual clarity between the parties, but it is also important for the calculation of Stamp Duty Land Tax (SDLT) liability, if applicable.

Agreeing the cryptoasset

Both parties will also need to agree the cryptoassets to be used in the transaction, and this will require due diligence on the assets involved. It may also be necessary to the current regulatory environment to ensure there are no restrictions on using the cryptoassets of choice. If a particular cryptoassets was regulated, for example, then strictly speaking it would technically not be permitted to deal in the same without regulatory approval.

From the seller’s perspective, they will have undoubtedly have additional considerations for the cryptoassets to be used, and may likely only want to deal in a cryptoassets that has sufficient liquidity.

For example, assuming the purchase price of the property is agreed in the sum of £800,000, the parties will then need to agree which cryptoasset (or assets) are to comprise the purchase price. In this example, we will assume that the parties agree to transact in Bitcoin and, as of September 2023, the value of 1 Bitcoin is approximately £20,000.

Due to the volatility of cryptoassets, it is not uncommon for parties to reach their own agreed upon conversion rate for the cryptoassets being used. In this example, if we assume that the parties agree that the Bitcoin used for the purchase will be valued at £19,500, the buyer will have to pay the seller 41.02 Bitcoin.

Due to the nature of using cryptoassets in such a transaction, separate agreements may be required that addresses the particular characteristics of these assets. For example, given the volatility of cryptoassets, both parties assume a market risk until the transaction is completed. To mitigate this, specific clauses can be inserted into agreements to address scenarios where the cryptoassets value changes dramatically before completion.

Specialised mechanisms or escrow type services for the actual transfer of the cryptoassets would also likely need to be agreed upon and catered for in a specific agreement. In typical transactions, buyers would usually send the purchase monies to their solicitors, who would then forward it over to the seller solicitors. In a crypto transaction, alternative mechanisms would need to be utilised to ensure that the transaction occurs properly, and payment is sent and confirmed to the relevant parties so subsequent steps in the conveyance procedure can take place.

Solicitors with expertise in cryptoassets transactions are crucial in such instances, to ensure legal compliance and clarity.

Post-completion formalities

After the transaction is complete, the usual formalities such as land registration will follow, and these may require special annotation to indicate the use of cryptoassets in the purchase. The land registry, in the past, has recorded the sale price of property in cryptoassets.

SDLT may also be applicable and will usually be calculated in relation to the value of the cryptoassets on the day of completion, as evidenced by reputable data sources.

From the seller’s perspective, they will want to ensure that they can continue to securely hold and access the cryptoassets or convert them into fiat, depending on their intentions. Oversight in this regard could lead to difficulties in them accessing the proceeds of the sale.

Conclusion

The purchase of property using the fiat proceeds of cryptoassets, or cryptoassets themselves is not only feasible but can also be an attractive option for both buyers and sellers.

Such transactions are accompanied by a unique set of legal considerations that require specialised knowledge and understanding of the cryptoassets sector; from due diligence on the cryptoassets used and their liquidity, to understanding the additional legal mechanisms required to ensure a compliant and clear transaction, the process necessitates an expert legal perspective.

Our cryptoassets team is equipped with specialised knowledge in the cryptoasset sector, enabling us to guide clients through each step of this innovative transaction method. If you are contemplating diving into the world of property purchases via cryptoassets, we are here to assist and advise.

It is a common misconception that the existence of cryptoassets was ushered in by the arrival of Bitcoin in 2009. In reality, the concept of digital or cryptographic currencies significantly predates Bitcoin, and there were several attempts to create a digital, decentralised form of currency before Bitcoin, for example eCash and HashCash. However, whilst Bitcoin was not the first attempt at a cryptocurrency, it was the one that solved certain key issues, such as double spending and decentralisation, more effectively than its predecessors. In this sense, it was undoubtedly the cryptocurrency that propelled cryptoassets into mainstream recognition.

Since the introduction of Bitcoin, the world of cryptoassets has grown exponentially, and the market now consists of tens of thousands of different cryptoassets, each with their own functionalities, supposed use cases, and legal implications.

Are coins the same as tokens?

From a legal and regulatory perspective, the terms coins and tokens can and are used interchangeably in relation to cryptoassets, and both terms essentially have the same meaning when used in this context.

However, in cryptocentric terms, Coins and Tokens have very different meanings.

Coins are usually used to refer to those cryptoassets which act as native cryptoassets to their own blockchain. For example, Bitcoin on the Bitcoin blockchain, or Ether on the Ethereum blockchain. Coins are usually intended to function as a digital store of value or medium of exchange.

Tokens, on the other hand, are cryptoassets that operate on an existing blockchain network instead of their own. Whilst tokens can also be used in a similar fashion to coins, they are often created to fulfil different purposes to coins, for example to raise funds or give access to particular services. Some examples of tokens include Shiba Inu, Tether, and Basic Attention Token.

So, whilst most of the regulatory language in the UK refers to “tokens”, it should be remembered that this is not a reference to the crypto specific definition of a token, and is essentially used as a technologically neutral term in a legal and regulatory context.

Altcoins and memecoins

An altcoin is simply a designation given to any cryptoassets which is not Bitcoin (and arguably Ether).

Many altcoins are designed to be used for a specific purpose or to address limitations and innovate upon existing blockchains. One of the first altcoins was Litecoin, which was forked (or simply put, an offshoot) from the Bitcoin blockchain, and offers faster transaction times than Bitcoin.

Memecoins are another subset of cryptoassets that often originate from an internet meme or joke, yet can attract serious following and price appreciation.

Memecoins often do not aim for any specific functionality or utility, and primarily gather attention through social media, viral marketing and online community engagement. They represent a fascinating microcosm within the cryptoassets world and can sometimes evolve into more refined projects with defined aims and utilities.

An example of a memecoin is Dogecoin, which experienced significant growth in a relatively short period of time, reaching a value of $0.68c at its all time high in May 2021, meaning it had a market cap of around $88 billion.

Stablecoins

Despite the name, most stablecoins are usually tokens utilising existing blockchains – another quirk of usual crypto lexicon!

One of the endemic characteristics of cryptoassets is that they are extremely volatile, and while this volatility can be beneficial, it is one of the characteristics that makes cryptoassets unsuitable as a medium of exchange or store of value. Stablecoins exist to address the problem of volatility by pegging their value to an external reference, for example a commodity such as gold, or a fiat currency such as the US dollar.

Whilst all stablecoins maintain their value by some external reference, there are different types of stablecoins.

Some stablecoins are said to be fiat-collateralised – in other words, they are said to be backed one-to-one by reserves of fiat currency. An example of such a stablecoin would be USDC. For every USDC token in existence, there is an equivalent amount of fiat US dollar held in reserve.

Other stablecoins are crypto-collateralised and so they are backed by a reserve of other cryptoassets. They utilise smart contracts that automatically adjust the collateral to maintain a stable value. An example of one such stablecoin is DAI.

Some stablecoins are commodity-collateralised and reference the value of a physical commodity such as gold or silver and aim to maintain a peg to that value. For example, Tether Gold is said to be collateralised to gold.

There also exists stablecoins that are not backed by any collateral at all but aim to use algorithms to control their supply and demand and maintain a stable value. There has been increasing criticism of algorithmic stablecoins, particularly since the collapse of Luna and Terra USD in May 2022.

It is a noteworthy point that many jurisdictions are developing central bank digital currencies (CBDC’s) and some have already been implemented such as the eNaira in Nigeria. They are digital, similar to cryptoassets, and their value tends to be fixed to their country’s fiat currency much like a stablecoin. However, CBDC’s should not be confused with cryptoassets, particularly as CBDC’s are controlled by a central bank or monetary authority, while cryptoassets are typically decentralised.

Governance tokens

Governance Tokens are a type of cryptoasset that allows holders to vote on decisions related to a particular platform or protocol. They act as a bridge between platform creators and the community of users and allow for an element of democratisation.

Examples of governance tokens include the maker token (MKR), issued by MakerDAO. One MKR token is equivalent to one vote, and token holders vote on several issues including appointing team members and modifying fees.

Fan tokens

Fan tokens are another form of cryptoasset that, in essence, represents membership of a fan club of a particular sports team, artist or celebrity. They often allow their holders to access fan membership perks such as voting on decisions, merchandise designs and rewards. They also often grant holders access to privileges such as exclusive content and ticketing privileges.

Football clubs such as FC Barcelona, Manchester City and PSG each have dedicated fan tokens.

Non-fungible tokens (NFT’s)

Non-fungible tokens (NFTs) are a form of cryptoasset that represents ownership or proof of authenticity of a unique item or piece of content. They are best thought of as assets that have been tokenised via a blockchain, and they are inherently unique in themselves, such that they are not interchangeable.

For example, a particular ETH coin is essentially no different to another ETH coin, and so they are interchangeable on a one-to-one basis. However, comparing two NFT’s, even though they may look the same will have independent and unique characteristics.

NFT’s can be used to tokenise a wide variety of assets from art and music, to real estate and event tickets.

Popular examples of NFTs include the Bored Apes Yacht Club collection and Cryptopunks.

The legal definition of cryptoassets that has been adopted in the UK includes NFTs, and this allows for them to be interpreted within the same framework as other cryptoassets which are deemed to constitute property. From a regulatory perspective, an NFT can be unregulated or regulated depending on the rights and obligations that attach to the NFT.

The High Court in England has already demonstrated its forward-thinking approach by allowing the service of legal documents via NFTs. As well as highlighting the flexibility of NFTs, this also highlights the English judicial system’s openness to integrate emerging technologies into practice.

Tokenised Real-world Assets

Another growing subset of assets within cryptoassets are tokenised assets that represent a share in a real-world asset, such as real estate, a luxury watch or handbag, vintage cars, and art. These usually utilise NFTs and allow for expensive assets to be broken down into smaller, easily traded units.

The legal and regulatory treatment for these can be complex and very much depend on the nature of the underlying asset which the token represents.

Conclusion

The landscape of cryptoassets is diverse and ever evolving, encompassing a range of asset types, many of which fall into one or more of the above categories.

Understanding and appreciating the legal intricacies of these various assets is imperative for both individual and institutional participants in this rapidly growing sector. As a UK-based law firm with a particular specialism in cryptoassets, Lawrence Stephens is uniquely positioned to provide expert guidance and innovative solutions to investors, creators and holders alike.

Please do not hesitate to contact our team who will be happy to discuss and identify your needs.

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.