A “framework for crypto” consists of both a regulatory component and a more tricky legal component. While the UK is still playing catch-up to the EU’s MiCA on the regulatory side, a comprehensive analysis by the Law Commission concludes that the legal side is already sufficiently clear in the UK, which is not the case across much of the EU. It may well be that the UK’s common law system allows it to leapfrog the EU in the race to become a global hub for crypto, writes Oliver Linch, CEO & General Counsel at Bittrex Global
“The law is sufficiently clear” — not a phrase you often expect to hear from lawyers, still less when it comes to digital assets. Yet for the future of crypto in the UK, this is the welcome conclusion of the UK Law Commission’s comprehensive report on digital assets, published a few weeks ago.
The 300+ page report demonstrates in impressive detail that — with a few relatively minor exceptions — the UK’s common law system is sufficiently flexible to accommodate digital assets, and is in fact already able to do so.
This is a hugely important finding in terms of the UK’s ambitions to become a global hub for crypto and digital assets. Most of the discussion about a “framework for crypto” focuses on the regulatory aspect. But this is only one half of the story. Equally, if not more, important is the legal aspect. Here’s why:
- The regulatory aspect looks at the obligations of crypto companies — how they are supervised and monitored — and how markets function and are controlled.
- The legal aspect looks at more fundamental property and contract questions, such as what it means to “own” a token, how they are transferred, what rights a person has when they engage in crypto transactions, and how those rights are enforced.
MiCA addresses the regulatory aspect, and the EU is clearly ahead of the UK on that side of things. But crucially, MiCA does not address the legal aspect – and it is the legal aspect that is the most technical and tricky to get right.
This is a big problem for the EU, because experience shows that civil law systems do not have sufficient answers to the legal aspect. For example, when Liechtenstein adopted its groundbreaking Blockchain Act in 2019, a significant part of it involved updates to the laws around ownership, control, and transfer of digital assets. Without that, the Blockchain Act would have been essentially pointless, because there would be no legal framework underpinning the entire system.
Each EU member state must now urgently engage in a review of their own contract/property law codes to update them to reflect the specific requirements of digital assets. This could involve a root-and-branch analysis of some of the core aspects of private law in each member state.
Unlike on the regulatory side, MiCA does not provide for any EU-wide answers on this. Each member state is left to work out how to adapt its own contract/property laws to accommodate the new technology and challenges presented by digital assets, without the whole complex system of codes unravelling before their eyes. This is a huge undertaking, the scale of which I think is underestimated across the EU.
But the UK has no such problem. The Law Commission analysis demonstrates in impressive detail that — with a few relatively minor exceptions — the common law is sufficiently flexible to accommodate digital assets, and is in fact already able to do so. In those very limited areas identified where developments are needed, the Law Commission concludes that most of them can be achieved through the common law itself.
This is critical, not only in terms of speed of possible execution, but also in terms of the confidence that market participants will have in the framework once finalised. The UK is a global leader in financial services, and market participants are already familiar with and confident in the UK’s legal system. It will be hugely reassuring to them that trading in digital assets can be done under those same, familiar laws, rather than relying on new and untested solutions at the EU level.
Wherever you stand on the bigger “civil law versus common law” debate, there is no denying that this is a huge competitive advantage for the UK. It means that, if HM Treasury can establish a proper regulatory framework following its consultation paper published earlier this year, the job will effectively be done, rather than only half done (as is the case with MiCA).
The Law Commission’s report should spur the UK government into action. It represents a significant advantage that the UK legal system has over the EU’s when it comes to digital assets. This, coupled with the UK’s attractiveness in a number of other areas, could propel the UK as a global leader in crypto and digital assets.
DISCLOSURE: Several friends and colleagues of the author were involved in the production of the Law Commission’s report. Neither Oliver Linch nor Bittrex Global were directly involved.