Cryptoassets: commercial transactions and law

For example, European Union law in the Regulation on Markets in Crypto-Assets operats with the term “crypto-assets”; but that is not quite consistent with a earlier piece of EU legislation, the so-called Fifth Anti-money Laundering Directive, where the law referred to “virtual currencies”. By way of another example is Dubai where the Virtual Assets Law operates with the “virtual assets”. In the United Kingdom, the Financial Services and Markets Act 2023 operates with term “cryptoasset” (although “digital settlement asset” is also used to refer to assets that do not use cryptography).

To put the differences in terminology aside we will somewhat loosely use here the term “cryptoasset”. The use of that term should be helpful for purposes of bird’s eye overview of the topic. Using the term “cryptoasset”, we intend to cover here, among others, the more well-known exchange tokens, such as Bitcoin or Ethereum.

To note, we aim to provide here only an introductory commentary to the the nature of cryptoassets and their legal status in transactions. In international transactions it is common to expressly chose English law as the applicable law, and so this will recieve much of the focus below.

When first significant profits were made in crypto industry, various tax authorities became concerned about uncertainties in the law. For example, in the United Kingdom, the tax authority, the HMRC, in what was one of first formal acknowledgments, clarified in 2014 that sales of exchange tokens for fiat currencies would not attract VAT; conversely, sale of VAT-able goods or services in exchange for Bitcoin (or other coins) would attract VAT in the normal way. Exchange movements involving coins would be taxable similar to that of fiat currencies; profits would normally be chargeable to income tax or corporation tax, as applicable, or otherwise as capital gains.

Now that the government could rest assured that cryptoassets were properly taxed, there were other legal matters to consider. First, let us turn to insolvency, specifically, were cryptoassets considered to be property for purposes of insolvency? how were they treated by the insolvency practitioner: as personal rights or property? The latter, in theory at least, would put the trustees / liquidators in a better position: property is defensible against the whole world whilst personal rights only against the debtor (and it is far from cleer who the debtor may be in a distributed ledger system).

In the United Kingdom, it was rather swiftly decided that in the insolvency context crypto assets were in the nature of property. Although seems natural, the “property treatment” is not a foregone conclusion at law: we understand that the courts in Japan in MtGox Co. insolvency initially reached somewhat of an opposite conclusion (ie, the courts did not take the view that crypto assets were property). However, in Japan, within a few years the Payment Services Act was revised to say the that crypto assets must be treated as “property value”.

As has been pointed out many times in legal reports, cryptoassets do seem to have all indicia of property, including exclusivity and control. However, the situation is not quite clear cut.

It was somewhat difficult to recognise with the outright property status was that the law recognises two forms of (personal) property: things in possession and things in action. The former means items that can be physically possessed and the second refers to incorporeal items that can only be enforced by a right to sue (such as a debt).

Cryptoassets cannot be seen as things in possession – after all, they certainly cannot be physically possessed; however, cryptoassets are not likely to be choses in action either (because (i) in a decentralised permissionless network such as bitcoin, for example, it is not clear against whom the action can be commenced; and (ii) it can be argued that cryptoassets in practice are ‘enjoyed’ without enforcing claims against others).

Since it cryptoassets seem to be property and yet do not fall within any of the sub-divisions of property, it is has submitted by various bodies that a third category (or other categories) of property must exist (Legal Statement on Cryptoassets and Smart Contracts, para. 86, UKJT; Digital Assets: Final Report, para.3.49, Law Commission).

As a matter of English law, cryptoassets cannot be possessed, and so they cannot be subject to certain types of security. For example, a pledge – an arrangement where the secured asset is delivered and held by the creditor as security – is not possible. Accordingly, where a financing transaction involves English law, other types of security must be used.

More importantly, cryptoassets are not considered to be goods under English law, and, accordingly, the Sale of Goods Act 1979 will not apply (at least without the parties expressly agreeing so) to a cryptoasset sale-purchase agreement governed by English law.

Commercially cryptoassets are often viewed as a (quasi) currency. This is also recognised by the regulators, who would consider such assets to be exchange tokens, some of which could be deemed to be, and is regulated as, e-money. To note, El Salvador has recognised Bitcoin as legal tender. For a short of period of time, Bitcoin was recognised as legal tender in the Central African Republic also. But this is rather the exception and, generally speaking, cryptoassets are not legal tender.

Finally, let us quickly mention that question of where a cryptoasset is located: at law, the proprietary aspects are governed by the law of that location. It is not easy even to say what specifically constitutes a cryptoasset and even more so – to locate that item on distributed ledger. Some suggested that a variation of PRIMA (place of relevant intermediary approach) should apply – at least with respect to ICOs (Financial Markets Law Committee on Initial Coin Offerings: Issues of Legal Uncertainty). However, it appears that courts in England will decide lex situs looking at the place of the residence of the owner (Tulip Trading Ltd v Van der Laan).