The Crypto Lawyer’s Toolkit: A look at various laws and regulations which may apply to cryptocurrencies and digital assets
With more and more people investing in cryptocurrency and engaging with other blockchain technologies such as NFTs, it’s important to remember that there is a broad range of possible legal implications. Having a good understanding of these issues can be incredibly useful when considering various risks, pitfalls, remedies, and protections in the cryptocurrency space.
Fraud and other financial crime
A mix of criminal offences and civil penalties apply to financial crime: the Fraud Act, common law conspiracy to defraud, lawful means conspiracy and unlawful means conspiracy are but a few of the actions which may “bite” in such instances. In the crypto space, a popular scheme is a “rug pull”, a malicious tactic where fraudsters abandon the cryptocurrency project in question after receiving investors’ funds and run off with the money.
Liability and fiduciary duties
In April 2022, encryption keys for the use of $4.5 (£3.6) billion’s worth of digital assets were deleted as the result of a cyber attack. A group of investors brought a claim against the cryptocurrency software developers, alleging the developers owed a fiduciary duty and/or duty of care to owners of digital currency assets on their networks.
Platform providers, marketplaces and exchanges, individual creators and rights holders, as well as ‘owners’ and decentralised autonomous organisations (DAOs) are just some of the stakeholders in the crypto ecosystem. Each will have its own priorities to pursue and interests to protect, and as such, the contractual frameworks they rely upon will vary greatly For each of these contracts, issues regarding the rights and obligations of the parties, intellectual property, liability, warranties, jurisdiction, and much more will need to be considered.
The Advertising Standards Authority (ASA), the UK’s advertising regulator, is tasked with preventing misleading and irresponsible advertisements, and we have seen a notable increase in the ASA’s regulatory activity regarding the marketing of cryptocurrencies and Non-Fungible Tokens (NFTs).
Rights in intellectual property, including copyright and trademarks, are of particular importance to NFTs and other audiovisual digital assets. For example, if you “purchase” an NFT it does not necessarily mean you own the underlying IP rights outright unless the NFT includes a transfer of the IP. Accordingly, you should carefully study the terms of such licence, to understand the nature and scope of the rights granted. Data protection
Blockchain ledgers, which may for example be used to show cryptocurrency transactions, are indelible, permanent, and unalterable. Although this is an advantage for security and authenticity, the immutable nature of blockchain poses challenges from a data protection law perspective, including the exercise of data subject rights. Questions to consider include whether a data subject can be a data controller in relation to personal data that relates to themselves, or if the use of blockchain necessitates a need to carry out a data protection impact assessment.
Cybercriminals who launch ransomware attacks often seek payment in cryptocurrency, as they can mask the ultimate destination address associated with the ransom demand, and unlike traditional bank accounts, it is possible to open a cryptocurrency wallet without disclosing much (or any) personally identifiable information. This poses considerable challenges when attempting to track and seize funds paid as ransom during cyberattacks. Thankfully, technological and legal advancements in this area are being made all of the time.
Regulatory law and compliance
HM Government announced in April 2022 that it plans to help make the United Kingdom ‘a global crypto asset technology hub’. As part of this initiative, we can expect to see a continued increase in regulatory measures, including new financial services legislation. Such legislation aims to reduce the risk of money laundering and counter-terrorist financing, or otherwise widen the current UK financial promotion regime to include crypto assets.
Corporate transactions and fundraising
2021 saw a significant uptick in corporate M&A activity regarding cryptocurrency entities, including the acquisition of trading infrastructure, data analytics, and financial technology targets. Likewise, many cryptocurrency projects are now rapidly scaling to become more established and sophisticated corporates in their own right, thanks in part to cash injections from private equity firms and other aligned investors. Naturally, any sort of corporate transaction or fundraising activity must take into consideration a wide variety of other legal issues, including fiduciary duties, contract law and financial regulations (as discussed above).
HM Government is exploring ways of enhancing the UK tax system in order to encourage further development of the crypto asset market. At present, activities which may trigger liability to pay tax include the buying, selling and/or transferring of cryptocurrency, as well as ‘mining’ or providing goods or services in exchange for cryptocurrency. Of course, the specific type of tax will depend on who is involved, and the specific situation in question: professional advice should always be sought when seeking to determine one’s liability.
The above blog is an excerpt from the DAC Beachcroft Crypto Lawyer’s Toolkit. For the full version please click here to visit the DAC Beachcroft website.
This article was written by Kelsey Farish ([email protected]), Associate, Technology and Media, DAC Beachcroft and Tim Ryan ([email protected]), Head of Tech, DAC Beachcroft. Feel free to get in touch!