What is “Cryptocurrency”?
Cryptocurrency is a virtual or digital currency based on blockchain technology (i.e. technology used to keep a record of all transactions which take place over peer to peer networks). Cryptocurrency is used as a general-purpose currency and it is independent of any central bank. It is secured by a mechanism known as cryptography and can be converted to and from legal tender. Bitcoin, Ethereum, XRP and Tether are all examples of cryptocurrency.
Cryptocurrency differs from conventional banking given that:
- It is purely digital (i.e. you can’t take out cryptocurrency in paper or coin form).
- It is a decentralised form of currency – this means that when you spend a cryptocurrency, the approver of the transaction does not come from a centralised authority. Rather, various sources on the internet "communicate" to verify that the spending of the cryptocurrency is a transaction.
Cryptocurrency has gained popularity since its creation in 2009, one of its perceived advantages being that it enables transactions to take place entirely independently of government-related entities (and therefore, is in theory, less susceptible to government interference or manipulation). The nature of cryptocurrency means that it can be transferred easily and immediately. It is, however, not without its disadvantages and carries associated risks of fraud, theft and exchange rate volatility.
Is cryptocurrency treated as “property” under English law?
The legal status of cryptocurrency (i.e. whether or not it constitutes “property”) is of significance since it will affect the legal action which can be taken in the event that cryptocurrency is misappropriated.
The UK Jurisdiction Taskforce’s “Legal Statement on the Status of Cryptoassets and Smart Contracts” (published in 2019) recognised that the inherent nature of cryptocurrency may create some practical obstacles to legal intervention but “that does not mean that crypto assets are outside the law”. Recent case law has gone on to provide greater clarity about the legal status of cryptocurrency.
For an asset to be classified as “property”, it must be: (i) definable, (ii) identifiable by third parties, (iii) capable in its nature of assumption by third parties and (iv) have some degree of permanence.
In the recent case of Robertson v Persons Unknown (unreported, CL-2019-000444), the Court held that Bitcoin should be treated as “property” for the purposes of an asset preservation order to assist a victim of fraud against a phishing attack whereby approximately US $1.2 million was transferred to the fraudster. Similarly, in AA v Persons Unknown [2019] EWHC 3556 (Comm), the Court held that “crypto assets such as Bitcoin are property” for the purpose of being subject to an interim proprietary injunction.
By virtue of its status of “property” in the English courts, cryptocurrency can be the subject of a proprietary claim (e.g. a proprietary injunction or freezing injunction). This will undoubtedly assist in attempts to recover misappropriated cryptocurrency (which can be dissipated at great speed) and offers a degree of protection to innocent commercial parties.
On a note of caution…
At present, the decisions relating to cryptocurrency as “property” in English case law are all interlocutory (i.e. provisional) pending the outcome of the hearings of the main proceedings. Additionally, the position that cryptocurrency does not have the legal characteristics of “property” has yet to be advanced in the English courts.
It is therefore possible (although in our view unlikely) that, in the future, we could see a volte-face from the court’s current position which would have the potential to significantly hinder attempts to recover misappropriated cryptocurrency. Whether this would, in turn, prompt an increase in regulation of the cryptocurrency market is uncertain but cannot be ruled out. It is clear that as technology continues to enable the development of new forms of asset courts in England and around the world have their work cut out keeping up.
Sarah Murray
Elizabeth Pistak