Regulation of the crypto market in England from a restructuring and insolvency perspective

It’s no secret that the Government is looking for the UK to become a leader in the crypto market while increasing its regulation. This balancing act will become even more prevalent in the English courts over the next couple of years when it comes to restructuring and insolvency. 

Here, Jana Rausova and Rob Turner discuss whether cryptoassets can be classified as property under law and explore the possible roles of the Bank of England and Financial Conduct Authority (FCA) in further regulation.

Can cryptoassets be classed as property under English law?

To see whether cryptoassets can be realised and distributed to creditors under English law, it's important to consider if they can be classed as property. This would mean that freezing orders and proprietary injunctions could be applied for. 

Under the current English legislation, the definition of property in restructuring and insolvency is wide enough to encompass cryptoassets. Section 436 of the Insolvency Act 1986 (IA86) states that property includes “every description of property wherever situated” and “every description of interest”. Therefore — despite not physically existing — cryptoassets are covered by the definition.

Cryptoassets don’t necessarily fall under ‘things in possession’ or ‘things in action’ — the traditional ways of dividing property under English law. However, the Law Commission recognises a third category of personal property — digital objects. Such property is treated as capable of having personal property rights under the law of England and Wales. 

This sentiment was shared by the English High Court in AA v Persons Unknown, Re Bitcoin, in which it was held that cryptoassets can be classed as property due to their “definable and identifiable” nature, as well as the fact that they’re capable of assumption and have a degree of permanence. However, it will be interesting to see whether any similar cases occur in the higher courts. 

While it’s currently safe to assume that cryptoassets fall under the definition of property in England and Wales (based on the current legislation, case law and the Law Commission’s recommendations), this doesn’t mean that realisations of the assets will be straightforward. This is mainly due to the difficulty of localising and identifying the assets. Additionally, cryptoassets form part of the debtor’s insolvency estate unless they’re held on trust, secured or taken away from the estate before insolvency and in those cases, the situation may be slightly different and legal advice should be sought.

Location of cryptoassets and other jurisdictions

The English courts in Ion Science Ltd v Persons Unknown and Fetch ai Ltd and another v Persons Unknown and others [2021] EWHC 2254 (Comm) held that where cryptoassets are located is based on where the owner of the assets — whether a person or company — is domiciled. 

However, the nature of cryptoassets means that it may be beneficial to initiate cross-border proceedings. For example, the question that often arises in the United States is whether cryptoassets constitute debtor or customer property. 

Government pressure to regulate the crypto market

The need for a regulatory and law enforcement framework became apparent in 2022, when both TerraUSD and FTX filed for bankruptcy. 

As a result, the Government has made moves to regulate the crypto market while attempting to become a global hub for cryptoasset technologies. It believes that cryptocurrencies should be regulated in the same manner as gambling — an opinion also expressed by Fabio Panetta, Member of the Executive Board of the European Central Bank in January 2023.

The Government recently released its response to a consultation conducted by HM Treasury on Managing the Failure of Systemic Digital Settlement Asset (including Stablecoin) Firms. The consultation contains special administration regime proposals which would give the Bank of England greater powers in the administration of systemic DSA (‘digital settlement assets’ such as stablecoin, bitcoin and other crypto tokens) firms. 

Through the regime, the Bank of England could gain the ability to direct administrators of systemic DSA firms and introduce further rules to ensure the effective implementation of an additional objective (aiming to return or transfer customer funds and custody assets). However, the Bank of England would first have to consult the FCA. The same would also apply before it could obtain an administration order in relation to systemic DSA firms — entities that are part of a systemic (where design or operation may affect the stability of the UK financial system or significantly impact businesses or other interests) DSA payment system, operator of the system or DSA service provider of systemic importance (such as an issuer of a stablecoin or wallet, or a third-party service provider linked to a DSA). Therefore, the failure of a systemic DSA firm could have an impact on financial stability and consumer protection. 

On the same day as the response to the consultation (30 October 2023), the Government published its response to the consultation on the Future Financial Services Regulatory Regime for Cryptoassets — suggesting that Part 24 of the Financial Services and Markets Act 2000 provisions should apply to cryptoassets and that they should be regulated by the Financial Services and Markets Act 2023 (FSMA 2023).

FSMA 2023 received Royal Assent on 29 June 2023. It added a broad definition of cryptoassets and included them in the definition of investment under section 22 of the Financial Services and Markets Act 2000. These changes ensure the FCA’s involvement in the insolvency of cryptoassets in certain circumstances, which may include the reporting requirements of insolvency practitioners where a company is carrying on a regulated activity in contravention of the general prohibition or consent of the FCA when an administrator is being appointed.

Significant shift in regulation

The above proposals show a significant shift. The Bank of England and FCA could both be increasingly responsible for regulating the crypto market in insolvency and restructuring.

With the current discussion paper published by the FCA on Regulating Cryptoassets Phase 1: Stablecoins, it’s clear that the Government wants a stablecoin to be used in payments. We’re likely to see changes to payments legislation as regulation continues. 

The question that remains is whether the Government will aim to apply a more stringent special administration regime to cryptoassets aimed at the continuity of service for customers.

If you have questions about cryptoasset regulations — whether in the UK or across multiple jurisdictions — our team can help.