The lack of regulation around crypto assets has provided fertile ground for scammers and fraudsters. In recent months, we have seen a boom in crypto-related litigation including insolvencies, criminal sanctions, and fraud. 

We have seen plenty of individuals lose their life savings having become embroiled in a network of fraudsters through one innocent click. Companies that have chosen to incorporate crypto in their business plans or portfolio have also been stung. We have seen the collapse of various exchanges including cryptocurrency exchange FTX - whose founder and CEO is now facing eight criminal charges in the US for fraud, conspiracy to commit money laundering and conspiracy to defraud. The amount deposited by customers is said to amount to billions of pounds.

Despite anti-money laundering regimes being put in place since 2020 for businesses undertaking crypto asset exchange or custody wallet services in the UK, there has been a rise in the number of money laundering investigations, large-scale fraud, Ponzi scheme claims and insider trading cases where the underlying subject matter is crypto-assets.

Other sanctions have been brought in the UK for those promoting illegal crypto Automated Teller Machines (ATMs) and enforcement action brought against those advertising crypto asset investments when unregistered with the Financial Conduct Authority.

Unsurprisingly, crypto asset tracing and recovery has become a new work source for lawyers.

In defiance of the bad press, the UK is seeking to use crypto to encourage growth and innovate with the new government plans being brought into force to regulate crypto and protect consumers. For many, in spite of the bad press, crypto and its underlying technology has been a force for good.

Future Plans to Regulate 

On 1 February 2023, HM Treasury published plans to put in place measures equivalent to the current regulatory and legislative mechanisms to safeguard consumers where crypto assets present “similar risk to financial instruments” (i.e. where they are susceptible to market manipulation). The proposals seek to regulate crypto assets, reassociate crypto assets with traditional finance rather than with criminal activity and hopefully, salvage its reputation. This would be done in a number of ways which would include adding cryptoassets as “specified investments” and therefore covered under the regulatory framework offered by the Financial Services and Markets Act 2000 (‘FSMA’). Anyone completing certain activities involving cryptoassets (by way of business) would need to be authorised by the Financial Conduct Authority (and possibly the Prudential Regulation Authority).

An important remark made within the government’s paper, was on the expectation that “firms undertaking regulated crypto asset activities will adhere to the same financial crime standards and rules under FSMA that apply to equivalent or similar traditional financial services activities.” This will cover anti-bribery and corruption, sanctions, fraud and other aspects of financial crime.

The government’s proposals to regulate cryptoasset investment and trading activities has been set out and it is clear that “robust prudential safeguards, operational risk controls, transparency and data reporting arrangements, measures to manage conflicts of interest, good governance and adequate record keeping” all fall high on the agenda. The regulatory framework will adopt four overarching policy objectives (encourage growth, innovation and competition in the UK, enable consumers to make well-informed decisions, with a clear understanding of the risks involved, protect UK financial stability and protect market integrity), with two proposed phases being suggested (at this stage) applying regulation to different cryptoasset activities.

In Phase 1, subject to a number of caveats, the following activity categories would be included:

• Insurance Activities (Issuance and redemption of a fiat-backed stablecoin);
• Payment Activities;
• Safeguarding and / or administration (custody) activities.

During Phase 2, additional categories and sub-activities would also be proposed which would include:

• Insurance Activities (admitting a cryptoasset to a cryptoasset trading venue, making a public offer of a cryptoasset);
• Exchange Activities;
• Investment and risk management activities;
• Lending, borrowing and leverage activities;
• Safeguard or safeguarding and administering (or arranging the same) a cryptoasset other than a flat-back stablecoin and / or means of access to the cryptoasset (custody)

Future regulatory phases are also anticipated which will include additional cryptoasset activities. The carrying on of a regulated activity when not an authorised or exempt person is already a criminal offence under section 23(1) of FSMA. It currently carries a maximum sentence of two years imprisonment on indictment.

What does this mean?

It is expected that there will be a rise in both criminal and civil claims associated with crypto assets should businesses fail to obtain the appropriate advice when setting up in the UK and conducting regulated activities. Crypto asset businesses, and those overseas who plan to market in the UK, will need to prepare for change. Not only is the proposal for certain crypto activities to become regulated, but the government is also set to add new offence(s) for failure to prevent fraud under the Economic Crime and Corporate Transparency Bill. This Bill is currently going through parliament, but the proposed offence(s) will be aimed at preventing money laundering, fraud and false accounting.

The hope is that further regulation will help demystify the risks associated with crypto assets and enable the use of crypto assets in a more positive way. Regulation should also ease the minds of investors and professional advisors with crypto assets falling under a more traditional finance model.

At JMW we have a dedicated team who represent both individuals and businesses in Cryptocurrency Investigations and Prosecutions, in addition to Cryptocurrency and Digital Asset Disputes. 

If you need assistance with any civil or criminal investigation relating to crypto assets please get in touch with Jemma Fleetwood or Sam Healey