28-6-2023 (LONDON) The Law Commission, funded by the Ministry of Justice, has recommended the creation of a specialized framework for using cryptocurrencies as collateral in a report published on Wednesday. The commission emphasized that such a regime should extend beyond the existing collateral arrangements regulated by traditional finance laws in the U.K., according to a statement provided to CoinDesk.
Additionally, the commission reiterated its previous call for crypto assets to be recognized as a distinct form of property. It urged the government to establish a panel of industry-specific experts, legal professionals, academics, and judges to advise courts on complex legal matters concerning digital assets.
This report follows the Law Commission of England and Wales’ claim that it conducted the first-ever government-commissioned analysis in the U.K. to assess how current legal frameworks can accommodate cryptocurrencies and non-fungible tokens (NFTs). Comprised of lawyers, judges, and professors, the independent body makes recommendations for potential legal reforms that the government can choose to adopt. However, the commission’s proposals do not apply to Scotland or Northern Ireland, which have their own legal systems.
While the legal systems of England and Wales are generally well-suited to support the integration of cryptocurrencies into existing frameworks, the commission highlighted the need for specific measures to accommodate digital assets. In a press statement shared with CoinDesk, Professor Sarah Green, commissioner for commercial and common law, emphasized the adaptability of the common law system, stating, “Our recommendations for reform and development of the law, therefore, seek to solidify the legal foundation for digital assets.”
Collateral arrangements pose a particular challenge within the current legal landscape. Although there are existing provisions allowing the use of cryptocurrencies as collateral, the commission deemed them “inadequate.” It recommended that the government establish a multidisciplinary project to create a bespoke statutory legal framework that better facilitates the entering into, operation, and enforcement of crypto collateral arrangements. This framework would need to be specifically tailored to the unique characteristics of cryptocurrencies, including asset custody, transfer mechanisms, and control.
The commission also highlighted the limitation of the existing Financial Collateral Arrangement Regulations (FCAR), which do not apply if either party involved is an individual. Considering the significant level of individual participation in crypto markets, this limitation should be carefully considered, the commission noted. The FCAR defines financial collateral as “cash, financial instruments, or monetary claims of certain types,” while typical collateral arrangements encompass charges over deposits, lending of stocks, and repo agreements.
The Law Commission’s proposal goes beyond crypto lending, encompassing the use of crypto as collateral for various arrangements. While the FCAR provides a scope for collateral usage, the commission aims to provide more comprehensive guidelines, extending beyond the limitations outlined in the existing regulations.
The commission’s recommendations align with the Conservative administration’s vision to establish the U.K. as a digital asset hub under the leadership of Prime Minister Rishi Sunak. Andrew Griffith, the economic secretary to the Treasury, highlighted the country’s reputation for transparency and the flexibility of its common law system, stating that it attracts businesses worldwide. Griffith pledged to carefully review the commission’s findings and recommendations.
