Much has been published recently about so-called cryptocurrencies. But do you know your legal rights if your investment runs into difficulties?
Digital currencies have garnered impressive headlines, both positive and negative, but very little by way of the defining legal certainties (or rather, uncertainties). News coverage appears to be more concerned with their rate/price variation than with demystifying the legal perils of investing.
What is cryptocurrency?
Some names are familiar such as the rock star to cryptocurrencies, Bitcoin. Others less so such as Ethereum, Litecoin, Peercoin, Zcash and Dash.
All of these have a common denominator: they lack legal tender status (a technical term which has little use in ordinary everyday transactions but essentially means, in England & Wales, Royal Mint coins and Bank of England notes) and therefore are not issued by a central bank. Despite this, they are accepted amongst the members of a particular virtual community as a digital medium of exchange, and therefore may serve as currency.
Whilst advocates will say that the currency feature is one its greatest attractions, in reality only 0.36% of all Bitcoin transactions were used as a currency (e.g. as payment for goods and/or services), according to a 2016 study by Stanford School of Business. The obvious conclusion is that it is difficult to say that it is a currency.
As more and more individuals and businesses continue to transact billions of pounds in cryptocurrency annually, one can only assume that they are 'investing' with a view to making a profit (and not for its currency capability or to encourage further development of the underlying technology, as advocated by an enthusiast in a recent conversation). On this assumption, one should obtain independent financial and legal advice prior to any commitment.
But what happens when things go wrong?
Here lie the uncertainties. Despite the increase in the volume of transactions, we are only beginning to see litigation, enforcement and some attempts to regulate the industry (and these are primarily seen abroad). Therefore, there is no specific case law to guide litigants in connection with issues exclusive and peculiar to cryptocurrencies.
Several important cryptocurrency cases are ongoing. These include the Mt. Gox case in which the world's largest bitcoin trading exchange collapsed in early 2014 essentially due to the disappearance from its virtual vaults of nearly 850,000 bitcoins, worth about $473m at the time, leaving some 24,000 customers around the world without access to hundreds of millions of dollars' worth of cryptocurrency and cash.
In addition, close attention is also being paid to the most recent class actions in the US - many relating to allegations of offer and sale of unregistered securities, fraud, unfair and deceptive trade practices, civil conspiracy and engagement in Ponzi schemes.
Once decided, these will hopefully provide some guidance on how foreign courts are likely to view the many legal issues arising from the industry. These may also assist the UK legal landscape.
One of the many challenges for customers attempting to pursue claims relating to cryptocurrency is the difficulty in identifying potential defendants and the international nature of the transactions, which may raise jurisdictional issues.
Bitcoin transactions do not involve a third-party intermediary. They are a peer-to-peer interaction between buyer and seller but their identities are encrypted (hence not completely anonymous). Whilst no personal information is transferred from one party to the other, there is a transaction record that is maintained on the public ledger. Whilst anti-money laundering laws (and in the UK, when in force, the GDPR) and Bitcoin exchanges may require the collection and protection of personal data of customers, identifying potential defendants who are claimed to have engaged in theft or fraud will continue to be challenging for the foreseeable future.
Legal catch up
The only certainties are that cryptocurrencies cannot be ignored and that as transactions evolve, a myriad of legal issues are likely to arise. The legal system will need to play catch up with cryptocurrency developments. In the meantime, there is no substitute for a careful and well informed assessment of the risks of any exposure to the industry.
If you have any questions or concerns about the legal implications of your digital currency transaction, please don't hesitate to get in touch with Luiz Costa.
The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.