Law Commission Recommends Tailored Framework for Using Crypto as Collateral in the UK

The Law Commission, funded by the Ministry of Justice, has released a report suggesting that the United Kingdom should create a unique legal framework to allow for the use of cryptocurrency as collateral. The commission recommends that this should extend beyond the current regulations for traditional collateral arrangements in the country. The report also reiterates that crypto assets should be treated as a new form of property. Additionally, the Law Commission recommends that the government establish a panel of technical experts, legal practitioners, judges, and academics to advise the courts on complex legal issues relating to digital assets.

The Law Commission of England and Wales claimed that this report marks the first-ever government-commissioned analysis in the UK on existing legal frameworks that can accommodate crypto and non-fungible tokens (NFTs). The independent body, comprised of lawyers, judges, and professors, is responsible for recommending law reform that the government can choose to implement. It is important to note that the Commission’s proposals do not apply in Scotland or Northern Ireland as they have their own legal systems.

Even though the legal systems of England and Wales are suitable for accommodating cryptocurrency into existing legal frameworks, certain areas may require specialized treatment to adjust to the unique nature of digital assets. In a press statement shared with CoinDesk, Professor Sarah Green, commissioner for commercial and common law, explained that “the flexibility of the common law means that the legal system in England and Wales is well-placed to adapt to this rapid growth. Our recommendations for reform and development of the law therefore seek to solidify the legal foundation for digital assets.”

The report also emphasized that while existing laws in England and Wales provide options for the use of crypto as collateral, those options are considered to be inadequate. According to the commission, a multi-disciplinary project to formulate and implement a bespoke statutory legal framework for crypto collateral arrangements is required. This framework should be tailored to the workings of cryptocurrency, including how assets are held, transferred, and controlled.

The Financial Collateral Arrangement Regulations (FCAR), which define financial collateral as “cash, financial instruments, or monetary claims of certain types,” currently do not apply if either party in the arrangement is an individual. However, given the level of personal participation in crypto markets, this limitation will need to be addressed. The commission explained that they are not necessarily restricting the scope of arrangements where collateral can be used, unlike the FCAR, which outlines the arrangements for collateral use.

The recommendations made by the Law Commission are in line with the government’s plans to make the UK into a hub for digital assets. According to Andrew Griffith, economic secretary to the Treasury, “our reputation for straight dealing, use of the English language, and flexible common law attracts business across the world. This, combined with our straightforward approach to regulating crypto assets, puts the UK at the vanguard of innovation to drive growth in digital assets and boost our economy.” Griffith has stated that he will carefully consider the commission’s proposals.