Britain has more than a token solution to offer fintech
English law could be the key to unleashing growth and innovation across new global digital markets
Today in the 21st century, history is once again being made in the UK’S financial services sector. New “crypto” financial products are being created, many in the UK, and then sold virtually, all over the world. Financial services such as lending, deposit-taking and insurance, as well as ownership tokens for real world products and entitlements, can also be intelligently bundled into crypto financial products, so the scope for new business models and activities, yet to be created, is greater than ever before.
The question is whether the UK’S legal system can, on its own, provide the necessary transactional fairness and regulatory certainty. The problem is that there is no consistency of approach or vision among states over legal and regulatory matters. Most crypto assets and currencies are used worldwide, so disagreements between legal and regulatory systems give rise to the possibility of conflicting rules being applicable, undermining the utility of technological advances.
Uncertainty over these issues goes to the foundations of whether crypto assets are capable of acquiring international validity and of sustaining economic value. The fundamental concern is that no international law or regulation exists specifically for crypto products to determine as a uniform matter the basic legal and regulatory consequences that arise from holdings and transfers of such assets.
Finding the solution involves identifying the matters to be addressed. These break down into two categories, one legal, the other regulatory. At root, the legal problem to be solved is how and where digital assets are owned. Innovations such as Distributed Ledger Technology, which powers Bitcoin and other crypto assets, add further complexity. With this, the records of ownership are generally dispersed so there is no single source to point to when determining the location of a person’s holdings. Records in the “cloud” are simply not tied to any country, with the result that it becomes unclear which legal regime determines questions of ownership, never mind what the rules of any such regime might be.
Identifying where those assets are located, as well as the limitations of existing laws, can involve conflicting approaches around the world. Further problems can arise from contrasting legal methods, which differ markedly between the common law and code-based civil law techniques in use worldwide.
Attempts by the creators of crypto financial products to resolve the matter with their own rules are insufficient, since a court can impose its decision over which property rights it recognises and in whom they are vested.
Another group of issues arises from potentially conflicting regulation. Consistent rules matter, as does their being followed and respected by domestic authorities regardless of who the main regulator is.
Furthermore, the main regulator should be capable of addressing the questions which arise: this is the key to any coordinated international solution. Yet states’ regulations differ markedly, with those founded on code-based approaches sometimes becoming particularly intrusive and inflexible.
The EU, for instance, has an expansive approach to crypto, and can, particularly post-brexit, be seen to use its code-based regulation as a tool designed to capture business, whether willing or not. The UK is following its typical, pragmatic common law approach of wait and see, using regulation for its normal purpose of managing financial risk, effectively, and in proven arrangements which facilitate business generation under the law. These divergences of approach – control, versus safety and pragmatism – leave open the problem as to whose regulators have jurisdiction, and how to address conflicts. Harmony is unlikely to be achievable soon or at all.
Yet, there is now an opportunity to solve the entire problem by exporting the UK’S legal and regulatory brand in its historic way, allowing new financial products, wherever they were created, to be sold around the world, solely within the protective umbrella of the UK’S legal and regulatory system, and providing once again a badge of quality and predictability.
The simplest answer to questions of asset location and ownership is for the crypto assets to be held in, and transferred between, accounts or other repositories within a particular country of choice, which has clear and discernible principles of ownership. If the law and jurisdiction of that country are selected by the terms governing the arrangements, this can then exclusively apply to the holdings and efficacy of any transfers of the financial products.
Under private international law as understood in most countries, the account records provide the anchor, and other legal and regulatory systems should defer to the law of the country where the records are held and allow it to be the sole judge of legal entitlements and regulatory consequences.
The UK’S common law system, if selected, is particularly well suited to dealing with these matters, with its flexible and versatile approach to law and regulation (more readily available after Brexit) which easily adapts to new developments and honours the intentions of market participants. By relying on the established principles that apply to holdings and transfers of other assets, the effects of dealings in financial products can be governed solely by the law and regulation of the UK’S highly regarded regime.
Ironically, in this brave new world of digital assets, it is the old, tried and tested concepts, and the English law legal system, that offer the best solution to novel developments. By structuring the arrangements to benefit from it, the UK’S system can perform, yet again, a key function for the benefit of the world’s economy, allowing for growth and innovation at one and the same time. The badge of quality “made in the UK” will serve again in modern times, but updated to “sold under the UK legal system”.