UK Law Commission Calls for Tailored Legal Framework for Crypto Collateral
The Law Commission funded by the Ministry of Justice in the UK has emphasized the need for a bespoke legal framework for using cryptocurrencies as collateral. In a report released on Wednesday, the commission stated that the existing regulations for collateral arrangements in traditional finance are insufficient for the unique nature of cryptocurrencies. The commission also reiterated its previous recommendation that crypto assets should be treated as a distinct form of property. Furthermore, it proposed the establishment of an industry-specific panel comprising technical experts, legal practitioners, academics, and judges to provide guidance on complex legal issues related to digital assets. The report from the Law Commission of England and Wales marks the first-ever analysis commissioned by the UK government on how current legal frameworks can accommodate cryptocurrencies and non-fungible tokens (NFTs). Comprised of legal professionals, judges, and professors, the independent body suggests law reforms that the government can potentially adopt. It is important to note that the commission's recommendations do not extend to Scotland or Northern Ireland, which have their own legal systems. While the legal systems of England and Wales are well-suited to support the government's efforts to integrate cryptocurrencies into existing frameworks, certain aspects require specialized attention to accommodate digital assets, as stated in the commission's press release. Professor Sarah Green, the commissioner for commercial and common law, highlighted the adaptability of the common law system and expressed the need to establish a solid legal foundation for digital assets through reform and development. Regarding collateral arrangements, the commission expressed dissatisfaction with the current laws in England and Wales, deeming them inadequate. Consequently, it recommended the government to establish a multidisciplinary project to create a tailored statutory legal framework that facilitates the entering into, operation, and enforcement of specific crypto collateral arrangements. Such a framework would need to consider the unique characteristics of cryptocurrencies, including how they are held, transferred, and controlled. Notably, the existing Financial Collateral Arrangement Regulations (FCAR) do not apply if an individual is involved, which poses a challenge considering the significant individual participation in crypto markets. The FCAR defines financial collateral as "cash, financial instruments, or certain types of monetary claims." Traditional collateral arrangements encompass charges over deposits, lending of stocks, and repo agreements. The Law Commission's proposal extends beyond crypto lending and encompasses the use of crypto as collateral for various arrangements. While the FCAR outlines the scope of collateral arrangements, the commission intends to avoid unnecessary restrictions. The commission's recommendations align with the UK government's ambition to establish the country as a prominent hub for digital assets. Prime Minister Rishi Sunak's leadership and the Conservative administration's plans to foster the growth of the digital asset sector receive support from the Law Commission's proposals regarding cryptocurrencies.