Crypto, Digital Assets and NFTs

There’s no simple answer to this question, but there are a few red flags which you could look out for:

• Any guarantee of profits, particularly large profits;
• Websites without clear information about who they are operated by and where the company operating the site is located;
• Websites without terms and conditions of use;
• Poorly written sites (typographical errors or poor use of language);
• Any hard-sell in terms of increasing the amount being invested or request for funds to cover the cost of withdrawing profits; and,
• Terms and conditions which have choice of law and jurisdiction clauses for unusual jurisdictions, different from where you think the investment is based, and where you are sending the money.

That doesn’t mean that a site which doesn’t exhibit these features is genuine.  As with any financial investment, you should proceed with caution and only after you’ve properly checked out the place and people you’re thinking of sending your money to.

On the assumption that there are links to England and Wales, you have a number of options in order to investigate and try to recover your money or crypto assets:

• Instruct a firm such as Kingsley Napley to investigate a civil claim for recovery of money or crypto assets.  This might involve applying for proprietary or freezing injunctions, seeking disclosure of information from third parties such as banks or crypto exchanges and issuing a claim in the High Court of England and Wales against the fraudsters.  These steps can be very effective, but are also expensive.  We charge on an hourly rate basis and for emergency actions such as injunctions you might expect to pay £50-100,000 in legal costs just for the initial applications.  If the case is complicated it might cost more than that.  As such the amount you have lost will dictate whether this route is available to you.
• If there is a regulated entity involved, then you could make a report to the regulator.
• You could report the matter to ActionFraud.
• You could report the matter to the police.
• You could engage a blockchain analyst to help to trace your crypto-assets and see where they have been transferred.

We can advise you on claims against various parties including exchanges.  We will need to see the terms and conditions which govern your use of the exchange which may dictate where a claim can be brought and which country’s laws will apply to any claim and which may include limitations or exclusions of liability on behalf of the exchange.

There are numerous reasons why an exchange or wallet provider might freeze a wallet.  You might need to update your ID documents, or there may be a misunderstanding about a transaction, or the exchange or wallet provider might have cause to suspect money laundering or the receipt of proceeds of crime.  However, there might also be technical reasons why a wallet could be frozen.  Likewise the inability to access a wallet or the assets in that wallet could be the first sign that something is wrong with the provider.

Whilst we can assist with some of those reasons, we cannot necessarily speed up the release of a wallet if there are suspicions of money laundering or receipt of the proceeds of crime, particularly if a Suspicious Activity Report has been made to the NCA.  We will not be able to help if a technical glitch has caused the freeze of your wallet.

All crypto firms operating by way of business in the UK are now required to register with the FCA under the Money Laundering Regulations before engaging in crypto asset activities. This covers three principal categories of activity:

• Exchanging, or arranging to exchange, crypto assets for money or one type of crypto asset for another;
• Operating a machine, such as a crypto ATM, which uses automated processes to exchange money into crypto assets or vice versa; and
• Provision of custodian services for customer’s crypto assets or private cryptographic keys.

Operating without the required registration may constitute a criminal offence or render the firm liable to a civil penalty.

Applications for registration are made via the FCA’s online system, Connect.

You will need to pay a fee of £2,000 if your business has UK crypto asset income of up to £250,000 and £10,000 if you have income of more than £250,000.

Businesses are required to provide:

• A business plan setting out the business objectives, customers, employees, governance, plans and projections. This needs to provide enough detail to show that the proposal has been carefully thought through and that the adequacy of financial and non-financial resources has been considered. It must also include details of the volume and value of transactions, number and type of clients, pricing and the main lines of income and expenses;
• A programme of operations setting out the specific crypto asset activities of the business;
• A marketing plan including a description of customers and distribution channels;
• An explanation how the business is structured and organised, which includes a description of any relevant outsourcing arrangements, if any, and a corporate structure chart;
• Details of the key IT systems which will be used to run the business, including details of IT security policies and procedures;
• Evidence that directors and any other persons who are or will be responsible for the management of the business have a good reputation, and have the appropriate knowledge and experience to act in this capacity;
• Details of governance arrangements, the internal control mechanisms in place to identify and assess risks and a description of money laundering and counter terrorist financing control measures in place;
• Anti-Money Laundering/Counter Terrorist Finance framework and risk assessment: this should highlight the risks specific to the business model activities and provide details on how these risks will be mitigated. Anti-Money Laundering/Counter Terrorist Finance staff training material should also be included;
• A business-wide risk assessment including monitoring and mitigation policy;
• All crypto asset public keys/wallet addresses: this should include all of the crypto asset addresses controlled by the business and used in the activity of the business for each crypto asset that the business deals with;
• An explanation of customer on-boarding agreements and process;
• Details of transaction monitoring, record-keeping and recording procedures;
• Business continuity plan, outsourcing arrangements policy and service license agreements;
• Budget forecasts and financials for the first three financial years; and,
• Money Laundering Reporting Individual forms for all directors, executives and officers.

You must also disclose to the FCA any issues as to why your business may not be fit and proper to be regulated by the FCA for these purposes.  This is something that the FCA takes very seriously, and giving them false or misleading information may be a criminal offence.

The FCA has three months to determine an application but this time period only starts to run when the FCA is satisfied that it has received all the information it requires: where further information has to be requested, this can significantly extend this three month period.

The registration process is a rigorous one and many firms are finding that their applications have been unsuccessful. There is a process by which a decision to refuse an application to register may be challenged. However, it may be more practical simply to withdraw the application, consider whether there are steps which may be taken to address the concerns raised by the FCA and, if so, submit a new registration application in due course.

No one factor determines how money made on trading crypto assets will be taxed and the circumstances must be looked at carefully as whole.  In the UK, money made by an individual is likely to be taxed as capital (on the basis that the crypto assets are held as investments) and so capital gains tax will be payable.  However, income tax will apply if a trade is carried on.  This is a question of fact that will be determined by, for example, the frequency of trades and how organised the activities are.  Advice should always be taken on this, together with the inheritance tax implications of owning crypto assets and whether any overseas tax implications are relevant.

Different considerations will apply to companies which own crypto assets.