Tuesday, 27th June 2023Crypto and Conveyancing: unruly, unregulated and here to stay?
For most people the closest they get to cryptocurrency is when it makes the news. As an asset class it comes with confusing terminology and jargon, not all of which has a precise legal definition. Yet for all the talk of its imminent collapse or fundamental risks, since 2018 Bitcoin, the most famous crypto out there, has seen an increase in value of some 334 percent (as of 20th June 2023)[1] and is trading at around £21k per ‘coin’. Other currencies such as Ethereum have seen similar increases in value. Increasingly, investors in virtual currencies have been looking to utilise this uplift in value in the real world.
For most individuals the most significant investment and their most valuable asset is real estate, often their home, but perhaps residential investment property or commercial property. Can the cryptocurrency investor therefore utilise their coins or their profits in a real estate transaction? The short answer, should be yes. It is of course well known that a fundamental rule of contract is that consideration does not automatically connote money. It must simply be sufficient. Therefore a willing seller and a willing buyer could agree to use a cryptocurrency as consideration for a real estate transaction (although considering price volatility this carries its own risks which we shall not dwell on here). What is more likely, and has been experienced by this author, is that a buyer in a transaction wished to use proceeds gained from the conversion of cryptocurrency to fund a real estate purchase.
There lies the rub. Law firms are required to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) alongside the Proceeds of Crime Act 2002 and the Terrorism Act 2000. As anyone who has sent funds to a solicitor will know, we are liable to ask some quite intrusive questions about the source of those funds. It is not just a case of “they’re from my bank account..”, rather like school maths lessons the sender must “show their workings”. From the solicitor’s perspective that means that we must be shown evidence of the accumulation of the funds, be that from savings, inheritance, sale of a property or even a lottery win. Whilst it can be invasive and a touch forensic, it is not that difficult to provide the required evidence. This is where cryptocurrencies fall down.
The Problem
Crypto, quite literally means hidden or secret. One of cryptocurrency’s great strengths, at least to its advocates, is that they are essentially anonymous, decentralised, with no national or supranational entity that regulates use. This also makes it of great use to money launderers. The anonymity provided by the online ‘wallets’ that most traders in cryptocurrencies use to hold their assets means it is almost impossible to adequately trace exactly where the funds originated from. If you are considering using funds raised from trading in cryptocurrencies to finance a real estate transaction, it is important that from the very outset you are prepared to evidence the source of the funds used to acquire the cryptocurrency, that you have had control over the cryptocurrency throughout and it has not been ‘mixed’ or stored in an unhosted wallet and that the cryptocurrency has performed in such a way to align with any increase in value over the original investment
The Future
Horizon scanning may be, for the most part, a fool’s errand, yet cryptocurrency continually weathers the storms that hit it and it is becoming clear that it will form part of the financial landscape of the future. Until there is a much more stringent regulatory framework in place which brings cryptocurrency trading into the existing money laundering regulations the use of funds generated from this asset class will mean that the legal sector, especially in transactional real estate, will continue to view these funds with suspicion.
If you require further information about anything covered in this briefing, please contact Oliver Whitehead or your usual contact at the firm on +44 (0)20 7526 6000.
[1] Yahoo Finance Bitcoin GBP (BTC-GBP) price, value, news & history – Yahoo Finance accessed 20 June 2023.
This article is for general purpose and guidance only and does not constitute legal advice. It should not replace legal advice tailored to your specific circumstances.
