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Digital assets: UK Law Commission publishes final report on crypto-token collateral arrangements and insolvency shortfall rules

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Authored by: Simon Deane and Ruby Hui

The Law Commission published its Report on digital assets on 28 June 2023. It covers discussions on crypto-token collateral arrangements and apportionment of shortfall losses on the insolvency of a custodial holding intermediary.

To summarise, the Law Commission has made various recommendations in the Report, including that:

  1. the government should establish a multi-disciplinary team for the purpose of the devising legislation to facilitate the entering into, operation and enforcement of particular crypto-token and crypto-asset collateral arrangements;
  1. the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226) (“Financial Collateral Regulations”) should be amended to include, among other things, additional guidelines on the interpretation of “money in any currency”, “account” and “similar claim to the repayment of money” used in the Financial Collateral Regulations; and
  1. the laws governing tokenisation of equity and other registered corporate securities should be reviewed.

Further, the Law Commission examined the structure of the collateral arrangements in respect of crypto-tokens and crypto-assets. Although a control-based security interest in respect of crypto-tokens may be of limited use, it will still be a viable development of the common law to recognise such an interest.

Relating to the insolvency of a custodial holding intermediary (as described in paragraph 7.26(1) of the Report), the Law Commission still supports a general pro rata shortfall allocation rule in respect of commingled unallocated holdings of crypto-tokens or crypto-token entitlements instead of a targeted rule. Nonetheless, at this stage, no detailed recommendations for an express statutory rule or application have been set out. Instead, there is a general statement that shortfalls arising on the insolvency of a custodial holding intermediary must be taken into account within wider regulatory and policy frameworks.

The Report is available here.

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Simon Deane

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Email or call +852 2825 9209

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