Should Cryptocurrency Be Classified As A Currency Or An Asset For The Purposes Of Civil Debt Claims?

Cryptocurrency is becoming an increasingly popular payment method and form of investment, but its legal status is still uncertain in many jurisdictions, including the United Kingdom.

One question which arises in relation to cryptocurrency is whether it should be classified as a currency or an asset for the purposes of civil debt claims. This blog post will examine this issue and discuss the potential implications of each classification.

What is cryptocurrency?

Cryptocurrency is a digital currency that uses cryptography for security and operates on “the blockchain”, which is a decentralised ledger that records all transactions made with the currency, and who holds how much. As such, it is independent of any bank or Government.

The most well-known examples are Bitcoin, Ethereum, and Dogecoin, which exploded in popularity following a campaign by Elon Musk. Unlike traditional flat currency, cryptocurrency is not backed by a Government or a physical commodity (such as gold or silver), and its value is determined purely by supply and demand. While cryptocurrency has far from overtaken traditional currency, its use in transactions has grown in recent years beyond what many expected.

Cryptocurrency has evolved from a niche investment opportunity for financial gurus in 2016 to a household name, but what implications might this have moving forward for debt claims?

Cryptocurrency and civil debt claims

Classification as a currency

If cryptocurrency is classified as a currency, it would be subject to the same legal treatment as traditional flat currency in the context of civil debt claims. In other words, if someone owes a debt in cryptocurrency and fails to pay, the creditor can take legal action as a debt claim, rather than a claim for damages under breach of contract.

However, there are some challenges to classifying cryptocurrency as a currency. Cryptocurrency is not widely accepted as a means of payment for goods and services. While the number of industries accepting cryptocurrency as payment is increasing, it is not yet widely used in the same way as traditional currency and is mostly limited to niche markets. This could make it difficult to argue that cryptocurrency should be classified as a currency for legal purposes.

Classification as an asset

If cryptocurrency is classified as an asset, it would be subject to the same legal treatment as other types of property in the context of civil debt claims. This means that if someone owes a debt and fails to pay, the creditor can take legal action, but for the monetary equivalent value of cryptocurrency. That would involve a valuation exercise, supported by credible evidence.

Alternatively, a claim to cryptocurrency in these circumstances could be pursued as a specific performance claim. That is, an order of the Court compelling a party to do something. For example, if party A had promised to Party B to transfer cryptocurrency to them and does not do so, Part B may elect to pursue an order requiring Party A to effect the agreed transfer, rather than pursuing a claim for the monetary value.

There are some arguments in favour of classifying cryptocurrency as an asset. Firstly, cryptocurrency is most commonly bought and sold as an investment, rather than as a means of payment. This suggests that it may be more appropriate to classify cryptocurrency as an asset.

Implications of the classification

The classification of cryptocurrency as a currency or an asset has important implications for creditors and debtors. Cryptocurrency is subject to some of the highest market volatility of any currently traded currency or asset.

In November 2020, the price of one Bitcoin was roughly £14,000; one year later in November of 2021, this skyrocketed to £45,000; one year later, disheartened investors were left with an investment worth only £13,000.

If the cryptocurrency were treated as a currency for the purpose of debt claims, recovery of a debt of 3 bitcoins, which was due in 2021, if recovered a year later would be worth less than a third of the original value in terms of buying power.

On the other hand, if cryptocurrency is classified as an asset, creditors may have an easier time recovering debts owed to them. This is because cryptocurrency could be seized and sold like any other asset, allowing creditors to gain from the proceeds of sale of the cryptocurrency, without losing out on the remaining value of the debt if the price has decreased.

The classification of cryptocurrency as a currency or an asset also has implications for regulation. If cryptocurrency is classified as a currency, it may be subject to different regulatory requirements, such as anti-money laundering and taxation regimes.

If it is classified as an asset, it may be subject to inheritance and capital gains tax. This would also likely affect its popularity, and therefore value. Proponents of cryptocurrency often cite its lack of regulation as a benefit, particularly those with anti-establishment sentiments or distrust in traditional banking systems.

Conclusion

The legal status of cryptocurrency is still uncertain. While there are arguments in favour of classifying cryptocurrency as a currency or an asset, there is no clear consensus on how this should be approached moving forwards, despite the potential significant practical ramifications. It will ultimately be up to parliament and the Courts to decide over the coming years.