UK Government Considering Expansion Of Investment Transactions List To Include Crypto-Assets

• Published date: 24 June 2022
• Subject Matter: Finance and Banking, Technology, Financial Services, Fund Management/ REITs, Fin Tech
• Law Firm: Cadwalader, Wickersham & Taft LLP
• Author: Ms Linda Swartz, Adam Blakemore, Mark Howe, Catherine Richardson and Gary Silverstein

The UK Government has announced a public consultation regarding the possible expansion of the UK's investment manager exemption ('IME') to encompass crypto-assets.

The IME enables UK-based fund managers to provide management services relating to investment transactions to non-UK located funds without resulting in such funds being subject to UK taxation. The meaning of 'investment transaction' in this context is construed in accordance with a list of qualifying transactions and asset-classes, including shares, securities and derivative contracts. That list is known as the Investment Transactions List, and is set out in a UK statutory instrument passed by parliament. The UK Government consultation considers whether crypto-assets should be included in the Investment Transactions List for the purposes of the IME, thereby offering fund investors a safe harbour for the management of crypto-asset portfolios, provided that the other conditions of the IME are also satisfied by the relevant fund manager.

Currently, crypto-assets are not included as a qualifying transaction on the Investment Transactions List. The UK Government had announced on 4 April 2022, as part of the UK Government's FinTech Sector Strategy, its intention to expand the IME to include types of crypto-assets. The stated aim of the UK Government was to provide certainty of tax treatment to UK investment managers and their non-UK resident investors who are seeking to include crypto-assets within their portfolios, and thereby also encourage new crypto-asset investment management businesses to establish themselves in the UK.

Defining crypto-assets

Barely a day goes by without an evolution in the crypto-asset marketplace. The perceived opportunities relating to, and investor appetite for, crypto-assets as an investment class have been a significant incentive behind the UK Government's consultation. Notwithstanding this enthusiasm, the consultation acknowledges that the definition of a crypto-asset for legal purposes is not straightforward.

The consultation states that 'the term 'cryptoassets' is an umbrella term,' comprising different types of crypto technologies, including but not limited to exchange tokens, utility tokens, security tokens, stablecoins, smart contracts, and non-fungible tokens. The UK Government's suggestion is that a legal definition for the IME (and other tax-related legislation) should follow the approach proposed in the Crypto-Asset Reporting Framework...