As a global leader in FinTech, the UK is a prime crypto market, barring deeper skepticism from the Financial Conduct Authority (FCA)
The United Kingdom is a global financial leader, especially in the financial technology sector. As such, the country has a substantial impact on the health of the global crypto market. Inevitably, changes in UK cryptocurrency regulation will influence the practices of other nations and shape the future of this emerging industry.
Changes in UK cryptocurrency regulation could also trigger a ripple effect across other economic sectors — particularly in London, Britain’s FinTech capital. If its crypto market suffers due to regulatory pressures, the UK could lose influence on the global stage. As the UK government considers its regulatory relationship to cryptocurrencies and blockchain technology, representatives aim to strike a balance that will protect consumers and promote innovation.
Today, 20% of the UK’s affluent millennials have already traded one or more cryptocurrency according to a survey conducted by Michelmores LLP, a London-based law firm. With buy-in from its millennial movers, the UK will need to quickly acclimate its regulating authorities on how best to embrace this new and fast-moving market.
For crypto traders and observers in the UK and around the globe, these are the three most significant developments in the UK crypto ecosystem to keep an eye on.
Jump to a section:
- UK cryptocurrency regulation has been lenient, but that’s all about to change
- The UK tax authority has its eye on crypto
- The UK financial watchdog is ramping up crypto investigations
- Conclusion: What’s next for UK cryptocurrency regulation?
1. UK cryptocurrency regulation has been lenient, but that’s all about to change
The Financial Conduct Authority (FCA) regulates financial business conduct in the UK. It considers cryptocurrencies like litecoin, ethereum and bitcoin to be questionable investments. This is likely due to both the intangibility and historic volatility of digital assets. However, as crypto gradually becomes more mainstream, the FCA may move to implement more comprehensive regulation to meet the needs of modern consumers.
Today, the FCA does not officially recognize cryptocurrencies as money or currency because they are not backed by any currency or other official assets. This has likely complicated the FCA’s decision on if, when and how to regulate cryptocurrencies. As of now, this is their delineation on the regulation of crypto:
“Although exchanges must register with the FCA, cryptoassets are not currently regulated according to the country’s most recent guidance.” — FCA
The FCA’s decision not to regulate crypto in the UK is not, however, for lack of trying. In fact, in Q1 of 2020, the FCA will deliver its final decision on whether or not it will finalize its ruling it previously made on July 1st of this year to ban the marketing, sale or exchange of crypto-related contract for difference trades. As these forms of exchanges are derivative, and thus, highly speculative, the ruling would not inherently be unfounded. However, it could harm the overall public perspective of the crypto market.
While the UK doesn’t currently regulate cryptocurrencies, it does recognize both the potential and risks of trading digital assets. Cryptocurrencies were designed to be anonymous and decentralized — a model that presents inherent regulatory hurdles. However, these hurdles have not stopped Her Majesty’s Revenue and Customs, the UK’s governmental arm responsible for collecting taxes, from subjecting crypto exchanges to one or more forms of taxation.
2. The UK tax authority has its eye on crypto
As with many major bureaucracies, the UK government moves at a measured pace. As is the case across the globe, many representatives lack education on the technology supporting the crypto industry. With cryptocurrency being one of the fastest moving industries in the world, UK regulators are now attempting to reorient and pass new legislation quickly. Taxation guidance is top of the list.
“HMRC had previously considered cryptocurrency trading to be the same as gambling. However, the latest tax guidance update states that the agency does not consider the buying and selling of cryptocurrencies as such.” — Cointelegraph
HMRC is beginning to recognize the legitimacy of cryptographic assets and has started to tax them more appropriately. This repositioning does establish some level of validation for the UK crypto market. Cointelegraph continues:
“Companies that buy or sell tokens, mine, exchange tokens for other assets or provide goods or services in return for tokens are liable to pay for one or more different types of tax. Those taxes include income tax, corporation tax, capital gains tax, stamp taxes, and National Insurance contributions.”
As the market is ever-evolving, each cryptocurrency will be evaluated individually to assess the trader’s tax liability. These liabilities are also subject to change to adapt to the most recent market shifts. For individual consumers, cryptocurrencies are taxed in these three scenarios:
- Exchanging for traditional currency: A Capital Gains Tax will be applied to individuals who dispose of their cryptocurrencies in return for a payout of Euros, USD or other recognized international currencies. Once this legal tender is received, it will be considered an official capital gain by the HMRC.
- Earning as payment: All UK residents who receive cryptocurrencies from their employers as a form of compensation will be required to pay the associative Income Tax for those earnings. This also applies to crypto payments for side jobs, freelance gigs, and services rendered.
- Cryptocurrency mining or airdrop acquisitions: Individuals who acquire cryptocurrencies through mining or airdrops are liable to pay Income Tax on all incumbent funds. The amount of taxation will vary depending upon the specific crypto token(s) that is/are acquired and the current valuation of the UK crypto market.
3. The UK financial watchdog is ramping up crypto investigations
The UK Cryptocurrency Taskforce published a report in 2018 which acknowledged the myriad potential benefits of crypto but also highlighted some of its most salient risks, including financial crime, consumer losses, and implications for overall financial (in)stability.
Their greatest concerns still remain the protection of individual consumers and overall market integrity. As is the case with regulators across the world, money laundering is an ever-growing concern. Crypto scams will also get more attention from government bodies in the year ahead, due to staggering statistics gleaned from a recent UK assessment.
“Following the report, U.K. regulators ramped up their investigations on cryptos. As a matter of fact, crypto investigations in 2019 have surged 74% in comparison to 2018, and the FCA reported that crypto investors in the U.K. lost over $34 million due to cryptocurrency and forex scams from 2018 to 2019.” — Cointelegraph
Conclusion: What’s next for UK cryptocurrency regulation?
While if left unregulated, the UK crypto market may leave consumers vulnerable, over-regulation could handcuff the market and degrade the UK’s standing as a global financial juggernaut. We hope that the UK government will work with the FCA to enact innovative and sensible regulatory policies, following the example of European counterparts such as Malta.
In 2020, we recommend that UK traders work with trusted exchanges that provide tailored services and support for their region. As UK cryptocurrency regulation and policies continue to take shape throughout the world, we will provide ongoing updates and analysis.
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